PHL banks’ nonperforming loans likely past peak, Fitch says

Philippine banks’ nonperforming loans (NPL) may have already peaked amid an improving operating environment and expectations of benchmark interest rate cuts in the near term, Fitch Ratings said on Thursday.

“We believe that NPLs have already peaked in the Philippines. We’re actually forecasting for the major banks, for the impaired loan ratios to fall flattish this year for some of them,” Fitch Ratings Head of South and Southeast Asia Banks Tania Gold said in a webinar.

Ms. Gold said this outlook is mainly due to the “economic environment and then ratios declining next year on the back of lower interest rates.”

The latest data from the Bangko Sentral ng Pilipinas (BSP) showed that the banking industry’s gross NPL ratio rose to 3.57% in May from 3.45% in April. This was also its highest in 23 months or since the 3.6% ratio in June 2022.

Soured loans rose by 3.1% to P495.67 billion in May from PHP 480.65 billion a month earlier. Year on year, it jumped by 13.7% from PHP 436.12 billion.

“Certain segments of the loan portfolio do have higher NPL ratios, but overall, we think that they think that they’ve been trending down with strong credit growth,” Fitch Ratings Head of Asia-Pacific Banks Jonathan Cornish said.

Fitch Ratings last month revised its outlook on the Philippine banking sector to “improving” from “neutral.”

“We revised the banking sector outlook to ‘improving’ from ‘neutral’ quite recently. This is really on the back of higher-for-longer interest rates, which means margin and interest income should hold up for longer than we previously expected,” Ms. Gold said.

Fitch also sees high net interest margins (NIM) amid increased unsecured lending.

“There’s even further upside if BSP reduces the deposit reserve requirements. To put some color on this, when we put the ‘neutral’ outlook for 2024 in the banking sector late last year, we were expecting a 7-basis-point (bp) NIM contraction, we’re now expecting a 7-bp increase,” she added.

BSP Governor Eli M. Remolona, Jr. earlier said they want to reduce big banks’ reserve requirement ratio to 5% from the current 9.5%.

The government’s infrastructure thrust will also drive loan growth, Fitch said.

Latest data from the BSP showed that bank lending grew by 9.6% to PHP 11.91 trillion as of end-April from PHP 10.87 trillion a year ago, its fastest pace of growth in 12 months.

“We saw some high NPLs during COVID, even on the mortgage side, so we’re watching to see how these unsecured loans season. However, all our issuer default ratings in the Philippines are driven by government support rather than the standalone ratings,” Ms. Gold added. — Luisa Maria Jacinta C. Jocson