Bad Loans Ratio Improves to Pre-Asian Crisis Level

February 19 2010

Source :

MANILA, Philippines (2nd Update) – Non-performing loans of universal and commercial banks in December 2009 accounted for 2.97% of total loan portfolio.

This NPL ratio, which is an indicator of the health of the country’s financial system, is the lowest in 13 years, according to the Bangko Sentral ng Pilipinas (BSP).

Data from the central bank showed that bad debts as of end-December amounted to P80.91 billion, down from P85.17 billion as of end-November and from P88.19 billion as of end-December of 2008.

The NPL ratios then were 3.26% and 3.52%, respectively.

The banking industry posted a 2.8% NPL ratio at end-December 1996, or before property bubble triggered the Asian financial crisis the following year. It was during the 1997 crisis when banks in Asia started to accumulate bad loans and non-performing assets as a result of the crash in the property market.

The BSP attributed the healthy December NPL ratio to the combined efforts of the industry to reduce bad loans in the banks’ books and the growth in total loan portfolio.

Total loan portfolio of banks stood at P2.72 trillion as of end-December 2009, up from P2.61 trillion as of end-November and P2.4 trillion as of end-December 2008.

BSP deputy governor Diwa Guinigundo said that with the expected improvement of the domestic economy this year, banks are expected to register an even lower NPL ratio.

Bad assets

Meanwhile, non-performing assets (NPA) ratio also improved to 4.04% in December.

Non-performing assets, usually called ‘bad assets,’ refers to the percentage of bad loans (NPLs) plus repossessed assets and restructured loans of defaulting borrowers against the banks’ total loan portfolio.

At end-December 2009, NPAs stood at P216.32 billion—an improved to end-2008’s total of P232.42 billion.

The total distressed assets of the industry had gone down significantly from the peak of 25% in 2000 when the financial sector felt the full brunt of the post-1997 collapse.

Repossessed assets, which are called ROPOA in industry lingo (real and other properties acquired), was lower by 0.49% at P135.41 billion at end-December 2009.

Banks also restructured lesser loans in 2009. The ratio against total loans improved to 1.65% compared to 2009’s ratio of 2.21%.

Buffer funds

Funds set aside by banks as buffer for these non-interest earning loans have reached 112.34% for the NPLs and 54.88% for the NPAs.

The Bangko Sentral ng Pilipinas compel banks to set aside provisional funds in case the losses on these bad loans and assets become real.

Banks have been speeding up efforts to unload their bad loans and assets to avoid heavy capital charges that would apply on non-performing assets as the BSP implemented new rules under its Basel II commitments.