AN analyst warned that there could be a lag effect in the war-driven bad loans ratio which could only be evident in the late-2026 or 2027 data.
Leonardo A. Lanzona Jr., an economist at Ateneo De Manila University (ADMU), explained this to the BusinessMirror after a report recently published by the Bangko Sentral ng Pilipinas (BSP) pointed out that the Philippine banking system’s bad loans ratio in June, at 3.3 percent, was the highest relative to its peers within the Asean-5 bloc.
‘Loan quality improved. The Philippine banking system’s gross non-performing loans [GNPL] ratio remained steady at 3.3 percent as of end-June 2026 relative to the previous quarter,’ the central bank’s Q2 2026 Report on Economic and Financial Developments noted.
‘Compared to its regional counterparts, the Philippine banking system’s GNPL ratio was higher than those of Thailand, Indonesia, Malaysia, and South Korea,’ the report also noted.
NPLs, also known as ‘bad’ or ‘soured’ loans, are credit accommodations that have not been paid for 90 days or more after the due date. The NPL ratio measures the proportion of bad loans to total loans.
‘Level gap, not fresh deterioration’
Lanzona said, however, that this only points to a ‘level gap, not a fresh deterioration’ as banks are not seeing a new wave of defaults.
Instead, he said: ‘They’re just carrying more legacy soured debt than peers.’
Lanzona said this is mostly structural as the Philippine economy has ‘heavier SME, micro-lending, and agri exposure, weaker collateral and credit-bureau infrastructure than Malaysia or South Korea.’
He also pointed to ‘pandemic-era restructurings that never fully cleared the books.’
Further, Lanzona explained to this paper that some of the gap is also ‘definitional’ since NPL classification is not ‘perfectly harmonized’ across the region.
‘Practically, it means Philippine banks price credit more conservatively and hold higher provisioning, which mildly constrains credit growth to riskier segments without signaling a brewing crisis,’ he also noted.
Lag effect
However, Lanzona emphasized that the 3.3-percent bad loans ratio in June 2026 does not yet reflect the loans stressed by the conflict-driven energy and inflation spike.
‘NPLs are a lagging indicator, so today’s 3.3 percent mostly reflect loans stressed before the Iran-conflict-driven energy spike and the BSP’s hikes to 5 percent,’ Lanzona said.
‘The transmission channel is plausible-squeezed real incomes and higher debt-service costs from rate hikes could pressure repayment capacity, and peso weakness adds risk for dollar-linked borrowers,’ he added.
But, he pointed out, that effect would more likely surface in late-2026 or 2027 data.
‘For now, treat it as a forward risk rather than something already visible in the numbers,’ Lanzona told this newspaper.
Michael L. Ricafort, chief economist at Rizal Commercial Banking Corporation (RCBC), explained that the highest NPL ratio in the Asean-5 region ‘could reflect relatively higher interest rates, hinged on relatively higher inflation as the country imports almost all of its oil.’
‘The relatively higher interest rates and relatively higher inflation fundamentally reduce the purchasing power of various borrowers, as well as the ability to pay their debts, on top of slower global and economic growth as a result of the said war that led to lower sales and earnings that also reduce the ability of some browsers to pay their debt,’ added the chief economist of RCBC.
Earlier, Jonathan L. Ravelas, senior adviser at Reyes Tacandong and Co., explained that for policymakers, NPLs are an important ‘financial stability’ signal.
‘Ideally, you want NPLs within the 2 to 3 percent range, so we’re slightly above comfort levels-but still manageable,’ he said.
In a commentary published early-September, SandP Global Ratings said it expects NPLs to climb for the Philippines in ‘riskier segments.’
‘Lower-income households and small and midsize enterprises (SMEs) are grappling with rising living costs and unemployment,’ the credit rating agency noted.
Further, it pointed out that auto loans are seeing a ‘sustained increase’ in NPLs and past due loans, reflecting the ‘squeeze’ in household incomes centered on mass market consumers.
‘The lack of broader fuel subsidies has resulted in a massive jump in fuel prices. As a result, auto loans have seen a sharp slowdown in growth,’ added SandP Global Ratings.