ROBUST economic growth and strong buffers support the stable outlook for the Philippines' banking system, Moody's Ratings said in its latest report.

Moody's emphasized that robust economic growth and the potential rate cuts in the latter half of this year will underpin economic recovery and mitigate potential stresses on asset quality.

It said the Philippine economy is expected to expand by 5.9 percent this year and further accelerate in 2025 to 6.0 percent.

The country's economy expanded by 5.6 percent in 2023, outpacing China (5.2 percent) and Malaysia (3.4 percent) but trailing Vietnam (6.7 percent). However, this falls short of the 6.0 to 7.0 percent target of the government.

"Strong domestic consumption underpins growth and this insulates against the impact of subdued growth of large global economies," said Moody's.

It expects inflation to ease in the second half of 2024, coupled with gradual interest rate cuts "that will give further impetus to the economy." The Bangko Sentral ng Pilipinas' policy rate currently stands at 6.5 percent, the highest since 2007, following a 450 basis points hike beginning in May 2022 as inflation surged in the wake of Russia's invasion of Ukraine.

Consumer price growth has since returned to the 2.0- to 4.0-percent target, and the policymaking Monetary Board opted to keep interest rates unchanged during its last three meetings.

However, the downward trend in inflation snapped in February, climbing to 3.4 percent.

"Notwithstanding some upside risks, we expect inflation to ease and gradual interest rate cuts to follow, which will drive domestic consumption and support economic growth," said Moody's.

Meanwhile, it cited that loans to large conglomerates will persist as a structural concentration risk for banks. However, Moody's anticipates the resilience of the loan quality, asserting business recovery will empower these borrowers to absorb elevated lending rates.

Consequently, it anticipates that the asset quality of banks will remain stable, aligning with the 3.2 percent systemwide nonperforming loan ratio reported at the end of December 2023. This is expected to hold even as some banks venture into the higher risk or return retail and SME lending segments.

"High levels of loan loss reserves will provide sufficient buffers against any loan losses," it said.

Despite the heightened interest rates, Moody's indicated that additional net interest margin expansion in the first half of 2024 will face limitations due to escalating funding costs. This is attributed to depositors shifting towards pricier term deposits, and upward repricing of loans will be constrained by intensified competition amid subdued credit demand. Conversely, even with potential rate cuts, the impact on loan yields is expected to be delayed. Moreover, capital buffers are expected to remain at current high levels as strong shareholder support and profit accretion support credit growth. It said credit growth will remain at around 10 percent in 2024, dampened by elevated borrowing costs in the first half, before picking up slightly in the second half as interest rates decline. "We expect the impact of declining interest rates on the valuation of banks' holdings of fixed-rate government securities to be positive in 2024," it said.