Banks’ NPL ratio rises to 5-month high

MANILA, Philippines — The share of soured loans to the banking sector’s total loan book increased to a five-month high of 3.44 percent in October amid higher borrowing costs, after declining for two straight months to a six-month low of 3.40 percent in September.

Preliminary data released by the Bangko Sentral ng Pilipinas (BSP) showed that the non-performing loan (NPL) ratio of Philippine banks was the highest in five months or since May’s 3.46 percent.

After climbing for five straight months to hit a nine-month high of 3.46 percent in May, the NPL ratio improved to 3.43 percent in June and July, 3.42 in August and 3.40 percent in September.

The industry’s NPL ratio improved steadily to a two-year low of 3.16 percent in December 2022 from 3.97 percent in December 2021. It peaked at 4.51 percent in July and August 2021 as the Philippine economy struggled due to the impact of COVID.

Based on BSP data, soured loans went up by 9.2 percent to P449.43 billion in October from P411.63 billion in the same month last year.

Philippine banks recorded an 8.3-percent rise in loan disbursements to P13.06 trillion in October from P12.06 trillion in the same month last year.

The banking sector’s past due loans increased by 14.4 percent to P557.08 billion from P486.75 billion as restructured loans slipped by 3.3 percent to P309.24 billion from P319.89 billion.

Amid the rising soured loans and past due loans, banks beefed up their loan loss reserves by 7.4 percent to P461.08 billion in October from P429.2 billion in the same month last year.

This translated to a loan loss reserve level of 3.53 percent and an NPL coverage ratio of 102.59 percent.

To tame inflation and stabilize the peso, the BSP has raised key policy rates by 450 basis points since May last year. This includes the off-cycle 25-basis-point hike delivered on Oct. 26.

Fitch Ratings sees the margins of Philippine banks declining next year as the BSP is seen cutting interest rates on easing inflation.

In its latest ASEAN emerging markets banks dashboard, the debt watcher said the net interest margins (NIMs) of banks operating in the Philippines would go down in 2024 with the expected pivot of the BSP to an easing cycle.

“The Philippines’ NIM is likely to decline – albeit from a record high – when domestic policy rates revert to lower levels in the second half of 2024,” Fitch associate director Jindarat Sirisithichote and Fitch director Willie Tanoto stated in the report.

The authors said Fitch expects NIMs in most ASEAN emerging markets to be supported by higher-for-longer policy rates in 2024, which would help banks to sustain steady profitability.