Bad loans fell to 6-month low in June

Philippine banks’ bad loans fell to a six-month low in June, a welcome sign of resilience even as lenders quietly built bigger financial cushions against mounting economic risks.

Nonperforming loans (NPL), or debts overdue by at least 90 days and at risk of default, accounted for 3.29 percent of the local banking sector’s total lending portfolio last month, figures from the Bangko Sentral ng Pilipinas (BSP) showed.

That marked the lowest gross NPL ratio since December 2025, when the share stood at 3.07 percent.

In peso terms, nearly P585 billion of the sector’s P17.8-trillion loan book had soured during the month. The stock of bad loans was still 10 percent higher than a year earlier, although it slipped 2.6 percent from the previous month.

Banks, however, continued to prepare for rougher waters.

Lenders set aside P541 billion in allowances for credit losses, pushing the industry’s coverage ratio to 92.53 percent—the highest since February 2026, when reserves covered 93.83 percent of bad loans.

The BSP has said banks and nonbank financial institutions remained on solid footing, adding that the financial sector was better equipped when the Middle East crisis rattled global markets earlier this year.

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The central bank has pledged to “take necessary actions” to steer inflation back to its 3-percent target. Last month, it raised its benchmark interest rate by 25 basis points to 4.75 percent, its second increase in the current tightening cycle and a cumulative 50 basis points of hikes.

At the same time, the BSP has rolled out relief measures to cushion banks and borrowers from the economic fallout of the conflict. These include temporary grace periods of up to six months for affected borrowers and the deferment of agricultural loan payments for as long as one year, subject to banks’ assessment.

The central bank has also temporarily allowed banks to exclude losses on government securities from regulatory capital calculations, easing pressure on lenders’ capital ratios while interest rates remain elevated.