Banks’ bad loan ratio rises to 9-month high

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July 4, 2026 | 12:00am

MANILA, Philippines — The non-performing loan (NPL) ratio of banks climbed to its highest level in nine months in May as bad loans continued to increase, reflecting normalization in asset quality and the delayed impact of previously high interest rates on borrowers.

Preliminary data from the Bangko Sentral ng Pilipinas (BSP) showed the banking industry’s gross NPL ratio rose to 3.44 percent in May from 3.37 percent in April.

The latest reading was the highest since the 3.5 percent recorded in August 2025 and was also slightly higher than the 3.38 percent posted in May 2025.

NPLs refer to loans whose principal or interest payments have remained unpaid for at least 90 days after their due date. These are considered high-risk assets because they indicate a borrower’s reduced ability or willingness to repay debt.

In peso terms, gross bad loans increased by 14 percent to P601.41 billion in May from P527.45 billion in the same month last year.

The increase came alongside continued growth in lending. Banks’ gross total loan portfolio expanded by 11.9 percent to P17.48 trillion from P15.62 trillion a year earlier, suggesting that credit demand from households and businesses remained resilient despite tighter financial conditions.

“The uptick in the NPL ratio likely reflects a normalization in asset quality alongside the lagged impact of previously high interest rates on some borrowers’ repayment capacity,” UnionBank chief economist Ruben Carlo Asuncion said.

Despite the uptick, Asuncion said the banking system remains resilient, with strong capital and liquidity buffers providing sufficient capacity to absorb higher bad loans.

“Moving forward, continued economic growth and lower interest rates should help stabilize asset quality, although global uncertainties and pockets of borrower stress may keep NPLs slightly elevated in the near term,” Asuncion added.

Other asset quality indicators also pointed to some pressure on borrowers.

Past due loans, or obligations that have missed payments but have yet to be classified as non-performing, rose by 15.6 percent to P761.87 billion in May from P659 billion a year earlier. This translated to a past due ratio of 4.36 percent.

Meanwhile, restructured loans, which refer to accounts whose repayment terms have been modified to help borrowers avoid default, increased by 11 percent to P348.02 billion from P313.39 billion in the same month last year. The restructured loan ratio stood at 1.99 percent.

To cushion against potential losses, banks continued to build up reserves as allowance for credit losses climbed by 7.2 percent to P534.76 billion in May from P498.83 billion a year earlier.

Despite the increase in bad loans, the banking system remained adequately provisioned as the NPL coverage ratio stood at 88.92 percent in end-May.