Moody’s: Philippines banking system to remain stable

MANILA, Philippines — Moody’s Ratings has maintained a stable outlook for the Philippine banking sector as strong economic growth and interest rate cuts are expected to sustain credit demand and mitigate asset quality risks.

“Strong economic growth underpinned by further rate cuts and stabilized inflation in 2025 will drive credit demand and support loan quality,” Moody’s Ratings said in its banking system outlook for the Philippines.

The global credit rating agency expects the country’s real gross domestic product to expand by six percent in both 2025 and 2026, making it one of the fastest-growing economies in Asia.

Despite global uncertainties that may pose inflationary risks, Moody’s projects inflation to stay within the central bank’s target range of two to four percent. This stable inflation environment will allow for further policy rate cuts, boosting domestic consumption and investments.

The impact of higher tariffs under the Trump administration will also be muted on the Philippines compared to its regional peers due to the country’s consumption-led economic model, Moody’s said.

“Banks’ profitability will remain broadly stable as net interest margin compression will be modest because of the weak monetary policy transmission to banks’ lending rates in the Philippines,” it said.

“Strong credit growth and the increasing share of higher-yielding retail and small and medium enterprise (SME) loans will also support yields,” it said.

Moody’s expects overall asset quality in the banking sector to hold steady, although risks will differ between larger and smaller banks.

Lower interest rates will help borrowers manage their debt repayments, offsetting potential loan quality deterioration from the rapid growth of retail and SME loans. Retail loans have surged by 35 percent over the past two years, raising concerns over loan seasoning risks.

Meanwhile, the quality of loans to large conglomerates is expected to remain solid, despite concentration risks.

Banks’ real estate exposure remains a key area of risk, with property loans making up around 20 percent of total loans as of December 2024.

However, non-performing commercial real estate loans are manageable at 2.1 percent, even as office vacancy rates remain high.

Capital levels in Philippine banks will also stay robust, supported by strong shareholder backing and internal capital generation.

Moody’s projects credit growth to accelerate to 12 percent this year, driven by lower interest rates and improved business sentiment. The central bank’s reserve ratio requirement cuts are also expected to further boost lending by increasing liquidity in the banking system.

The Philippine banking sector will remain well funded, primarily through deposits, Moody’s said.

While banks are reallocating liquidity from government securities to loans, their liquidity position remains strong.

Moody’s also expects the central bank to proactively provide liquidity support if needed to prevent any sudden financial stress.

“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,” the debt watcher added.