But while local banks are likely to see more bad loans, they are better capitalised and more able to survive the crisis than some of their counterparts in other Asian nations.

"We now expect NPL's (non-performing loans) to peak at 17 per cent of loans, marginally higher than our earlier estimate of 15 per cent. The peak should be reached sometime in the middle of 1999," Merrill Lynch & Co said in a recent study on the Philippine banking sector.

"This does not alter our view that the banking system remains solvent and top banks should meet minimum capital requirements without fresh capital infusion," it added.

Among the country's large banks, Metropolitan Bank and Trust Co reported a net income of 1.41 billion pesos in the second quarter, compared with 1.43 billion in the first quarter, Bank of the PhilippineIslands 1.29 billion pesos against 1.49 billion, and Far East Bank and Trust Co 509 million pesos compared with 691 million.

Eirvin Knox, chief executive officer of Standard Chartered Bank in Manila, said that the industry's main focus would be maintaining the quality of portfolios.

"You've got to be really focused on managing risks, so you have to work with your customers and understand and support the ones that are doing well. You've got to work with those that are struggling to restructure credit facilities," he said.

"It looks like we're not going to see anything before 2000, but it's going to vary from country to country and (this) would be expected...We're in for 18 months, two years (before the regional economies recover)," Knox said.

An analyst from a foreign brokerage house said: "The second quarter was weaker than the first quarter primarily because (interest) spreads dropped dramatically for most of the banks and the foreign exchange gains that were in the first quarter havesubsided."

Domestic interest rates were lower and the peso was steadier in the second quarter, which has resulted in narrower interest margins and foreign exchange gains.

But the third quarter might see banks post more foreign exchange gains after the peso's return to volatility in recent days, when it slid to seven-month lows, one analyst said.

"They (banks) make money on volatility. Perhaps, they could have more non-interest income," he said, adding that banks are trying to make up for the slack in lending activities through foreign exchange gains.

Merrill Lynch forecast a 13 per cent reduction in Philippine banks' profits this year, due in part to higher provisionings required by the central bank as a cushion against probable bad loans.

It also cut loan growth estimates for the top banks to one per cent from an earlier eight per cent.

Helen Alvarez, research director at All Asia Capital and Trust Corp, said profits of the country's top five banks could grow seven per cent this year comparedwith 12 per cent growth in the previous year.

Loan growth is forecast at seven per cent this year from 30 to 50 per cent in recent years, she said.

Banks have been cautious in lending due to the business uncertainty created by the region's currency turmoil.

Central bank deputy governor Alberto Reyes said the bank is looking at other measures to encourage banks to lend such as the securitisation of loans.

Under this scheme, banks can sell their loans in the local capital market, the proceeds of which can be used for relending.

"This is part of the capital market initiatives...It will provide some initiative for growth. Banks should start lending and take some risks," Reyes said.