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U/KBs' NPLs Remain Low Amid Rise in Lending


The gross non-performing loan (GNPL) ratio of universal and commercial banks (U/KBs) was 2.75 percent in May 2013. This is the ninth consecutive month that this ratio has been below or equal to 3 percent.

The latest figure is consistent with the longer-term trend of a general decline in the amount of GNPLs. While this is already an indication of strong credit risk management on the part of U/KBs, the trend is made more impressive by the fact that the total loan portfolio (TLP) continues to rise.

As of May 2013, the TLP of U/KBs was at Php3.69 trillion with gross NPLs amounting to Php101.37 billion. In contrast, comparative year-end 2012 TLP and gross NPLs were Php3.65 trillion and Php100.61 billion, respectively.

Although their GNPL ratio has been declining, U/KBs continue to pro-actively set aside reserves for potential losses from loans. The value of loan loss reserves (LLR) as of May 2013 for U/KBs was at Php130.26 billion and translates into a gross NPL coverage ratio of 128.50 percent. The NPL coverage ratio measures LLR as a percentage of GNPL. At current levels of the GNPL coverage ratio, banks have effectively set aside a greater amount of funds than their outstanding NPLs.

While a lower GNPL ratio is being reported by U/KBs, the net NPL (NNPL) ratio has remained nearly constant. As of May, the NNPL ratio was at 0.44 percent and the year-to-date ratios have been within a very narrow band between 0.43 percent and 0.45 percent. Net NPLs are derived by deducting loan-loss provisions for specific accounts from gross NPLs.

Across economic activities, there is likewise a generally declining trend in the respective GNPL ratios. This is evident in major economic activities such as financial intermediation, real estate, manufacturing as well as wholesale and retail trade. These four are particularly important to U/KBs since they collectively represent 62.39 percent of the TLP of these banks.

The BSP earlier introduced an amended reporting standard for NPLs. Beginning with the January 2013 reports, banks have been required to report their “gross” NPLs and their “net” NPLs.

Gross NPLs represent the actual level of NPL without any adjustment for loans treated as “loss” and fully provisioned. Net NPLs is just the gross NPLs less specific allowance for credit losses on TLP.

The new reporting standard was driven by the BSP’s intent to be more transparent as it gives a fuller picture of the gross amount of NPLs and the full extent of allowances for probable losses. Under the previous framework, NPLs were reported net of loans considered as “loss” but fully provisioned for.

NPL ratios, both on a gross or net basis, are key indicators of the strength of the credit risk management standard of banks. Low and generally declining NPL ratios indicate that U/KBs are taking pro-active steps to ensure that their respective credit portfolios adhere to high standards. Maintaining this high standard amidst an environment of available liquidity and lower-funding cost is critical from both a financial stability standpoint as well of the safety and soundness of individual banks.

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