February NPL ratio highest in 11 years

By Luz Wendy T. Noble, Reporter

LENDERS’ bad loans rose for the second straight month in February, bringing the nonperforming loan (NPL) ratio to its highest since 2009 as borrowers had difficulty making payments amid the coronavirus pandemic.

Bad loans are expected to peak by the second half of this year, according to S&P Global Ratings. However, it noted that improvements in borrowers’ capacity to pay remain clouded by the pace of economic recovery which depends on the successful handling of the coronavirus disease 2019 (COVID-19) and the mass vaccination drive. 

Gross NPLs held by banks surged 80% to P431.266 billion in February from P239.902 billion a year earlier, based on preliminary data from the Bangko Sentral ng Pilipinas (BSP). It also increased by 9.05% from the P395.465 billion in January.

This brought the NPL ratio to 4.08% in February, from 2.2% logged a year ago. This is the highest since the 4.09% NPL ratio recorded in October 2009.

“With borrowers now no longer able to rely on the cover provided by the loan moratorium, we will begin to see the pickup in this ratio quicken to some extent,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in an e-mail.

Loans are deemed nonperforming once they are left unpaid at least 30 days beyond the due date. They are considered as risk to lenders’ asset quality as these have high risk of default.

Analysts said the worst is not over for lenders as asset quality is likely to further deteriorate in the coming months, showing the fuller impact of the pandemic on borrowers. A 60-day loan moratorium provided for under Republic Act No. 11494 or the Bayanihan to Recover as One Act has already expired.

“The industry’s NPL ratio will likely increase to 6% in 2021,” Nikita Anand, an analyst at S&P Global Ratings,  said in an e-mail to BusinessWorld.

Ms. Anand said banks’ consumer, and small business loan portfolios will continue to see high new NPL formation, as renewed lockdown measures are expected to hurt borrowers.

“Many small businesses have had to shut shop as revenues plunged with the lockdowns. Household incomes have been disrupted due to job losses and salary cuts. Most new NPLs since COVID-19 have come from the consumer segment, reflecting the loss of household incomes from the sharp economic contraction,” she said.

As nonperforming loans edged up, lenders’ total loan portfolio contracted by 3% to P10.579 trillion from P10.91 trillion from a year ago and by 0.37% from the P10.618 trillion in January.

Past due loans in February reached P551.472 billion, climbing by 71.3% from the P321.862 billion last year. This brought the ratio to 5.21% from 2.95% in the same month of 2020.

Restructured loans also surged by more than six times (346%) to P200.986 billion from P45.045 billion a year earlier. With this, its ratio reached 1.9%, up from the 0.41% in February last year.

As NPLs increased, banks beefed up loan loss reserves by 70% to P373.631 billion from P218.785 billion a year ago.

Meanwhile, banks’ NPL coverage ratio, which measures the allowance for potential losses due to bad loans, dropped to 86.64% from 91.2% in February 2020.

For Ms. Anand, the bad loan pileup scenario may only peak by the second half of this year, under a base case of renewed economic activity. This, together with low interest rates could improve debt servicing ability of borrowers by 2022.

However, she cautioned that a weaker-than-anticipated recovery due to a prolonged pandemic and slow vaccination could be a downside risk to this view.

S&P downgraded its outlook for Philippine growth this year to 7.9% (from 9.6%) as the inflation spike is seen to weigh down on the country’s consumption-driven economy.

“If the economic recovery was delayed, the private sector will face renewed pressure, particularly among corporate sectors hit hardest by the pandemic. Such strains would mean weaker companies may have to restructure their debt and even go out of business, and that would ultimately impinge on their lenders,” she said.

The S&P analyst warned that continued weakness in the economy may also affect corporate credit quality which has remained “steady thus far.” In this scenario, debt servicing of corporates in pandemic-hit sectors such as lodging and food services, retail, transportation, and entertainment and recreation will be more challenged.

Ms. Anand also said that banks will stand to benefit from the recently enacted Financial Institutions Strategic Transfer (FIST) Law by giving them a chance to focus more on growth opportunities rather than spending resources on recovering loans. However, she said the success of the measure will still depend on its execution and lenders’ willingness to sell their bad assets.

“FIST could prove effective for small and midsize banks, as typically their resolution and recovery mechanisms are underdeveloped compared to larger banks,” she said.

Republic Act No. 11523 gives tax incentives for banks that will sell their nonperforming assets to FIST Corporations. BSP Governor Benjamin E. Diokno has said banks are expected to offload at least P152 billion in nonperforming assets through the measure.

Mr. Mapa said that while the FIST Law may ease NPL buildup, the root cause of the bad loans remains tied to the weak economic environment.