Banks’ soured loans jumped in 2023 amid high rates

MANILA, Philippines  —Local banks’ bad loans surged in 2023 compared to the preceding year after some borrowers struggled to repay their debts amid a high interest rate environment.

Gross nonperforming loans (NPL), or bank credit that remained unpaid at least 30 days past the due date, jumped by 12.1 percent year-on-year to P446.99 billion as of end-December last year, latest data from the Bangko Sentral ng Pilipinas (BSP) showed.

That meant 3.23 percent of banks’ total loan portfolio had soured by the end of 2023, slightly higher than the 2022 ratio of 3.16 percent. At the same time, the NPL ratio had yet to return to the prepandemic level of 2.04 percent recorded in 2019.

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But on a month-on-month basis, gross NPL fell by 1.6 percent in December. Meanwhile, the NPL ratio in the final month of 2023 was the lowest reading for last year.

Rising costs

Ruben Carlo Asuncion, chief economist at Union Bank of the Philippines, attributed the spike in bad loans to rising costs of borrowing as a result of the BSP’s aggressive anti-inflation rate hikes.

”[This is the] impact of elevated interest rates. Higher cost of borrowing and thus higher cost to pay,” Asuncion said.

With threats to its inflation target still very much present, the BSP said it “deems it necessary to keep monetary policy settings sufficiently tight until a sustained downtrend in inflation becomes evident.” But Governor Eli Remolona Jr. said a rate cut was “possible” this year.

The BSP’s benchmark rate—which banks typically use as a guide when charging interest rates on loans—is currently at 6.5 percent, the highest in 16 years. By keeping borrowing costs high, the central bank wants to bring demand for key consumer items in line with limited supply to prevent a fast rise in prices.

READ: Philippine rates to stay higher for longer to tame inflation, says BSP chief

To protect their balance sheets from the increase in unpaid loans, BSP data showed banks’ allowance for credit losses amounted to P456.5 billion by the end of 2023, up by 7 percent year-on-year. That brought the NPL coverage ratio, a measure of sufficiency of buffers against unpaid loans, to 102.13 percent last year, from 107 percent in 2022.

Increased buffer

Moving forward, results of the BSP’s latest “Banking Sector Outlook Survey” showed half of the country’s big banks were expecting NPLs to eat up “above 2 percent to 3 percent” of their loan portfolio this year.

READ: PH banks still wary about lending to businesses in Q4 2023

A projected decline in soured debts would lessen the need for banks to beef up their buffers against potential losses from unpaid loans. This, in turn, would allow lenders to use more of their resources to ramp up their lending activities.

“Higher NPL ratio possibly due to the rising interest rate environment although a robust jobs market is helping offset the increase as the steady stream of income helps households generate cash flow to keep some loans up to date,” Nicholas Mapa, senior economist at ING Bank in Manila, said. —Ian Nicolas P. Cigaral