Weakening investor sentiment may weigh on PHL banks’ performance

WEAKENING business sentiment could weigh on Philippine banks’ performance amid slower loan demand among corporates, and with lower interest rates continuing to squeeze their margins, analysts said.

However, lenders’ ongoing efforts to grow their consumer portfolios could help ease some of the pressure and support both profit and credit growth.

“Philippine banks are expected to sustain double-digit loan growth despite softer corporate borrowing amid weak business sentiment… Banks are shifting toward retail and SME (small and medium enterprises) segments to offset slower demand from large corporates, supported by BSP’s (Bangko Sentral ng Pilipinas) liquidity easing and strong deposit bases. While manufacturing loans remain in contraction, real estate and utilities continue to drive growth,” Union Bank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion added in a Viber message.

He said they expect production loans to grow by 6.6% by December from an estimated 9.3% expansion in September, which would be the main drag on overall credit growth.

“Two major factors are driving this anticipated weakness: 1) A sustained decline in manufacturing loans, which could end the year down by 6.8%; and 2) A broad-based slowdown in loan demand across other production sectors,” he said.

Bank lending growth eased to a nine-month low in August as loans for business activities expanded at a slower pace, BSP data showed. Outstanding loans from universal and commercial banks to businesses and individual consumers expanded by 11.2% year on year to P13.62 trillion in August, slower than the 11.8% growth in July.

This was the slowest growth since the 11.1% increase in November 2024.

This came as loans for production activities increased by 9.9% year on year to P11.51 trillion as of August, slowing from the 10.8% growth seen in July.

Meanwhile, consumer loans grew by 23.9% to P1.79 trillion, slightly faster than the 23.6% growth the month prior.

The Philippine central bank this month delivered a surprise rate cut, with the BSP chief citing the need to boost domestic demand due to a softer economic outlook as governance concerns due to a graft scandal involving government infrastructure projects have dented business sentiment, affecting companies’ expansion plans.

The Monetary Board trimmed benchmark interest rates by 25 basis points (bps) for a fourth consecutive meeting, bringing the policy rate to an over three-year low of 4.75%. It has now slashed borrowing costs by a cumulative 175 bps since it began its rate cut cycle in August 2024.

Mr. Remolona has also left the door open to more reductions in the coming months to support the economy, adding that there needs to be a “credible resolution” to the corruption mess.

Philippine Institute for Development Studies Senior Research Fellow John Paolo R. Rivera said banks’ move to aggressively expand their consumer lending businesses could help offset weakening credit demand from businesses and boost their profits.

“Despite slower corporate uptake, banks may still post modest growth, supported by a low interest rate environment, improving household consumption, and digital lending innovations,” he said in a Viber message.

MARGINS
While lower rates amid the BSP’s ongoing easing cycle also put pressure on banks’ margins, this could also help improve loan demand as credit costs cheapen, First Metro Investment Corp. Head of Research Cristina S. Ulang said in a Viber message.

“There will be increased competition among banks as they try to grab market share,” she said, adding that the big banks are unlikely to be affected as they have high business volumes.

“It (BSP rate cuts) could narrow banks’ NIMs (net interest margins) due to reduced lending rates amid heightened competition, especially in the consumer segment. However, it may boost loan demand as borrowing becomes more attractive, particularly for households and MSMEs (micro, small and medium enterprises,” Mr. Rivera likewise said. “While this can support bank earnings through volume growth, it also increases exposure to credit risks, particularly if standards are relaxed.”

He said rapid credit growth without risk controls could affect banks’ asset quality.

“Banks may shift strategies by diversifying into fee-based services, enhancing credit screening, and investing in digital efficiency to offset margin compression,” he added.

As of end-June, the banking industry’s combined net income grew by 4.14% year on year to P198.14 billion from P190.26 billion in the same period last year, BSP data showed. — Aaron Michael C. Sy