S&P Global Ratings expects the top 10 Philippine banks to cope with tests posed by US tariffs as strong capitalization and liquidity provide a buffer against unexpected risks.
This is according to a chartbook-style report S&P Global Ratings titled, “Top-10 Philippine Banks: Large Banks Are On Solid Ground Amid Tariff Tensions.”
“The Philippine economy should be resilient to tariffs due to low reliance on exports. Philippine banks’ credit quality will stay strong amid relatively benign economic conditions,” said S&P Global Ratings credit analyst Nikita Anand.
“The indirect effects of tariff and geopolitical tensions such as lower consumer spending and business volumes could affect banks’ growth prospects and reduce profitability. Rising household leverage and larger share of high-yield, riskier loans pose challenges to asset quality,” she said.
“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. However, consumer lending in the Philippines entails higher nonperforming loans. Banks’ provisioning costs should hence stay elevated compared to historical averages. The asset quality of banks with a higher share of unsecured consumer loans should stay weaker than the sector average,” said Anand.
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 this improvement in profitability in a declining interest rate environment. A lot will depend on how banks can contain asset quality risks, while growing their consumer loans portfolio, according to S&P.
“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,” Anand said.
“State-owned banks’ profitability should stay lower than that of private banks due to their policy role and vulnerable borrower profile. Large banks generally have strong capitalization and liquidity that will cushion them against unexpected risks,” she said.
