Philippine banks' bad loan ratio eases as September asset quality improves

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Banks' bad loan ratio eases

Highlights

Philippine banks' gross nonperforming loan ratio fell to 3.27% in September from 3.35% in August, marking a nine-month low.
Total soured loans dropped 0.51% month-on-month to P593.275 billion, while the total loan portfolio rose 1.97% to P18.133 trillion at end-September.
The NPL coverage ratio increased to 94.05% in September, reflecting lender risk management amid expanding consumer loans and steady lending activity.

September loan metrics show firmer asset quality

As reported by BusinessWorld, citing the Bangko Sentral ng Pilipinas, the banking industry's gross nonperforming loan ratio falls to 3.27% in September from 3.35% in August and 3.31% a year earlier, based on preliminary data posted on the central bank's website. The September reading marks the lowest bad loan ratio in nine months, or since 3.07% in December last year.

Soured loans slip by 0.51% month on month to P593.275 billion in September from P596.299 billion in August, although they are still 10.09% higher than P538.924 billion a year earlier. Loans are classified as nonperforming once they remain unpaid for at least 90 days after the due date, making them risk assets because borrowers are considered unlikely to pay.

The industry's total loan portfolio stands at P18.133 trillion at end-September, up 1.97% from P17.783 trillion a month earlier and 11.42% from P16.276 trillion a year earlier. Past due loans rise by 0.24% month on month to P771.748 billion, but the past due loan ratio eases to 4.26% from 4.33% in August, even as it is higher than 4.16% a year earlier.

Restructured loans edge up to P342.783 billion from P340.581 billion in August and account for 1.89% of total loans, lower than 1.92% a month earlier and 2.04% a year ago. Loan loss reserves inch up to P557.979 billion, while the reserves ratio declines to 3.08% from 3.12% in August and 3.11% a year earlier.

Provisioning trend reflects lending growth and risk management

Central bank data also show the NPL coverage ratio, which measures allowances set aside for potential losses from bad loans, climbs to 94.05% at end-September from 93.17% in August and 93.85% a year earlier. Earlier, the BSP tells BusinessWorld that the recent provisioning trend does not reflect systemic stress or weakening asset quality.

Instead, the central bank says lenders' allowance for credit losses and NPL coverage ratio increase alongside expanding consumer loans and as part of risk management practices. Jonathan L. Ravelas, senior adviser at Reyes Tacandong & Co., says steady lending activity helps banks manage credit stress and improve asset quality during the period.

He says the drop in the NPL ratio signals improving asset quality and highlights the resilience of both borrowers and lenders. He adds that steady loan growth and stable economic activity help contain credit stress.

In our earlier article on planned Philippine sovereign bond reforms and the country’s prospective inclusion in J.P. Morgan’s Government Bond Index-Emerging Markets, we explained how these steps could broaden the investor base, improve liquidity, and support price discovery for peso government securities. We also noted that lower yields and stronger inflows are not automatic, and that translating market modernization into real-economy investment still depends on fiscal credibility, deeper domestic capital markets, and wider structural reforms that expand businesses’ access to financing beyond bank loans.

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