Bank's bad loans hit 13-year high

NONPERFORMING LOANS (NPLs) held by Philippine banks continued to rise in May, bringing the industry’s NPL ratio to the highest in 13 years amid the prolonged pandemic.

Data released by the Bangko Sentral ng Pilipinas (BSP) on Thursday showed that gross NPLs surged by 83% to P479.481 billion in May from P262 billion a year earlier. Bad loans also increased by 3.4% from the P463.659 billion in April.

This brought the industry’s gross NPL ratio to 4.49% in May, from 2.43% during the same month last year and the 4.35% in April.

The NPL ratio matched the 4.49% recorded in June 2008 and is the highest since the 4.61% in May 2008 amid the global financial crisis.

Loans are considered nonperforming once they are left unpaid for at least 30 days beyond the due date. These are considered a risk to banks’ asset quality as borrowers are likely to default on these debts.

Analysts said the continued rise of bad loans reflect the huge impact of the pandemic on borrowers.

“They [borrowers] may have the capacity to pay at the time of the loan approval but because of the continued uncertainties and risks to income capacities, the likelihood of default is relatively higher,” Asian Institute of Management

economist John Paolo R. Rivera said in an e-mail.

Bad loans will likely continue to increase in the next months amid the elevated unemployment rate and muted economic activities, ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said.

“The fate of the banks’ balance sheets rests on how quickly we can get economic activity back on its feet as this would ensure rising incomes that would in turn be used to make these loan payments on time,” Mr. Mapa said in an e-mail.

Meanwhile, the banking industry’s loan portfolio shrank by 1.2% to P10.669 trillion in May, as lenders remained risk averse as the crisis continued. Month on month, the loan portfolio inched up by 0.18% from the P10.649 trillion in April.

In May, past due loans reached P593.346 billion, rising by 5.2% to P563.761 billion from a year ago. These loans made up 5.56% of the total loan portfolio versus 5.22% a year ago.

Restructured loans surged by 447% to P263.514 billion in May, from P48.09 billion a year ago. With this, the ratio rose to 2.47% from 0.45% last year.

As bad loans piled up, lenders beefed up their loan loss reserves by 50% to P383.389 billion in May, from P254.945 billion last year. This brought the ratio to 3.59% from 2.36% a year ago.

However, lenders’ NPL coverage ratio — a gauge of allowance for potential losses due to soured loans — slumped to 79.96% from 97.31% in May 2020.

Analysts noted banks may start to lend more once the economy fully reopens, although this would depend on the pace of the vaccine rollout.

“The only way banks will be less risk averse to take on more loans is through speeding up the national vaccination program so the economy can be opened allowing for more sustained income-generating capacities for both firms and consumers,” Mr. Rivera said.

Bank lending continued to decline for the sixth straight month by 4.5% in May, although slower than the 5% fall in April. This, as lenders tightened their credit standards to guard against the rise in bad loans while borrowers shied away from credit activities during the crisis.

Meanwhile, Mr. Mapa said the Financial Institutions Strategic Transfer (FIST) Law may not be able to provide “immediate help” for banks. In this regard, he said keeping policy rates at record lows will be more helpful for both banks and borrowers.

“This highlights the need for BSP to retain its accommodative stance as any tightening of monetary policy may result in even higher NPL ratios and an even slower recovery in bank lending,” Mr. Mapa said.