Banks’ bad loan ratio drops to 3-month low

MANILA, Philippines — The non-performing loan (NPL) ratio of Philippine banks eased to a three-month low in March as lending growth outpaced the rise in soured loans, while borrowers remained broadly resilient despite emerging inflation risks.

Data from the Bangko Sentral ng Pilipinas showed that the banking industry’s NPL ratio slipped to 3.29 percent in March from 3.33 percent in February. This marked the lowest level since it hit 3.07 percent in December last year.

NPLs refer to credit obligations that have not been repaid for at least 90 days past their due date. These loans are considered high-risk assets, signaling a borrower’s weakened capacity or willingness to repay.

In peso terms, soured loans of Philippine banks rose by 10.2 percent to P568.55 billion in March from P516.12 billion in the same month last year, partly cushioned by robust lending growth.

The industry’s loan book grew at a slightly faster rate of 10.4 percent to P17.26 trillion in March from P15.63 trillion a year ago amid sustained credit demand from both households and businesses.

UnionBank chief economist Ruben Carlo Asuncion said the decline in the NPL ratio was largely driven by robust loan growth and still-resilient borrower repayment capacity, which helped dilute the ratio even as bad loans continued to rise in peso terms.

“Stronger lending activity – particularly on the back of business and consumer credit expansion – supported the denominator, while earlier improvements in employment conditions and easing inflation helped borrowers stay current on their obligations,” Asuncion said.

The banking sector’s NPL ratio has stayed below the four percent mark since April 2022 as lenders maintained prudent credit standards. The ratio peaked at a 13-year high of 4.51 percent in July and August 2022.

Past due loans, or obligations unpaid but not yet classified as non-performing, climbed by 13.9 percent to P736.18 billion from P646.37 billion last year, translating to a past due ratio of 4.26 percent.

Restructured loans went up by 8.6 percent to P338.39 billion in March from P311.48 billion in the same month last year, resulting in a restructured loan ratio of 1.96 percent. These restructured accounts typically reflect borrowers who have renegotiated loan terms to avoid default.

Amid the slight rise in problem loans, banks beefed up the allowance for credit losses by 5.9 percent to P519.46 billion in March from P490.56 billion a year ago. This translated to an NPL coverage ratio of 91.37 percent as of end-March.

However, Asuncion said the improvement in asset quality could be temporary, as the impact of high energy prices and rising inflation linked to the Middle East conflict could weigh on borrowers’ repayment capacity.

“Moving forward, we expect NPLs to stabilize to slightly higher, with risks tilted to the upside, especially among more vulnerable segments such as small businesses and retail borrowers, should these pressures persist,” he added.