Moody's affirms stable outlook for local banks

ADDITIONAL interest rate cuts and stable inflation will boost credit demand and enhance loan quality for Philippine banks, Moody's Ratings said on Wednesday as it affirmed a stable outlook for the banking system.

The debt watcher expects the economy to grow by 6.0 percent this year and in 206, one of the fastest in Asia. This, along with inflation staying within the 2.0- to 4.0-percent target, will likely lead to policy rate cuts.

"As a result, domestic consumption and investments will improve, giving further stimulus to the economy," Moody's 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," it added.

The Philippine banking system is expected to benefit from increased credit demand as borrowing costs decline. Moody's projects credit growth to accelerate to 12 percent in 2025, supported by reserve requirement ratio cuts that will inject liquidity into the financial system.

Despite lending risks, Moody's anticipates asset quality to remain stable.

"Policy rate cuts will support borrowers' debt repayment capacities, which will mitigate potential loan quality deterioration from the seasoning of newer retail and SME (small and medium enterprise) loans," it said.

Also, growth in retail loans — 35 percent over the past two years — pose loan seasoning risks," it added.

Real estate exposure remains a concern as loans to the sector account for 20 percent of total system loans with nonperforming commercial real estate loans at 2.1 percent.

Moody's noted that most banks were continuing to reduce their real estate exposure and that it expected stable operating conditions in the sector this year.

Banks are also expected to maintain profitability despite slight compression in net interest margins due to weak monetary policy transmission. The increasing share of higher-yielding retail and SME loans will help sustain loan yields.

"Provisioning costs will increase, but remain low as banks will apply potential write-offs to their existing loan loss reserves, further supporting reported profitability," Moody's said.

Moreover, the banking sector's funding and liquidity conditions are likely to stay solid as banks continue to rely on deposit funding and hold substantial government securities.

"We expect the government to prioritize systemic stability and provide support for rated banks in times of need," Moody's also. "The government is unlikely to adopt a bail-in regime in the next 12 to 18 months."