Moody’s outlook: Philippines banks remain on stable footing

March 8, 2024 | 12:00am

MANILA, Philippines — Moody’s Investors Service has maintained a stable outlook for Philippine banks as interest rate cuts from the Bangko Sentral ng Pilipinas (BSP) this year are seen to support economic recovery.

In a report on the Philippine banking system, the debt watcher said the outlook remains stable as banks’ operating environment would likely improve amid hopes of a stronger economic growth for this year.

“We forecast that the Philippines’ GDP will expand by 5.9 percent in 2024 and six percent in 2025. Despite battling high inflation, the Philippines remains one of the fastest growing economies in Asia,” Moody’s said.

Despite the aggressive rate hikes to tame inflation, the Philippines booked a gross domestic product growth of 5.6 percent in 2023. Still, expansion was below the government target of six to seven percent.

“Strong domestic consumption underpins growth and this insulates against the impact of subdued growth of large global economies,” Moody’s said.

The BSP has raised key policy rates by a total of 450 basis points since May 2022, bringing the benchmark rate to a near 17-year high of 6.5 percent. The Monetary Board has been keeping borrowing costs steady since November 2023.

The debt watcher said the asset quality of banks would remain resilient this year as business recovery will enable large conglomerates to absorb higher lending rates.

“We also expect the interest rate cuts in the second half to support overall asset quality for the year. As a result, we expect banks’ asset quality to remain largely stable, in line with the 3.2 percent systemwide nonperforming loan ratio as of end-December 2023,” Moody’s said.

Elevated loan loss reverses will also provide buffers against any losses, while capital buffers are expected to remain at current high levels.

“We expect credit growth to remain at around 10 percent this year, dampened by elevated borrowing costs in the first half, before picking up slightly in the second half as interest rates decline,” Moody’s said.

But despite elevated policy rates, higher funding costs will constrain further widening of banks’ net interest margin in the first half. This developed as depositors turn to more expensive term deposits, while upward loan repricing will be limited due to higher loan competition amid soft credit demand.

Meanwhile, Philippine banks’ funding and liquidity conditions will continue to be robust this year as loan-to-deposit ratios  remain stable.

“High prevailing rates in the first half will continue to attract deposits and deter wholesale market borrowings, while possible rate cuts in the second half will lead to a turnaround in growth trends for deposits and loans,” Moody’s said.

“We expect the central bank to remain proactive in providing liquidity to the system to prevent any near-term liquidity stress that may result from a sudden change in economic conditions,” it added.

Latest data from the BSP showed that earnings of Philippine banks jumped by 14.4 percent to hit an all-time high of P354.93 billion in 2023 from P310.12 billion in 2022.

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