Banks’ bad debts inched up in Feb as rates stay high

MANILA, Philippines — Bad debts held by local banks inched up in February compared with a year ago, as the high interest rate environment continued to weigh on borrowers’ ability to pay their debts.

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed that gross nonperforming loans (NPLs)—or bank credit that remained unpaid at least 30 days past the due date and at risk of default—amounted to P466.11 billion in February, up by 13.36 percent from the same month last year.

On a month-on-month basis, NPLs rose by a smaller 1.16 percent.

That means 3.44 percent of the local banking industry’s total loan portfolio, which grew at an annualized rate of 9.07 percent in February to P13.54 trillion, had soured in February, unchanged from the ratio recorded in January.

READ: Banks’ soured loans jumped in 2023 amid high rates

At the same time, the NPL ratio had yet to return to the prepandemic level of 2.04 percent recorded in 2019.

Bad debts continued to rise amid ultra tight monetary policy settings meant to tame inflation.

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 nearly 17 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.

BSP to stay hawkish

BSP Governor Eli Remolona Jr. last month said the BSP would stay hawkish—or in favor of keeping borrowing rates high—in the face of persistent price pressures that may upset inflation expectations. For analysts, this means borrowing costs would likely stay higher for a longer period.

While soured loans continued their ascent, Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said the NPL ratio of banks in February was nevertheless among the lowest in 3.5 years or since August 2020.

But he added that the ratio was “still worse than the 15-year average of about 3.06 percent since 2008.”

To protect their balance sheets from the increase in soured loans, BSP data showed banks’ allowance for credit losses amounted to P466.39 billion in February, also accounting for 3.44 percent of the industry’s entire loan portfolio.

READ: PH banks see lower bad debts in 2024

That brought the NPL coverage ratio, a measure of sufficiency of buffers against unpaid loans, to 100.06 percent, from 100.29 percent in January.

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.

A 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 banks to use more of their resources to ramp up their lending activities.