Banks’ bad loans continue to decline

Universal and commercial banks posted an even lower exposure to bad debts as of end-May, in what regulators consider an indication that the crisis offshore is not dragging down the ability of Filipino borrowers to repay their bank loans.

The average nonperforming loan (NPL) ratio of universal and commercial banks settled at only 2.18 percent as of end-May. This was lower than the already benign figures of 2.3 percent the previous month and 2.8 percent recorded during the same period last year, the Bangko Sentral ng Pilipinas reported.

NPL ratio is the proportion of bad debts or soured loans—liabilities to banks that have remained unpaid for at least a prescribed period following maturity—to outstanding loans of a bank. It is one of the closely watched indicators of the banking system’s soundness.

Bad debts amounted to P70.98 billion, while outstanding loans reached P3.25 trillion.

BSP officials said the latest NPL ratio, which has fallen to the 2-percent territory since last year, was very comfortable. This level indicates the efficiency of banks in collecting loan payments, on one hand, and the ability of individual and corporate borrowers to pay their debts, on the other, they said.

The prolonged debt crisis in the eurozone, one of the biggest export markets in the world, has led to shrinking revenues for export firms, such as those from the Philippines. Given this backdrop, concerns were earlier raised on the potential drag the eurozone debt crisis may have on the ability of banks to collect loan payments from clients, particularly those engaged in the export business.

Officials said, however, that the NPL ratio remains manageable partly because Filipino exporters have started to diversify markets.

The BSP also said that even if loan defaults significantly rise, result of its recently conducted stress tests showed that banks in the country remain strong. This is because universal and commercial banks in the country have sufficient capital to absorb risks, the central bank said.

In case of a steep rise in loan defaults, the banks can simply pull out reserves, it added.

Data from the BSP showed that the combined loan-loss reserves of universal and commercial banks are even higher than their total bad debts. The NPL coverage ratio—the proportion of loan-loss reserves to bad debts—stood at 128.93 percent as of end-May.

“The industry’s provisioning against potential credit losses remained adequate,” the BSP said in a report.

Meantime, the BSP also reported that the nonperforming assets (NPA) ratio of universal and commercial banks improved to 2.71 percent as of end-May from 2.77 percent the previous month and 3.26 percent as of the same period last year.