Moderating loan growth, rate cuts drag listed big banks in Q3

By Lourdes O. Pilar, Researcher

SHARE PRICES of listed universal and commercial banks slipped at the close of the third quarter as loan growth moderated and policy rate cuts continued to squeeze lending margins.

However, analysts still expect a rebound in the last quarter of this year.

The Philippine Stock Exchange index (PSEi) fell by 18.1% year on year to 5,953.46 at the end of the third quarter, worse than the 6.5% decline in the second quarter.

The decline was reflected in the financials subindex which also declined by 10.6% during the period.

The third quarter saw 10 out of 13 largest banks’ stock prices contract annually as of end-September. Philippine Trust Co. led the decliners with 25.7% drop during the period, followed by Security Bank Corp. (-25.6%) and Union Bank of the Philippines (-22%).

On the other hand, three U/KBs saw their share prices grow in the third quarter. Philippine National Bank (PNB) grew the most with 89.3% surge. Other lenders which recorded growth were China Banking Corp. (21.6%), and East West Banking Corp. (17.8%).

“The decline in most listed banks was largely due to investor concerns over the impact of recent policy rate cuts on lending margin amid backdrop of moderating loan growth,” Ralph Jonathan B. Fausto, research associate in Chinabank Securities Corp., said in an e-mail.

Business loan appetite notably softened amid prevailing uncertainties while asset quality likewise came under scrutiny, with the continued expansion in high-yielding segments resulting in higher provisioning requirements which weighed on banks’ bottom-line performance, Mr. Fausto said.

The Monetary Board trimmed the key policy rate by 25 basis points (bps) to a three-year low of 4.75% in October, while inflation in the first nine months averaged at 1.7%, matching the central bank’s full-year forecast.

The Monetary Board slashed its key rate for a fifth straight meeting in December by another 25 bps, bringing the target reverse repurchase rate to an over three-year low of 4.5%.

The Bangko Sentral ng Pilipinas (BSP) also signaled that the current easing cycle, which started in August last year, approaches its end.

Aggregate net income of universal and commercial banks grew by 4.2% to P283.16 billion as of end-September from P271.73 billion the previous year, data from the BSP showed.

Gross total loan portfolio of these big lenders rose by 8.8% to P15.03 trillion as of end-September from P13.81 trillion last year.

Likewise, the big banks’ gross nonperforming loans (NPLs) ratio narrowed down to 3.02% in September from 3.18% a year ago.

The big bank’s net interest margin (NIM) — a ratio that measure banks’ efficiency in investing their fund by dividing annualized net interest income to average earning asset — improved to 4.2% in the third quarter from 4.06% recorded in the same period last year.

Provision for credit losses by these big banks reached P116.63 billion, up by 60.9% from P72.48 billion in September 2024.

Kervin Laurence Sisayan, head of research of Maybank Securities Philippines, said that most of the banks were more conservative in third quarter due to the ongoing slowdown in the economy.

“Note that we’ve seen gross domestic product (GDP) growth slower than expected mostly due to weaker gross capital formation. As a result, majority has increased credit costs to account for any potential weakness for example in the construction sector,” said Mr. Sisayan.

For the third quarter, the Philippine economy expanded by 4%, easing from the 5.5% of the previous quarter growth and 5.2% expansion in the last three months of 2024.

However, this was still below the 5.5%-6.5% growth target of the government.

“A decelerating economy as evidenced by the dismal 4% 3Q25 GDP outturn amid weather-related disruptions that weighed on consumption, and the corruption scandal that curtailed government spending and reduced investment activity,” Abigail Kathryn L. Chiw, first vice-president and head of research at BDO Securities Corp., said in an e-mail.

The Marcos administration faces increasing scrutiny over flood control projects, where billions of pesos in public funds were diverted through padded contracts and shell companies. The Department of Finance said that economic losses from corruption in flood control projects may have averaged P118.5 billion annually from 2023 to 2025.

At present, the Independent Commission for Infrastructure and Congress are conducting separate investigations to individuals involved in public works projects, including claims of budget manipulation and contractor collusion.

STANDOUTS
Investors should closely monitor the trajectory of interest rates, as the BSP easing cycle will impact NIM, Globalinks Securities and Stocks, Inc. Head of Sales Trading Toby Allan C. Arce said. Traders should consider near-term volatility due to potential adjustments in monetary policy expectations and global risk sentiment.

“Despite the broader sectoral weakness, BDO and BPI stood out due to their resilient loan growth and strong noninterest income performance. BDO’s diversified business lines and solid capital position helped it weather market volatility,” he said.

“These banks demonstrated operational agility and managed to sustain profitability despite external challenges,” Mr. Arce added.

Mr. Fausto said that BPI continue to deliver mid-teens return on equity (RoE) underpinned by its deliberate strategy to continue scaling its consumer loan portfolio alongside the revenue uplift and efficiency gains from tech investments. Meanwhile BDO also stood out during the quarter due to sustained double-digit growth in corporate lending.

