Banks’ NPL ratio rises to over two-year high

Philippine banks’ asset quality worsened in July as the industry’s gross nonperforming loan (NPL) ratio rose to its highest in over two years.

Preliminary data from the Bangko Sentral ng Pilipinas (BSP) showed the banking industry’s gross NPL ratio went up to 3.58% in July from 3.51% in June and 3.43% a year ago.

This was the highest bad loan ratio in 25 months or since 3.6% in June 2022.

Data from the BSP showed that soured loans increased by 1.13% to PHP 508.11 billion as of end-July from PHP 502.42 billion a month earlier. Year on year, bad loans jumped by 15.46% from PHP 440.07 billion.

Loans are considered nonperforming once they remain unpaid for at least 90 days after the due date. These are deemed as risk assets since borrowers are unlikely to pay.

The loan portfolio of Philippine banks slid by 0.78% to PHP 14.21 trillion as of end-July from PHP 14.32 trillion at end-June. However, it increased by 10.79% from PHP 12.82 trillion a year ago.

Past due loans rose by 1.88% to PHP 625.71 billion in July from PHP 614.17 billion a month earlier. Year on year, it increased by 18.37% from PHP 528.62 billion.

This brought the past due ratio to 4.4% in July, higher than 4.29% in June and 4.12% a year ago.

On the other hand, restructured loans stood at PHP 291.08 billion in July, down by 0.86% from PHP 293.62 billion in June. Year on year, it fell by 4.47% from PHP 304.71 billion a year ago.

Restructured loans accounted for 2.05% of the industry’s total loan portfolio, steady from a month ago but lower than 2.38% in July 2023.

Banks’ loan loss reserves inched down by 0.05% to PHP 479.24 billion in July from PHP 479.46 billion in June but rose by 6.44% from PHP 450.24 billion a year ago.

This brought the loan loss reserve ratio to 3.37%, slightly higher than 3.35% last month but lower than 3.51% a year ago.

Lenders’ NPL coverage ratio, which gauges the allowance for potential losses due to bad loans, slipped to 94.32% in July from 95.43% in June and 102.66% in July 2023.

The higher NPL ratio in July can be attributed to elevated borrowing costs, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

“The NPL ratio for Philippine banks reached 3.58% in July, a two-year high likely due to factors like post-pandemic recovery challenges, rising interest rates, and sector-specific issues,” Reyes Tacandong & Co. Senior Adviser Jonathan L. Ravelas said in a Viber message.

The BSP had kept its policy rate at an over 17-year high of 6.5% from October 2023 to July 2024. At its August meeting, the Monetary Board cut its policy rate by 25 basis points (bps) to 6.25%.

“Furthermore, the latest pickup in banks’ NPL ratio may also be a function of faster loan growth in recent months, meaning the faster expansion in banks’ loan portfolio also partly corresponds to some pickup in NPLs as well, so it is very important to have tight and uncompromising credit/lending standards to curb NPLs to as minimal as possible,” Mr. Ricafort said.

Outstanding loans of universal and commercial banks rose by 10.4% year on year to PHP 12.14 trillion in July from PHP 11 trillion a year ago. This was the fastest loan growth in 19 months or since the 13.7% logged in December 2022.

For the rest of the year, Mr. Ricafort said rate cuts by the US Federal Reserve and the BSP would lower borrowing costs for consumers and businesses.

“(This) could also help boost economic growth and other business activities, thereby could lead to some improvement in borrowers’ ability to pay that helps ease NPL ratio and overall asset quality of banks,” he said.

Mr. Ravelas said he is “cautiously optimistic” on the outlook for banks.

“However, with improved economic conditions, accommodative measures from the BSP, and strengthened risk management by banks, the outlook for asset quality is cautiously optimistic for the rest of the year,” Mr. Ravelas added.

BSP Governor Eli M. Remolona, Jr. previously said the central bank could cut rates by another 25 bps within the year. The Monetary Board’s last two policy-setting meetings this year are on Oct. 17 and Dec. 19. — Aaron Michael C. Sy