Bad loans continue to pile up

PHILIPPINE BANKS’ nonperforming loans (NPLs) further increased in May, bringing their NPL ratio to the highest in nine months, central bank data showed.

Data released by the Bangko Sentral ng Pilipinas (BSP) showed the banking industry’s overall NPL ratio rose to 3.46% in May, from 3.41% in April, although lower than the 3.75% a year earlier.

This is the highest NPL ratio since August, when it stood at 3.53%.

Bad loans in May inched up by 1.9% to P436.117 billion from April, and by 1.6% from a year earlier.

The uptick in the NPL ratio reflects the higher interest rate environment both locally and globally, as central banks hiked aggressively to tame inflation, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

Since May 2022, the Monetary Board raised borrowing costs by 425 basis points (bps), bringing the key interest rate to a near 16-year high of 6.25%. The BSP is widely expected to keep the policy rate steady for the rest of the year.

Aside from higher borrowing costs, firms are also dealing with elevated inflation that has cut into their profit margins and reduced their capacity to repay their loans.

“Nevertheless, the reopening of the economy somewhat overshadowed these risk factors,” Mr. Ricafort said, adding that better revenues, earnings, and employment improved the capability of consumers and firms to pay their loans.

He noted the NPL ratio in June is still among the lowest since the pandemic when it peaked at 4.51% in August 2021.

Based on BSP data, the banking industry’s total loan portfolio expanded by 10.1% to P12.6 trillion from P11.44 trillion in June 2022. Month on month, it inched up by 0.3%.

Past due loans in May rose by 3.3% to P525.511 billion from P508.508 billion a year ago. This brought the ratio to 4.17%, slipping from 4.44% last year.

Restructured loans fell by 7.8% to P310.298 billion from P336.723 billion a year ago. These borrowings made up 2.46% of the industry’s total loan portfolio, down from 2.94% in May 2022.

Lenders continued to beef up their loan loss reserves by 9.2% to P444.028 billion from a year earlier. However, its ratio inched down to 3.52% from 3.55%.

In May, lenders’ NPL coverage ratio — which gauges the allowance for potential losses due to bad loans — increased to 101.81% from 94.76% a year earlier.

Easing inflation and eventually lower interest rates will help improve the credit quality of many borrowers, Mr. Ricafort said.

Headline inflation slowed for a fifth straight month in June to 5.4% from 6.1% a year ago.

For the first six months of the year, inflation averaged 7.2%, still above the BSP’s 5.4% full-year forecast.

BSP Governor Eli M. Remolona earlier said the Monetary Board may consider cutting interest rates if inflation falls below 4% by October.

The BSP’s next policy-setting meetings are set for Aug. 17, Sept. 21, Nov. 16 and Dec. 14. — Keisha B. Ta-asan