“BDO is the bank that stood out the most given the stable and high-quality growth. What we like about BDO is the improvement in quarterly RoE, bringing it closer to mid-teens level. In addition, they continue to see above industry loan growth despite the economic slowdown,” said Mr. Sisayan.

Mr. Sisayan also said that in the near term, they might see overall weakness in profitability for banks as they increase provisions for bad loans.

“For short term we are currently looking for the local currency movement as the weaker peso could bring lower inflows and liquidity for the banks. The declining foreign direct investment (FDI) should also be watch as lower FDI   could translate to slower economic growth and loan growth impacting the banks performance,” Jash Matthew M. Baylon, equity analyst at The First Resources Management and Securities Corp., said in a Viber message.

BSP reported that net inflows of FDI into the Philippines slumped by 25.8% in September to $432 million from $830 million in the same month in 2024, amid a drop in net investments in debt instruments.

RATE CUTS
Mr. Sisayan said that lower policy rates would put downward pressure on asset yields or loans.

“However, we have yet to see the policy rate cuts have a significant impact to asset yields of banks in the past 12 months. In fact, the decline in NIMs has been quite minimal especially if we take into account the banks’ pivot towards lending more to the consumer segment,” said Mr. Sisayan.

He also added that the trend remains that policy cuts will negatively affect NIMs and profitability.

“In theory, lower rates should make funding cost cheaper and spur loan growth. But if most corporates are cautious to expand given the economic slowdown, this might not translate to higher demand for loans in the near term,” he added.

Luis A. Limlingan, head of sales at Regina Capital Development Corp., said that in the medium term, these developments are “beneficial” for banks as lower policy rates can encourage more borrowing.

“Cheaper loans make credit more accessible to clients, which helps support stronger loan demand. As loan growth picks up, banks are likely to see a corresponding boost in revenues. But in the near term, pressured margins are one of the key factors the market is already pricing in,” Mr. Limlingan said.

Ms. Chiw said that subdued inflation and easing interest rates are positive for consumption and supportive of growth.

“We believe these conditions are constructive for banks, as it encourages lending activity and fee income growth as transaction volumes increase. We also think NIM pressures from rate cuts could be mitigated by the rising mix of higher-margin consumer loans and cultivating lower-cost CASA deposits to support loan expansion,” she said.

Mr. Baylon thinks that the BSP’s monetary policy reduction has a balanced effect on the country’s financial sector, as rate cutting cycle at its December meeting could improve the spending in the country which may show a recovery on economic activity.

Mr. Arce said that while lower rates could compress NIMs and reduce interest income, they may also stimulate credit demand from consumers and businesses, supporting loan growth.

“The benign inflation outlook enhances purchasing power and reduces credit risk, improving banks’ asset quality. Overall, in the medium term, the sector is poised for steady but moderate growth, as profitability will hinge more on volume expansion and cost efficiency than margin gains,” Mr. Arce said.

OUTLOOK
Analysts expect a rebound for listed banks in the last quarter of this year.

Mr. Arce said that the fourth quarter of 2025 is expected to bring a modest rebound for the sector as lending activity gradually picks up and the holiday season boosts consumer spending.

“However, the sector’s overall growth may remain tempered by cautious corporate lending and lingering global uncertainties. BDO, BPI, and MBT are projected to lead the sector in terms of earnings momentum, while mid-tier banks like RCB and EW may post selective growth due to niche lending and digital strategies,” Mr. Arce said.

“We expect banks to perform in line with their current trajectory, as we do not see any significant developments that could affect profitability drastically through yearend. Loan growth is also likely to remain steady, with the current trend showing a slowdown despite the recent rate cut from the BSP,” Mr. Limlingan said.

Mr. Fausto expects listed banks to end fourth quarter of 2025 on a solid footing supported by healthy loan demand from corporates earmarking for expansion plans and working capital requirements for 2026.

“Consumer lending is also poised to remain strong, driven by increased credit card and personal loan utilization amid holiday-driven spending. Given that most bank stocks have declined year-to-date, current valuations appear more attractive which could potentially prompt investors to reconsider names with still durable growth prospects and support potential share price recovery over the medium term,” said Mr. Fausto.

Mr. Baylon also shared that the banking sector will show improve provisions as higher consumer spending and consumer capacity to pay off their loans which may benefit banking provision. 

“Moreover, the expectation of lower interest rates for the year end could boost loan demand for both retail and corporate which may offset the declining net interest margin. However, we still consider the revised GDP outlook for the full year 2025 which may bring a more cautious approach on its corporate loans segment,” Mr. Baylon added.

However, Ms. Chiw expects their covered banks of lower earnings growth.

“Overall, we expect our covered banks to deliver slower earnings growth of 5.4%-8.3% for this year from 6%-9.7% previously, on account of preemptive provisioning costs and moderating loan growth trends in recent months, which is reflective also of slackening GDP performance,” said Ms. Chiw.

“However, lower borrowing costs may result to a pickup in lending activity and a reduction of NPL stress, which in turn would allow banks to cut back on provisioning costs that could also lift earnings in the ensuing quarter,” she added.