Financial sector ‘highly vulnerable’ to climate risks

The Philippines financial sector is “highly vulnerable” to climate risks, the World Bank said.

“Financial institutions operating in the Philippines face high operational risks from natural disasters,” the World Bank said in a background paper for its Country Climate and Development Report.

“The Bangko Sentral ng Pilipinas (BSP) reports that in the aftermath of storms and natural disasters, banks are faced with severe disruptions of operations resulting from damage to infrastructure and branches,” it added.

Natural disasters also affect the “soundness of financial institutions and stability of the overall financial system,” the World Bank said.

Citing data from AIR Worldwide, the World Bank said typhoons alone cause losses in public and private assets equivalent to 0.71% of gross domestic product annually.

“Typhoons could increase market risks in the Philippines’ financial sector, where banks hold sizeable investment portfolios, totaling 20% of total assets as of end-December 2018,” it added.

The occurrence and size of a typhoon “significantly” impacted nonperforming loan (NPL) ratios in the Philippines, it added.

World Bank data showed that for a 1% rise in the typhoon damage ratio, the NPL ratio would rise by 0.66% in the same year on average.

“During interviews with BSP and banks, it was reported that rural and agricultural exposure, and therewith rural and cooperative banks, are most significantly affected by the impacts of typhoons. In contrast to universal banks, these banks predominantly operate in the regions and hold sizeable exposures in loans for the agricultural sector (17.5%).”

The insurance sector also faces “increasing underwriting risks” due to climate issues, the World Bank added.

“Large scale disasters can affect an insurer’s ability to pay out claims. During interviews, industry stakeholders reported difficulties following large typhoons,” it said.

“The aftermath of Yolanda showed that the sector was significantly affected by claims as a result of typhoon damages, even though catastrophe insurance penetration is low. Yolanda also affected the micro insurance sector, which paid out over P500 million in claims,” it added.

The financial sector is vulnerable to both physical risks and transition risks due to climate change, the World Bank said.

“Physical risks are already highly material for the Philippine financial sector. Typhoons, floods, droughts, as well as geological events like earthquakes and volcanic eruptions, can affect — and in fact are already affecting — credit, market, operational and underwriter risks, therewith threatening the profitability and solvency of banks and insurers,” the World Bank said.

To mitigate these risks, the government should strengthen post-disaster mechanisms and scaling up financial risk management of public assets., it said.

The government should also prepare for the increasing cost of climate disasters, it added. — LMJCJ