Rising consumer loans driving banks’ NPL provisioning — BSP

By Katherine K. Chan, Reporter

PHILIPPINE BANKS’ higher provisioning for nonperforming loans (NPL) is largely driven by rising consumer loans, rather than systemic stress across the sector, the Bangko Sentral ng Pilipinas (BSP) said.

According to the central bank, the recent increases in NPL allowances merely reflect growing consumer credit, particularly in the credit card segment, and lenders’ risk management efforts.

“No particular bank group appears to account for the recent increase in loan loss allowances,” the BSP told BusinessWorld in an e-mailed response to questions. “Rather, the increase has been driven mainly by the continued expansion of consumer loan portfolio, particularly credit cards.”

The central bank added that provisioning for consumer loans remained in line with the segment’s portfolio growth, credit seasoning, and banks’ management of emerging credit risks.

In July, universal and commercial banks’ outstanding consumer loans to residents jumped by 17.1% to P2.062 trillion from P1.761 trillion a year ago, the latest central bank data showed.

Credit card loans accounted for the bulk of consumer loans, rising by 24.5% year on year to P1.304 trillion in July.

Meanwhile, separate BSP data showed NPLs reached P585.081 billion as of July, up by 9.27% from the P535.448 billion seen last year and by 0.02% from P584.971 billion in the prior month.

According to economists, bad debts rose during the period as elevated consumer prices and borrowing costs have strained borrowers’ repayment capacities.

This brought the sector’s gross NPL ratio to a two-month high of 3.35% in July, inching up from 3.29% in June but easing from 3.4% in the same month last year.

Last month, BSP Deputy Governor Zeno Ronald R. Abenoja told a House briefing that the local banking system remains sound, with NPLs, or loans unpaid for at least 90 days after the due date, are still “manageable and well-provisioned.”

The central bank later reaffirmed the same, adding that the rise of NPLs does not point to an industry-wide asset quality deterioration.

“While some loan segments have higher NPL growth, current data do not indicate a broad-based weakening in asset quality,” the BSP also told BusinessWorld.

“Rather, these trends reflect sector and portfolio-specific pressures that remain manageable, supported by adequate provisioning, strong capital buffers, and prudent risk management,” it added.

Meanwhile, the central bank noted that its move to highlight NPL provisioning was mainly to complement the NPL ratio and capital adequacy ratio (CAR), which it uses to gauge banks’ health and asset quality.

“The NPL coverage ratio does not replace (the) NPL ratio and CAR,” the regulator said. “Rather, it forms part of the range of banking strength/asset quality indicators monitored by the BSP.”

“The NPL coverage ratio reflects the robustness and maturity of banks’ provisioning practices, thus providing additional information on the extent to which existing NPLs are covered by allowances and complementing other indicators, such as the NPL ratio and CAR,” it added.

As of July, banks’ loan loss reserves stood at P540.895 billion as of end-July, slipping by 0.06% from P541.238 billion in the period ending June. However, it was up by 5.63% year on year from P512.061 billion previously.

Loan loss reserves comprised 3.1% of the lenders’ total loan book as of end-July, slightly higher than 3.04% in June but lower than 3.25% a year prior.

This brought banks’ NPL coverage ratio down to 92.45% in July from 92.52% in the previous month and 95.63% a year ago.

The NPL coverage ratio, or the loan loss reserves to NPL ratio, gauges banks’ buffers against potential losses emerging from bad loans. It indicates their capacity to cover bad loans using their loan loss reserves.

The latest figures mean the sector’s asset quality remains healthy in terms of the level of NPLs and how much it can absorb potential credit losses, the central bank noted.

“As such, the recent increase in provisioning reflects banks’ broader risk management practices,” it added. “Overall, the latest data indicate that banks continue to proactively build buffers against potential losses while supporting the growing credit needs of households and businesses.”

According to the central bank, domestic banks continue to see minimal direct exposure from the nearly seven-month long Middle East war, with risks looming mainly from indirect channels.

“Banks have reported limited direct exposure to jurisdictions affected by the Middle East conflict,” it said. “Potential risks to the domestic banking system stem mainly from indirect channels, including higher oil and input costs, inflationary pressures, exchange rate volatility, rising market yields, and tighter funding conditions.”

As of end-June, the banking industry’s CAR has remained above the BSP’s 10% minimum requirement. Their solo CAR stood at 15.23%, while their consolidated CAR, which covers banks and their subsidiaries, was at 15.59%.