Philippine banks’ bad loan ratio further deteriorated to 3.44 percent as of end-May, marking a nine-month high as borrowers struggled to settle loans due to elevated borrowing and business costs.

The latest Bangko Sentral ng Pilipinas (BSP) data showed that the banking industry’s gross non-performing loan (NPL) ratio widened to 3.44 percent in May from 3.37 percent in April. The May ratio was the highest since the 3.5 percent recorded in August 2025.

At end-May, the value of gross NPLs increased by 3.7 percent to ₱601.4 billion from ₱579.9 billion in the previous month. Loans are classified as non-performing if they remain unpaid for at least 90 days past the due date, representing a credit risk as the likelihood of repayment diminishes.

During the month, the Philippine banking system’s total loan book expanded by 1.6 percent to ₱17.48 trillion from ₱17.2 trillion in April.

Despite the increase in bad loans, past-due loans slipped slightly to ₱761.9 billion in May from ₱763.6 billion in April. This translated to a past-due ratio of 4.36 percent in May, improving from 4.44 percent in the previous month.

Past-due loans refer to accounts in which the borrower has failed to pay the principal, interest, or any other amount due on the scheduled date.

Reyes Tacandong & Co. senior adviser Jonathan Ravelas said the increase in the share of soured loans in the banking sector’s loan book suggests that Filipino borrowers are struggling to repay their obligations due to tighter cash conditions.

Ravelas said this suggests that “some pockets of borrower stress are beginning to surface, reflecting the lingering effects of previously high interest rates, elevated business costs, and softer demand conditions.”

He also noted that the declining provisioning buffer to 88.9 percent points to rapidly growing NPLs, “faster than banks are setting aside provisions for potential losses.”

“This divergence may reflect banks’ view that asset quality risks remain manageable and that the current increase in bad loans is still within expected levels,” Ravelas said, stressing that this should be monitored closely.

While the domestic banking system remains well-capitalized and profitable, Ravelas cautioned that if bad loans continue to increase, “banks may eventually need to rebuild provisions to maintain adequate buffers.”

“For now, I would view this as a caution flag rather than a red flag. Asset quality is softening, but the overall banking sector remains fundamentally sound and resilient,” Ravelas said.