Banks’ bad loans fall to lowest in 51/2 years

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February 13, 2026 | 12:00am

MANILA, Philippines —  The soured loans of Philippine banks continued to ease in December last year, hitting their lowest level in more than five years, as improved borrower repayments and cautious lending helped strengthen overall asset quality.

Preliminary data from the Bangko Sentral ng Pilipinas (BSP) showed that the banking industry’s non-performing loan (NPL) ratio improved further to 3.27 percent in December from 3.54 percent in November.

It marked the lowest clip since the 2.08 percent recorded in August 2020.

NPLs refer to credit obligations that have not been repaid for at least 90 days past their due date. These loans are considered high-risk assets because they signal a borrower’s reduced ability or willingness to meet payment obligations.

Jonathan Ravelas, senior adviser at Reyes, Tacandong & Co, said the decline in the banking industry’s NPL ratio reflects both genuine improvement in asset quality and a more conservative lending environment.

“Asset quality has genuinely strengthened as borrowers’ repayment capacity improved and banks tightened underwriting. At the same time, slower loan growth also played a role – fewer new loans mean fewer potential problem accounts entering the system,” he said.

“So this is a healthy signal, but partly supported by cautious lending. The real test is whether NPLs stay low once credit growth accelerates again,” Ravelas said.

In absolute terms, the industry’s soured loans still increased by 5.2 percent to P526.68 billion at end-2025 from P500.43 billion a year earlier.

This rise, however, was outpaced by the expansion in total lending, with gross loans growing by a faster 11.6 percent to P17.1 trillion from P15.32 trillion. The stronger growth in overall loans helped pull the NPL ratio lower despite the increase in bad loans.

Past due loans, which include accounts that are late on payments but not yet classified as non-performing, rose by 11.4 percent to P674.38 billion from P605.22 billion.

Restructured loans, or accounts whose terms were modified to help borrowers repay, also rose by eight percent to P336.46 billion from P310.44 billion.

Soured loans remain a critical measure of banks’ asset quality, as higher bad loans force lenders to set aside more funds as buffers against potential losses. These provisions can weigh on profitability and reduce funds available for new lending.

Reflecting this risk management approach, Philippine banks increased their loan loss reserves by 6.2 percent to P510.54 billion at end-December last year from P480.64 billion a year earlier.

This resulted in a loan loss reserve ratio of 2.98 percent, meaning banks had set aside nearly P3 for every P100  of loans.

The NPL coverage ratio stood at 96.93 percent, indicating that provisions were sufficient to cover almost all bad loans on banks’ books, a sign of a well-capitalized and cautious banking system.