Banks’ bad loan ratio climbs to 3.46 percent in May

MANILA, Philippines — The share of soured loans to the banking sector’s total loan book climbed for the fifth straight month to hit a nine-month high in May amid the high interest rate regime, as the Bangko Sentral ng Pilipinas (BSP) aggressively raised interest rates to control inflation.

Preliminary data from the BSP showed that the non-performing loan (NPL) ratio of Philippine banks rose to 3.46 percent in May, the highest since the 3.53 percent recorded in August last year, from 3.41 percent in April.

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

According to BSP data, banks’ bad loans climbed by 1.6 percent to P436.12 billion in May from P429.11 billion in the same month last year. The banking industry’s bad debts have been increasing in the past five months from P398.79 billion in December.

On the other hand, the growth in the banking sector’s total loan portfolio has been slowing over the past few months as the BSP raised interest rates by a total of 425 basis points since May last year to fight inflation and stabilize the peso against the dollar.

Philippine banks booked a 10.1-percent increase in loan disbursements to P12.6 trillion in May from P11.44 trillion a year ago due to the impact of the yearlong tightening cycle that saw the benchmark interest rate hit a 16-year high of 6.25 percent.

The banking sector’s past due loans grew by 3.3 percent to P525.51 billion from P508.51 billion, as restructured loans went up by 7.6 percent to P310.3 billion from P335.72 billion.

Amid the rising soured loans and past due loans, Philippine banks beefed up their loan loss reserves by 9.2 percent to P444.03 billion in May from P406.62 billion in the same month last year.

This translated to a loan loss reserve level of 3.52 percent and an NPL coverage ratio of 101.81 percent.

Despite increasing since the start of the year, Bank of the Philippine Islands lead strategist Marco Javier said the NPL ratio of Philippine banks is likely to be stable at three to four percent this year.

“We’re looking at low single digits for credit growth and NPLs probably near the three to four (percent) handle. Again, the lag effects of monetary tightening will probably be creeping in the latter part of this year,” Javier said.

After raising interest rates by a total of 425 basis points since May last year to tame inflation and stabilize the peso, the BSP decided to extend its prudent pause by keeping the benchmark interest rate steady at 6.25 percent in the last two rate-setting meetings on May 18 and June 22.

Inflation cooled for the fifth straight month to a 14-month low of 5.4 percent in June from 6.1 percent in May, bringing the average to 7.2 percent in the first half, higher than the central bank’s two to four percent target.

“But again, they (NPLs) should still be relatively lower than the peak that we saw during the height of the pandemic,” Javier said.