By Beatriz Marie D. Cruz, Reporter

SOLID ECONOMIC GROWTH and the potential for interest rate cuts are expected to boost lenders in the Asia-Pacific region this year, Moody’s Investors Service said, as it kept a “stable” outlook for 13 banking systems in the region including the Philippines.

“We maintain a stable outlook for the Philippines’ banking system,” the rating company said in a report. “Solid economic growth and the potential for rate cuts in the second half of 2024 will support economic recovery and limit asset quality stress.”

A “stable” outlook means Moody’s assessment of rated local lenders is likely to be steady in the next 12 to 18 months. The debt watcher rates eight lenders in the country whose total assets accounted for 67% of the sector’s total as of end-September.

Moody’s expects the Philippine economy to grow by 5.9% this year and by 6% in 2025, behind the government’s target of 6.5-7.5% this year and 6.5-8% from 2025 to 2028. Economic growth was 5.6% last year, short of the state’s 6-7% target.

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

Inflation quickened to 3.4% in February due to rising food and transport costs, from 2.8% a month earlier and 8.6% a year ago.

In the report, the credit watcher said it expects Philippine banks’ profitability to remain stable in the first half as depositors shift to more expensive term deposits amid elevated interest rates.

“Upward repricing of loans will also be limited due to higher loan competition amid soft credit demand,” it added.

Net interest margins will then gradually expand in the second half as lenders begin to expand into retail and small and medium enterprises (SME).

Moody’s said this could increase returns but also loan loss provisions as the retail and SME sectors face asset quality risks due to high interest rates.

The credit watcher also expects the Philippine central bank to “gradually” cut interest rates by the second half, saying this would likely not affect margins due to lagged effects.

The asset quality of loans to the corporate sector will also remain stable as companies expect earnings to improve alongside the country’s growth. The expected rate cuts by the BSP are expected to support the industry’s overall asset quality.

Philippine banks’ net income rose by 14.95% to P356.49 billion last year amid higher interest income and trading gains, according to central bank data.

BSP Governor Eli M. Remolona, Jr. has said the central bank is unlikely to cut benchmark interest rates in the near term due to inflation risks.

The Monetary Board raised the key rate by 450 basis points to a near 17-year high of 6.5% from May 2022 to October 2023.

The banking industry’s nonperforming loan (NPL) ratio fell to 3.23% in December — the lowest in a year — as borrowers paid their debts amid low unemployment rates and slower inflation.

Lenders’ gross NPLs stood at P446.99 billion, rising by 12.09% from a year earlier but down by 1.6% from end-November.

“Banks’ loan loss coverage and capitalization will remain strong, with internal capital generation keeping pace with loan growth,” Moody’s said. “Funding and liquidity in the banking system will remain robust.”

Capital buffers would remain high due to strong shareholder support amid sustained profit and loan growth, it added.

Moody’s expects the industry’s loan growth at 10% this year, dampened by elevated rates in the first half before slightly picking up in the second half once the BSP begins cutting rates.

“We expect the impact of declining interest rates on the valuation of banks’ holdings of fixed-rate government securities to be positive in 2024,” it said.

Deposits are expected to grow in line with loan demand due to high interest rates, resulting in stable loan-to-deposit ratios.

Moody’s said rate cuts later in the year would result in “a turnaround in growth trends for deposits and loans.”

The BSP is expected to provide liquidity to the financial system in case of any sudden change in economic conditions.

Moody’s expects the government to support rated banks. “It is unlikely to adopt a bail-in regime in the next 12 to 18 months,” it said.

Banks in the Philippines and 12 other countries got a stable outlook, while China, Hong Kong, Korea received a negative outlook.

The Philippines has a “Baa2” sovereign rating — a notch above minimum investment grade — with a stable outlook from Moody’s, affirmed in September last year.