S&P Global Ratings is positive the Philippines’ large lenders can withstand the effects of US tariff threats and geopolitical tensions, braced by strong capitalization, liquidity, low reliance on exports and resilient credit quality.
In a report titled “Top-10 Philippine Banks: Large Banks Are On Solid Ground Amid Tariff Tensions” released on Monday, S&P Global said the country’s big banks can cope with stress because the local economy has low dependence on exports to worry about tariffs; credit quality is likely to stay strong and banks have enough capital and liquidity as buffer against unexpected risk.
S&P Global Director and Credit Analyst Nikita Anand said, however, there could be “some pain” due to some indirect consequences of tariff and geopolitical uncertainty, such as slower global growth, currency and interest volatility that could hit banks’ bottomlines.
The upside, Anand said, is that economic conditions support a trade position that is less dependent on exports and mostly driven by domestic consumption instead. The strong credit growth is also supported by a stable economy, low inflation and unemployment rates.
“Philippine banks’ credit quality will stay strong amid relatively benign economic conditions,” she said.
The country’s top 10 banks dominate about 85 percent of the market, led by the biggest bank BDO Unibank Inc., followed by Metropolitan Bank & Trust Co.; Land Bank of the Philippines; Bank of the Philippine Islands; and China Banking Corp. Other rated big banks include Rizal Commercial Banking Corp. (RCBC), Philippine National Bank, Union Bank of the Philippines, Security Bank Corp., and Development Bank of the Philippines.
Indirect effects
Anand said that while the indirect effects of both tariff and geopolitical tensions could “amplify downside risks” to local banks, consumer credit is expected to offset this since it will grow faster than corporate credit.
“The indirect effects of tariffs and geopolitical tensions could affect banks’ growth prospects and reduce profitability. We believe banks will continue to pursue higher risk-adjusted returns by expanding their consumer loan books. This should improve diversification and reduce concentration risk,” she said.
S&P cautioned that consumer sentiment and spending will have an affect on corporate sector revenues but it also noted that local businesses “can absorb a moderate depreciation of the peso due to relatively small share of external debt in funding” while “policy rate easing (by the Bangko Sentral ng Pilipinas) will squeeze banks’ net interest margins.”
Meanwhile, Anand said unsecured consumer loans, such as credit cards and personal loans, will continue growing rapidly as “yields for these products are significantly higher than corporate or housing loans.”
Corporate credit growth is also expected to remain stable this year. But, consumer lending entails higher non-performing loans (NPL) and that banks’ provisioning costs “should hence stay elevated compared to historical averages,” she said.
Better asset quality
Anand said lower inflation and more policy rate cuts will support loan repayments over the next two years.
“Asset quality fared better than we expected due to the measured pass-through of higher policy rates,” she said, also noting that weak loans will stay under 6 percent of the total loans while secured consumer NPLs are declining since 2024.
Anand said credit costs will likely stay slightly higher than pre-pandemic levels at 0.7 percent to 0.8 percent of loans. The pre-Covid years had an average of 0.5 percent credit costs.
“(The) rising share of unsecured consumer loans and global uncertainties drive elevated credit costs,” said Anand, adding that “banks should maintain adequate provisions” with a coverage ratio of 100 percent.
Improved profitability
The report said Philippine banks’ profitability has improved with better margins and sustained reduction in operating expenses.
An increase in the proportion of higher-yielding loans could potentially help in sustaining profitability in a declining interest rate environment, Anand said, since a lot will depend on how banks can contain asset quality risks while growing their consumer loans portfolio.
“The financial performance of banks will stay differentiated based on their risk management, loan portfolio composition, and funding profile. Midsize banks’ profitability is likely to trail that of larger banks due to their higher share of riskier unsecured consumer loans and higher cost of funds as reflected in their relatively small deposit franchises,” she said.
State-owned banks’ profitability is expected to stay lower than that of private banks due to their policy role and vulnerable borrower profile, according to the report. This is because “large banks generally have strong capitalization and liquidity that will cushion them against unexpected risks.”
Most profitable
First Grade Finance Inc. Managing Director Astro del Castillo said S&P’s assessment confirms the view of most local analysts and economists on the banking sector, in general.
“We also share the same sentiment on the challenges ahead for the sector, especially in lending practices, particularly in the consumer segment. It also confirms our view that local banks’ improved profitability and stable asset quality provides a cushion against tariff concerns and other geopolitical risks,” he said.
RCBC chief economist Michael Ricafort said banks are among the most profitable sectors in the country. “Philippine banks have more than enough capital buffers with capital adequacy ratio, much higher than the 10 percent minimum set by local regulators and the 8 percent minimum set by international regulators,” he said.
He added that despite the risk entailed by the US tariffs, the local economy is relatively resilient and largely consumer-driven, with consumer spending accounting for about 75 percent of gross domestic product.
