Philippine banks’ NPL ratio may rise up to 5% by end-2021 – Fitch

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The Philippine banking industry will likely see a rise in soured loans this year as many consumers struggle to settle their debts amid the crisis, Fitch Ratings said.

The non-performing loan (NPL) ratio is expected to spike to 4.5-5% by end-2021 as more bad loans pile up in the first half, the debt watcher said in a note released on Friday.

“We expect Philippine borrowers to have a harder time meeting their debt obligations after the expiry of the moratorium, than borrowers in more developed markets where aggressive fiscal stimuli have resulted in larger cash handouts and stronger employment support,” Fitch analysts Tamma Febrian and Willie Tanoto said.

While employment prospects will likely improve as the economy gradually recovers, they noted the jobs market will remain sluggish for at least several quarters.

This in turn will impact consumer loan quality that will keep NPL ratios elevated this year.


The jobless rate in the country stood at 8.7% or about 3.813 million unemployed Filipinos in October, much higher than the 4.6% or 2.045 million jobless a year earlier. This was an improvement from the record 17.6% unemployment rate in April when 7.228 million individuals were jobless amid the lockdown.

“The improvement in the national jobless rate has not translated into better consumer loan asset quality. This was partly because the unemployment ratio within the National Capital Region (NCR), where most of the banks’ customers are concentrated, remained stubbornly high at 12.4%,” Fitch analysts said.

The industry-wide bad loan ratio stood at 3.61% as of end-December, easing from the 3.78% in the prior month partly due to the impact of the temporary grace period for borrowers which expired in December. However, this was still higher than the 2.08% seen as of end-December 2019.

As of end-September, Fitch analysts noted the consumer loan segment with the worst NPL ratio was for motor vehicle loans (9.7%). This was followed by residential mortgages (8.4%) and credit card receivables (7.5%).

Meanwhile, the debt watcher flagged risks related to real estate loans.

“Banks that were actively underwriting mortgage loans at the height of the property boom in late 2019 and early 2020 are more vulnerable to heightened provisioning risks from the recent price correction as the property values of some of these loans may already be underwater, raising the incentive for borrowers to default or reducing collateral recovery rates,” Fitch analysts said.

Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno earlier dismissed financial stability concerns related to asset price bubbles.

Central bank data showed residential home prices slipped 0.4% year on year in the third quarter last year, as prices of condominium and duplex homes decreased by 15% and 8.8%, respectively.

However, prices of townhomes and single detached/attached houses rose by 12.4% and 7.4%, respectively in the same period.

As bad loans pile up, Fitch said the passage of the Financial Institutions Strategic Transfer (FIST) Law will be a source of relief for the banking industry. Republic Act No. 111523 will cover assets of banks that will be deemed non-performing until end-2022.

“SPV (special purpose vehicle) law may help banks to offload NPLs, though pace of disposal will likely hinge on implementation and economic recovery,” the Fitch analysts said. — Luz Wendy T. Noble


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