NPLs may rise amid high rates, inflation — IMF

NONPERFORMING LOANS (NPLs) could rise in the near to medium term as interest rates are expected to remain high amid lingering upside risks to inflation, the International Monetary Fund (IMF) said.

“Because we’re in a high interest rate environment, especially if loans need to be reset, there is a risk that people will need to switch to loans with higher interest rates and that could lead to some repayment difficulties,” IMF Representative to the Philippines Ragnar Gudmundsson said in an interview on the sidelines of the BusinessWorld Forecast 2024 economic forum on Nov. 22.

The banking industry’s NPL ratio eased for the fourth straight month in September, although soured loans inched up amid high borrowing costs, preliminary data from the Bangko Sentral ng Pilipinas (BSP) showed.

Banks’ NPL ratio stood at 3.4%, easing from the 3.42% seen in August 2023 and September 2022. This was the lowest NPL ratio in six months or since 3.33% in March.

However, the amount of bad loans rose by 0.3% to P444.313 billion in September from P442.902 billion in August and by 7.2% from P414.606 billion in September last year.

The real estate sector will be heavily affected by the high interest rate environment and could drive the overall rise in NPLs, Mr. Gudmundsson said.

“As interest rates on loans taken out during COVID-19 reset, NPLs could increase further, especially in the commercial real estate segment, where vacancy rates remain elevated,” he said in a speech at the same forum. “Despite the regulatory limits for real estate loans at 25% of total loans, a prolonged real estate slowdown could affect banks’ profitability.”

“In the commercial real estate sector, some of these real estate developers may need to refinance. That’s a normal thing: for real estate developers to refinance their activities. But now, they will have to refinance in a higher interest rate environment, which of course means that it could affect their profitability. That’s why we’re saying that it is an area of potential vulnerability that needs to be monitored,” Mr. Gudmundsson said.

For the residential segment, homeowners may likewise need to refinance their mortgages with higher rates compared to when they first took out their loans, he added.

Banks’ NPLs may decline once inflation slows further, as this could prompt monetary easing, Mr. Gudmundsson said.

BSP Governor Eli M. Remolona, Jr. on Friday said its policy stance will remain “hawkish for a while” as upside risks to prices remain.

At its Nov. 16 policy meeting, the BSP kept its policy rate at a 16-year high of 6.5% amid easing inflation following an off-cycle hike of 25 basis points (bps) last month.

The Monetary Board has now raised borrowing costs by a total of 450 bps since it kicked off its tightening cycle in May 2022.

It will hold its last policy review for this year on Dec. 14.

Headline inflation slowed to 4.9% in October from 6.1% in September. This brought the 10-month average to 6.4%, still above the BSP’s 2-4% target and 6% forecast for the year.

The BSP’s “higher-for-longer” stance and readiness to resume hiking if more upside risks to prices emerge should keep inflation on track to return within target, which will improve the outlook for NPLs moving forward, Mr. Gudmundsson said.

Still, regulators should consider “introducing a sectoral systemic risk to real estate exposures or increase relevant risk weights” to maintain financial stability, he said.

“The BSP, the Securities Exchange Commission, and other regulatory agencies should collaborate closely to address remaining data gaps on large conglomerates and expand their stress testing capabilities,” Mr. Gudmundsson added. — A.M.C. Sy