Banks’ bad loans down to 14.96% in August

The bad loans of commercial banks declined from 15.38 percent in July to 14.96 percent in August, and the Bangko Sentral ng Pilipinas (BSP) expressed optimism that the Special Purpose Vehicle Act (SPVA) would improve the quality of banks’ loan portfolio.

Latest BSP data indicated that the proportion of non-performing loans to the commercial banking sector’s total loan portfolio declined due to the takeout of bad loans that were sold to individual buyers.

BSP officer-in-charge Alberto V. Reyes told reporters that although there is still no massive and system-wide unloading of bad loans, banks have begun in earnest to unload their NPLs to individual buyers.

"At the very least it is an indication that concrete steps are being taken by banks to dispose of their NPLs," Reyes said. "Of course we would still rather see more decisive steps in this direction, but it’s a start."

The BSP’s internal target is to reduce the commercial banking sector’s NPL ratio to 10 percent of their total loan portfolio by 2005, a process expected to be accelerated by the SPVA which provides incentives to banks to unload their NPLs to asset management companies.

The shift in the banking sector’s NPL level, however, was met with skepticism by credit ratings agencies who said that the decline in NPL ratio had been due, not to the actual decline in bad loans but to the change in definitions that allowed banks to window-dress their portfolio.

In its most recent report on the Philippine banking industry, Moody’s Investors Service said it did not believe that the recent easing in reported non-performing loan (NPL) ratios indicated a fundamental improvement in asset quality.

"Instead, the lower numbers are due to definitional changes," said Moody’s analyst John Tham.

Since September 2002, bad loans which are fully provided for have been excluded from the computation of NPL ratios, causing an artificial decline in NPLs.

"In fact, the moderate rise in foreclosed assets and restructured loans – which are reported separately – may imply a short-term weakening in borrowers’ debt-servicing capabilities," Tham said.

On the whole, Tham said the outlook on the Philippine banking system was dim, primarily because of the negative outlook on the country’s overall currency ratings which pulled down its expectations on Philippine banks.

Moody’s said the banking industry also stands on shaky grounds because of the weakness in a number of undercapitalized banks and banks that are Banks’ bad under rehabilitation which Tham said could cause destabilization.

Tham said Moody’s outlook for Philippine banks’ debt and deposit ratings was generally negative. Although the major indigenous banks’ financial health remained fairly sound, the ratings agency said the financial profile for the rest of the sector was varied.

According to Moody’s, a benign interest rate environment – given the system’s high liquidity – has allowed banks to support lending margins through active asset and liability management.

"Some support will come in the form of the moderate level of domestic consumption – against a backdrop of stabilizing global conditions," said Tham, adding that that this should compensate for the political fluidity leading up to next year’s presidential elections.