Banks’ bad loan ratio slips to more than five-year low

By Katherine K. Chan, Reporter

THE PHILIPPINE BANKING industry’s gross nonperforming loan (NPL) ratio eased to its lowest in over five years at the end of 2025, as overall lending activity slowed, preliminary central bank data showed.

The banking industry’s gross NPL ratio fell to 3.08% at end-December from 3.32% in the previous month and the 3.27% logged as of December 2024.

This was the lowest bad loan ratio recorded since 2.84% in August 2020.

Based on Bangko Sentral ng Pilipinas (BSP) data, banks’ soured loans slipped by 3.34% to P526.68 billion at end-December from P544.863 billion at end-November.

Year on year, it rose by 5.24% from P500.434 billion.

Loans are considered nonperforming once they are unpaid for at least 90 days after the due date. These are deemed risk assets since borrowers are unlikely to pay.

At end-December, the total loan book of Philippine banks stood at P17.105 trillion, up 4.23% month on month from P16.411 trillion in November. It also climbed 11.62% from the P15.324-trillion loan portfolio at the end of 2024.    

Past due loans slipped by 3.1% to P674.384 billion as of December from P695.982 billion at end-November. Year on year, it grew by 11.43% from P605.216 billion.

This brought the past due ratio to 3.94% in December, the lowest since the 3.79% seen in December 2022. It also eased from 4.24% in November and 3.95% at end-2024.

Meanwhile, restructured loans climbed by 1.56% to P336.457 billion by yearend from P331.276 billion in the previous month, and by 8.38% from P310.439 billion in December 2024.

Still, restructured loans had a lower share in banks’ total loan portfolio at 1.97%, versus 2.02% at end-November and 2.03% in the comparable year-ago period.

Lenders’ loan loss reserves reached P510.537 billion at the end of December, down by 1.29% from P517.185 billion in the prior month. However, it was up by 6.22% from P480.638 billion at end-2024.

With this, the ratio dropped to 2.98% in the last month of 2025 from 3.15% in November and 3.14% a year earlier.

On the other hand, banks’ NPL coverage ratio, which gauges the allowance for potential losses due to bad loans, climbed to 96.93% by end-2025 from 94.92% in the previous month and 96.04% as of December 2024.

Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp., said the over five-year low NPL ratio may indicate recovering economic and business conditions and better loan repayment capabilities amid the holiday season.

“This could signal some improvement in the economy and business conditions towards the end of the year, in view of the Christmas holiday spending, in terms of higher sales, incomes, bonuses, livelihood, all of which improved the ability of borrowers to pay their loans,” he said via Viber.

“Improved credit risk management practices that are better aligned with global best practices also led to slower growth in bad loans,” he added.

Meanwhile, Jonathan L. Ravelas, a senior adviser at Reyes Tacandong & Co., said the easing of banks’ NPL ratio at end-December may be traced to the slow lending activity during the same period.

“The decline in the NPL ratio reflects both real improvement and caution,” he said in a Viber message.

“Asset quality has genuinely strengthened as borrowers’ repayment capacity improved and banks tightened underwriting,” he said. “At the same time, slower loan growth also played a role — fewer new loans mean fewer potential problem accounts entering the system.”

Separate BSP data showed that bank lending grew by 9.2% year on year as of December last year, the weakest pace seen in about two years. It was also the first time in over a year that banks recorded a single-digit loan growth.

“The real test is whether NPLs stay low once credit growth accelerates again,” Mr. Ravelas noted.