Moody’s sees faster bank loan growth, slower margin decline

MANILA, Philippines — A slow interest-cutting cycle and increased lending to high-yielding but risky retail and small and medium enterprise (SME) segments should help Philippine banks avoid a sharp decline in their margins, Moody’s Ratings said.

In a commentary on Wednesday, the global debt watcher said credit growth could accelerate to around 25 percent this year as declining interest rates boost demand for loans.

But Moody’s said the gradual easing cycle of the Bangko Sentral ng Pilipinas (BSP) could suggest that borrowing costs would not go down as quickly as many had hoped to. This, in turn, could translate to a “modest compression” in bank margin.

Recall that the BSP – wary of external headwinds – kept the key rate that banks use as a guide when pricing loans at 5.75 percent last February, still among the highest in Asia.

At the same time, a “weak monetary policy transmission channel” in the country could limit the pass-through of policy rate cuts to lending rates, Moody’s added.

Despite the projected decline in rates, Moody’s said the growing share of consumer and SME loans ––which typically carry higher borrowing costs because of the risks they carry for banks –– would help prevent a significant erosion in lenders’ interest income.

The big cuts to banks’ reserve requirement ratio  – which would free up more loanable funds into the financial system – are also seen to temper the slowdown in margin growth.

READ: Bank lending posted best growth in over 2 years in January

“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.

Record high profits

BSP head office – file photo

Latest data from the BSP showed that local banks had netted P391.28 billion last year, growing by 9.76 percent. That was the sector’s highest net profit on available record dating back to 2008.

Figures showed that such a growth was driven by net interest income, which jumped by 13.45 percent to P1.04 trillion. That was the first time on record that margins breached the trillion-peso mark.

READ: PH banking system saw record profit in 2024

With Philippine banks seen staying profitable, Moody’s maintained its “stable” outlook on the sector while also expecting capitalization to remain strong despite a projected slowdown in deposit growth.

“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. However, banks’ loan-to-deposit ratios will increase given slower deposit growth and accelerated loan growth,” the credit rating agency said.

“We expect the government to prioritize systemic stability and provide support for rated banks in times of need. The government is unlikely to adopt a bail-in regime in the next 12 to 18 months,” it added.