Fitch: Philippines banks to benefit from shallower rate cuts

MANILA, Philippines — Philippine banks are expected to emerge as key beneficiaries across Southeast Asia economies if policy rate cuts remain shallower than anticipated in 2025, Fitch Ratings said.

In its latest commentary, the debt watcher said robust funding profiles and liquidity in the banking system could enable larger Philippine banks to maintain net interest margins (NIM).

“We believe Philippine and Singapore banks will be key beneficiaries if rates are higher than we expected. Our rated banks in these markets have good funding profiles and are in liquid banking systems that can capitalize on yields staying buoyant while keeping deposit rates lean,” Fitch said.

Smaller Philippine banks, however, face more challenges, as their weaker deposit bases and limited competitive edge in lending constrain their ability to leverage the same benefits.

Fitch’s outlook suggests that central banks across Southeast Asia, including the Philippines, will likely lower policy rates this year.

However, potential risks such as inflationary pressures, a strong dollar fueled by prospective tariff hikes in the United States and tighter local-currency liquidity in some markets may temper the magnitude of these cuts.

“Nevertheless, low rates of inflation in the region mean that policymakers have some headroom to accommodate weaker currencies without breaching inflation targets, supporting their rate-setting autonomy,” Fitch said.

The Bangko Sentral ng Pilipinas slashed policy rates by 25 basis points during its policy meeting last December, bringing the key rate down to 5.75 percent. The central bank has slashed interest rates by 75 basis points since August 2024.

Fitch also warned that shallower rate cuts or modest rate hikes could strain certain sectors, such as micro and small and medium-sized enterprises. But policymakers could step in to cushion debt strains if rate hikes or external shocks emerge.

The report also noted that Southeast Asian banks have historically mitigated NIM pressures by shifting to higher-yielding lending segments. While this approach sustains profitability, it may heighten risk profiles unless accompanied by stronger loss-absorption buffers.

“We expect such dynamics to play out again in 2025 where NIMs come under pressure,” Fitch said.

While economies in the region could face episodic pressures on NIM and asset quality, Fitch said that Southeast Asian banks’ overall capital positions remain sufficient to withstand fluctuations in bond yields and valuation impacts in 2025.

Interest income from lending to private corporations and households and investment in securities continued to drive banks’ profitability.

The profit of banks operating in the Philippines rose by 6.4 percent to P290.1 billion from January to September 2024 compared to P272.6 billion a year ago.

Gross total loan portfolio increased by 11.3 percent to P14.5 trillion, while lending and investment activities of banks, which were mainly funded by deposits, expanded by 6.7 percent to P19.46 trillion in October 2024.