Philippine Markets Newsletter

MONDAY MACRO: Higher NPL levels not yet out of control; Uniform Accounting shows confidence that this economic contraction is not debt-driven.

June 8, 2020

Uncertainty over the state of the Philippine economy continues to loom even though businesses have slowly started to reopen.

Over two months of temporary closure have caused numerous businesses to either close down for good or lay off some employees. This has raised a number of other concerns about not just the unemployment rate, but also of companies’ ability to pay their debt in general.

Banks use this metric to determine how high or low quality their current total loan portfolio is. As long as this shows a healthy level, the Philippines should still be able to weather the impending recession.

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When a scheduled payment for a loan is unpaid for more than 30 days, whether for interest or the principal payment, the odds that it will be repaid in full become considerably lower. These loans are then tagged as a non-performing loan (NPL).

As a percentage of the total loan portfolio, a low NPL ratio shows strength in the financial system and state of the economy. A high NPL ratio, on the other hand, implies that banks have taken on low-quality loans.


According to the Bangko Sentral ng Pilipinas (BSP), the NPL ratio of the Philippine banking system was declining for five years from 3.5% in January 2013 to 1.7% in December 2017. The drop in the NPL ratio indicates that credit risk to the banking sector had become relatively limited.

Since then, the NPL ratio has been rising, reaching 2.2% in March 2020 as loan activity increased to PHP 11.1 trillion and banks’ gross NPLs increased to PHP 248.1 billion. Both figures are much higher than the PHP 9.0 trillion of loan activity and PHP 165.8 billion of NPLs in March 2018.

Subsequently, the current 2.2% level is the highest since 2016. It is estimated to double to 5.0% this year due to the COVID-19 pandemic, as NPLs could increase to PHP 557 billion.

Compared with the 8.6% NPL ratio during the 1997 Asian Financial Crisis–the last time the Philippine economy was in a recession–this 5.0% level is still manageable.

Though the NPL ratio doubling within just a year is concerning, we need to keep in mind that Philippine banks have had stable capital adequacy ratios (CAR) in the last few years.

As we mentioned in our April 27th Monday Macro report, the Philippine banking system is equipped with enough loss-absorption and liquidity buffers to withstand moderate stresses in the system. The BSP requires a 10% CAR, higher than the 8% required by Basel III globally.

It is important to note, though, that the pandemic has yet to pass; higher defaults are still possible if businesses close or are unable to turn a profit. Companies may seek to refinance their debt obligations, but if the economic environment continues to be unfavorable, these businesses will be faced with more problems than solutions.

To restructure debt and assist the financial system, the Philippine government proposed the Financial Institutions Strategic Transfer (FIST) bill.

The FIST law encourages financial institutions to sell their NPL to asset management companies to be created as so-called financial institutions’ strategic transfer corporations.

These corporations specialize in the resolution of distressed assets by providing fiscal incentives such as tax exemptions and reduced registration and transfer fees on certain transactions.

If passed, this will allow banks to transfer their NPL to a separate corporate entity to give banks more room to underwrite new loans necessary to keep the economy running.

Furthermore, as we discussed in our June 1st Monday Macro report, the aggregate credit profile of companies in the PSE All Shares Index (excluding Financials) shows there is enough cash available for these companies to cover high-priority obligations such as debt and interest payments.

With sufficient liquidity of corporations, the strength of the financial system, and the passage of the FIST bill, it is likely that the Philippine economy will recover at a faster pace compared with recovery in previous recessions. A prolonged recession is unlikely since there are no massive credit issues.

About the Philippine Market Daily
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!


Angelica Lim
Research Director
Philippine Markets Daily
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