Why Philippine banks' headline profits are expected to remain muted

Banks' large stock of investments in government bonds is one factor.

Moody's predicts that the Philippine banks' profitability will remain stable. Banks have seen a rebound in their NIMs due to the rebalancing of their loan exposure to higher-yielding segments.

While this trend should continue, its impact on headline profits will be offset by a gradual increase in credit costs and higher operating costs. Philippine banks operate under a high cost base, reflecting the sprawling geography of the country that necessitates banks to rely on a brick-and-mortar operating model to access existing and new customers.

Here's more from Moody's:

NIMs improved slightly in the first half of 2017 from higher lending yields, as more banks focus on higher-yielding, but riskier segments, such as middle market and consumer loans, to combat lower yields in their existing corporate sector loans. We expect this trend to continue over the next 12-18 months, providing upside to the banks' core profitability.

However, headline profits will remain muted, with one swing factor being banks' large stock of investments in government bonds. The related trading gains are a volatile source of profits and have declined in recent years. We expect that banks will continue to book trading-related gains on an opportunistic basis.

Credit costs will rise accordingly in line with our expectation of a gradual increase in nonperforming loans. That said, the stronger risk-adjusted margins in the consumer segment compared with the corporate segment will continue to encourage banks to expand their consumer business.

Banks will also incur higher operating costs as they work to improve IT infrastructure to keep pace with business growth, especially as they expand their distribution networks to pursue growth in consumer segments.4This will limit the scope for banks to improve their cost efficiency.