Banks lend more as asset quality improves

MANILA, Philippines — Bank lending grew at its fastest pace in 11 months in March, showing resilience in the face of a high-interest rate environment, as asset quality also improved.

Outstanding loans by big banks, excluding funds lent among themselves, amounted to P11.8 trillion in March, up by 9.4 percent year-on-year, the Bangko Sentral ng Pilipinas (BSP) reported on Friday.

The expansion was faster than the 8.6-percent annualized growth in February. It was also the briskest pace of increase since April 2023

This, in turn, flushed more liquidity into the financial system. Domestic liquidity, the broadest measure of money supply, grew by 5.7 percent to P17.2 trillion in March.

Robert Dan Roces, economist at Security Bank, said banks were still riding the ongoing economic recovery from the pandemic, helping them weather tight financial conditions.

Pent-up demand

“The acceleration in bank lending growth despite a high-interest rate environment can be attributed to a still ongoing economic recovery, some pent-up consumer demand [and] improving business sentiment,” Roces said.

READ: Credit growth picked up pace in Feb, fastest in nine months – BSP

The overall credit expansion in March was driven by a strong appetite for consumer loans, which picked up by 25.4 percent to P1.3 trillion.

Household loan growth is now nearly double the P839.2-billion consumer credit recorded at end-2019, or before the pandemic struck. Credit card and auto loans posted punchy growth rates of 30 percent and 19 percent in March, respectively, while salary-based loans picked up by 17.6 percent.

READ: Banks kept tight lending standards to businesses in Q1

Loans for businesses rose by 7.7 percent to P10.1 trillion.

Businesses were still “possibly constrained by the high-interest rate environment,” said Nicholas Mapa, senior economist at ING Bank in Manila.

“This is in stark comparison to bank lending during the recent growth spurt of the Philippines where lending to production was vibrant given the balanced monetary policy stance of the BSP back then,” Mapa said.

Bad loans ease

The strong credit growth coincided with improved asset quality. Banks’ nonperforming loans—those more than 90 days late on a payment—accounted for 3.39 percent of the total loan portfolio in March, down from 3.44 percent in the previous month.

Bad loans totaled P464.7 billion, up by just 0.3 percent from February’s P466.7 billion. By the end of the first quarter, the total loan portfolio of the sector reached P13.7 trillion.

To keep their balance sheet safe from unpaid loans, lenders set aside P467.8 billion of their capital as a buffer against credit losses. This brought the industry’s NPL coverage ratio, which measures the sufficiency of rainy-day funds, to 100.66 percent.

Ruben Carlo Asuncion, chief economist at Union Bank of the Philippines, said the easing of soured loans boded well for lenders as they opened the year with healthy profits on the back of hefty interest income.

“Higher interest rates have helped the bottom lines of financials under this prevailing environment. At the same time, it has a shelf life and that is now the job of central banks to make sure that neutral rates are reached especially if you need to address inflation and eventually not sacrifice economic growth,” he said.

For Security Bank’s Roces, the BSP must ensure that both borrowers and banks are not engaging in risky behaviors.
“While faster credit growth can signal economic recovery, steps by regulators and lenders alike need to be made to ensure sustainability and prevent excessive risk-taking,” he said.