S&P: Philippine banks’ profit to moderate in 2025

MANILA, Philippines — The earnings of Philippine banks could moderate over the next two years as net interest margins decline in line with anticipated policy rate cuts, according to S&P Global Ratings.

Nikita Anand, primary credit analyst at S&P Global Ratings, said the Philippine banking sector’s return on average assets could normalize to the long-term average of 1.2 to 1.4 percent over the next two years, after peaking at about 1.5 percent in 2023.

“This is because net interest margins will decline in line with policy rates. A moderating cost-to-income ratio and increasing share of retail loans could push profitability above our forecast,” Anand said.

The Bangko Sentral ng Pilipinas (BSP) is largely expected to continue its easing cycle until next year, reducing interest rates to support economic growth amid stable inflation. Lower rates typically reduce the profitability of lending activities, pressuring bank earnings.

S&P expects the BSP to cut interest rates by 50 basis points to 5.5 percent by the end of the year from the current level of six percent, before reducing it further to 4.25 percent in 2025 as inflation stays moderate.

Anand said interest rate cuts could boost loan growth to about 12 percent next year from an estimate of 10 percent by end-2024.

“Higher economic growth, along with lower inflation and interest rates, will support credit demand,” she said.

The credit rater expects the Philippines’ gross domestic product to grow to about 5.7 percent in 2024 and 6.2 percent in 2025, higher than the 5.5 percent average in 2023.

Credit losses in the banking sector are also expected to remain unchanged next year as credit costs could stay at about 0.5 to 0.6 percent of gross loans over the next two years, Anand said.

“The rising share of higher-risk (and higher-yielding) consumer loans is likely to lead to a manageable deterioration in the nonperforming loan ratio,” she said.

“Large corporates, which form the bulk of the sector’s loan portfolio, should remain resilient. Banks with higher exposure to unsecured loans could see elevated credit costs as the portfolio matures.”

However, a sharp correction in asset prices could hurt asset quality given banks’ sizable exposure to the residential and commercial real estate markets.

Anand said real estate loans form about 21 percent of sector loans, two-thirds of which are commercial real estate loans.

“Notably, office vacancy rates have stayed sustainably elevated in Metro Manila. While a fallout in the property sector is not our base case, it is a key downside risk amid higher interest rates and challenging global credit conditions,” she added.

The profit of Philippine banks went up by 6.4 percent to P290.1 billion from January to September compared to the P272.6 billion recorded in the same period last year.

During the nine-month period, provision for bad debts rose by 27.8 percent to P85.74 billion from P67.08 billion in the same period last year, while the amount of soured loans written off surged to P2.29 billion, nearly five times higher than the P462.7 million a year ago.