Philippine banks to stay resilient, Moody’s says

The Philippine banking system is seen to remain resilient amid support from a strong macroeconomic environment, Moody’s Ratings said, with profits expected to be stable amid robust credit growth.

“We maintain a stable outlook for the Philippines’ (Baa2 stable) banking system. Strong economic growth underpinned by further rate cuts and stabilized inflation in 2025 will drive credit demand and support loan quality,” the debt watcher said in a report.

“Banks’ profitability will remain broadly stable as net interest margin compression will be modest because of the weak monetary policy transmission to banks’ lending rates in the Philippines.”

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed the net profit of the country’s banking industry rose by 9.76% year on year to PHP 391.28 billion in 2024.

Moody’s said Philippine banks’ capitalization is expected to remain strong.

“Capital levels will remain high, as strong shareholder support and internal capital generation keep pace with high credit growth,” it said.

It expects bank’ credit growth to accelerate to an estimated 12% this year amid declining interest rates and surge in business activity and consumer sentiment.

Bank lending jumped by 12.8% to PHP 13.02 trillion in January, its fastest pace in over two years, central bank data showed.

“Reserve ratio requirement cuts by the central bank will also drive credit growth, by releasing more liquidity for banks to channel into lending,” Moody’s added.

The RRR of universal and commercial banks and nonbank financial institutions with quasi-banking functions will be reduced by 200 bps to 5% from 7% later this month. BSP Governor Eli M. Remolona, Jr. has said big banks’ RRR can be brought down to zero eventually.

“Strong credit growth and the increasing share of higher-yielding retail and small and medium enterprise (SME) loans will also support yields,” it said.

However, Moody’s noted that retail loans have been growing by 35% over the past two years, “posing loan seasoning risks.”

“Policy rate cuts will support borrowers’ debt repayment capacities, which will mitigate potential loan quality deterioration from the seasoning of newer retail and SME loans.”

The BSP began its easing cycle in August last year, slashing borrowing costs by a total of 75 basis points (bps) to bring the policy rate to 5.75%.

“Meanwhile, the quality of loans to large conglomerates will remain solid, notwithstanding the concentration risks they pose to banks,” Moody’s said.

“Loan loss reserves will decrease, but the larger Philippine banks will continue to have stronger buffers against any loan losses, compared to the smaller banks.”

Banks’ loan loss reserves amounted to P488.48 billion, up by 1.6% from P480.64 billion in December and by 5.7% from PHP 462.12 billion a year ago. This brought the January loan loss reserve ratio to 3.22% from 3.14% in December and 3.45% in the same month in 2024.

“Banks continue to reduce their real estate exposure and we expect stable operating conditions in the sector in 2025,” Moody’s added.

Banks’ real estate exposure ratio dropped to 19.55% at end-September from 19.92% at end-June and from 20.55% at the end of September in 2023. This was the lowest real estate exposure ratio recorded in five years or since the 19.5% as of September 2019.

Meanwhile, Moody’s expects credit costs to rise “modestly” as banks grow their retail and SME loan portfolios, but this can be offset by their loan loss reserves.

“Funding and liquidity in the banking system will remain robust,” it added.

Growth outlook

Moody’s Ratings expects the Philippine economy to grow by 6% this year and next, which will benefit banks.

The credit rater’s forecast is at the low end of the government’s 6-8% growth target for 2025 and 2026.

Philippine gross domestic product grew by 5.6% in 2024, well below the government’s 6-6.5% goal for the year.

“Although global uncertainties pose upside risks to inflation, we expect it to remain between 2% and 4%, which will support further policy rate cuts in 2025,” it said.

“As a result, domestic consumption and investments will improve, giving further stimulus to the economy,” it said. “Given the country’s consumption-led economic model, we expect the impact of higher tariffs on the Philippines under the Trump administration to be muted compared to its regional peers.”

On Tuesday, Mr. Remolona said a rate cut is “on the table” at the Monetary Board’s policy meeting next month, which has been rescheduled to April 10 from April 3 previously.

He added that the BSP is still on easing mode and expects to slash benchmark borrowing costs by “a few more times” this year.

The Monetary Board in February unexpectedly paused its rate-cut cycle, which Mr. Remolona said was a “prudent” move amid uncertainty over the trade policies of US President Donald J. Trump and their potential impact on the Philippines. – Luisa Maria Jacinta C. Jocson, Reporter