Moody’s Ratings: Philippine banks’ profits to remain stable

Philippine banks profits are expected to remain stable this year as increased interest earnings from loans to retail and small and medium enterprises (SME) could be offset by higher provisioning and funding costs, Moody’s Ratings said.

“In terms of profits, we expect this to be largely stable. Any further uptick to NIMs (net interest margins) will be limited due to higher funding costs,” Moody’s Financial Institutions Analyst Clarabelle Tan said in a webinar on Thursday.

“Meanwhile, the higher yields from SME and retail loans will be partially offset by a mild increase in provisioning costs,” she added.

Philippine banks will be supported by strong economic growth, Ms. Tan said.

“The overall outlook for the Philippines’ banking system is stable and this is really underpinned by the strong economic growth which will be much higher than its Asian peers, and thus we have the operating environment improving,” Ms. Tan said.

An increase in retail and SME loans could also affect banks’ nonperforming loans (NPLs), but the overall ratio is expected to be at just 3.2% to 3.5%, she added.

The Bangko Sentral ng Pilipinas’ expected rate cuts could also support banks’ asset quality, Ms. Tan said.

“We expect the rate cuts in the second half of the year will also support any repayment capacities, and the banks’ high loan loss provision coverage will provide sufficient buffers against loan losses,” she said.

“Meanwhile, we expect the impact of interest rate cuts will be lagging while cost of funds will come down first and this is because if we look at the loans balance sheets, typically their deficits reprice faster than loans and hence we expect a more pronounced compression of NIMs in 2025,” Ms. Tan noted.

She added that banks could face asset quality risks from agricultural loans due to the El Niño weather event, even as their exposure to the sector remains limited.

Lenders’ capitalization is also expected to stay strong, Ms. Tan said.

“Funding and liquidity will remain robust as deficit growth will keep pace with the modest loan growth at about 2%,” she added. — A.M.C. Sy