Bad Loan Ratio Hits 9-Month High as Buffers Shrink

What It Means

• The bad loan ratio at Philippine banks climbed to 3.44 percent in May, the highest reading in nine months.
• Gross non-performing loans rose 3.7 percent to ₱601.4 billion in a single month, while the coverage ratio that protects against those losses fell to 88.9 percent.
• Rural banks, thrift banks, and consumer lenders exposed to transport and fuel-sensitive borrowers carry the sharpest version of this stress.
• Banks with strong capital are absorbing the gap for now, but that cushion narrows every month the ratio keeps climbing faster than provisions.

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Bad Loan Ratio Climbs While Coverage Falls

The bad loan ratio at Philippine banks rose to 3.44 percent in May, up from 3.37 percent in April and the highest print since August last year, according to Bangko Sentral ng Pilipinas data. Gross non-performing loans grew 3.7 percent in a single month, from ₱579.9 billion to ₱601.4 billion, against a total loan book of ₱17.48 trillion. The headline number is not the interesting part. What matters more is that the industry’s provisioning coverage, the buffer banks hold against those bad loans, slipped to 88.9 percent over the same stretch. Loans are only classified as non-performing once payment has been late for 90 days or more, so this print is a trailing signal of stress that built up earlier in the year, not a live reading of today’s conditions.

Two Analysts, One Number, Different Conclusions

Jonathan Ravelas of Reyes Tacandong and Co. pointed directly at the gap between the two figures, saying “this divergence may reflect banks’ view that asset quality risks remain manageable.” He called the current print a caution flag rather than a red flag, but said it needs watching if the trend continues. UnionBank chief economist Ruben Carlo Asuncion took the opposite read, arguing the gap “may reflect a normalization in provisioning behavior rather than heightened credit stress.” Both analysts are looking at the same 88.9 percent coverage number attached to the same bad loan ratio. One reads it as risk building quietly. The other reads it as banks rationally easing off a buffer they no longer think they need. The disagreement itself is the tell. Normalization and risk accumulation produce identical numbers in month one. They only look different in month four or five, after the coverage ratio has kept falling.

The Oil Shock Explains Direction, Not Speed

The timing lines up with the run-up in fuel and transport costs tied to the Middle East conflict and the national energy emergency it triggered. Higher pump prices feed into logistics, food distribution, and household budgets before they show up in a bank’s book, and the 90-day lag on NPL classification means May’s number reflects pressure from roughly February and March, when the shock was near its sharpest. That gives the oil shock a real claim on the direction of the bad loan ratio. It does not explain why banks chose to let coverage slip rather than build reserves in step with rising bad loans. That is a capital allocation decision made inside the banks, not a direct transmission from the price of crude.

Rural and Consumer Lenders Carry the Sharper Version

Universal and commercial banks can absorb a rising bad loan ratio of this size without much strain. Their capital bases are large, their loan books are diversified across sectors, and BDO, BPI, and Metrobank in particular price new credit fast enough to protect margins even as bad loans tick up. The exposure sits further down the chain. Rural banks, thrift banks, and consumer lenders whose portfolios skew toward transport operators, small retailers, and salaried borrowers carry a version of this stress with a thinner cushion behind it. Many of these institutions do not have the balance sheet depth to treat a coverage decline as a rounding error. If bad loans keep climbing in June and July, these are the lenders that will need to rebuild provisions fastest, and the fastest way to do that is to slow new lending.

The Squeeze Compounds for Recent Borrowers

Borrowers who took on debt during the 2025 easing cycle at lower variable rates are now facing the BSP’s own rate hikes on top of this asset quality pressure. The same repricing mechanism that reset credit lines upward this year is landing at the same time banks are watching their loan books sour faster than expected. A borrower managing a renewal in the next two quarters is negotiating with a lender that is simultaneously absorbing higher policy rates and a rising bad loan ratio. Neither pressure alone forces a lender’s hand. Together, they shift how a renewal conversation goes, and not in the borrower’s favor.

The Next Two Prints Will Settle the Question

A single month of a rising bad loan ratio does not confirm a trend. It takes at least two or three more prints to know whether banks are managing a temporary normalization or delaying a reserve build they will eventually be forced into anyway. The fuel cost pressure driving this cycle has not meaningfully eased, which means the borrowers behind May’s bad loans are unlikely to see relief before the June and July prints land. If the bad loan ratio keeps rising while coverage keeps falling, the caution flag Ravelas raised becomes harder to wave off as normalization, and the banks that waited will be rebuilding reserves at the same moment their smaller borrowers need credit most.

Banks with capital to spare are treating this as routine. The ones without it are running out of room to call it that.

More developments that reshape the operating environment in National Signal section of Hemos PH.