Moody’s flags PH bank capital relief as ‘credit negative’
The move of the Bangko Sentral ng Pilipinas (BSP) to let banks exclude government securities-related losses from capital calculations is “credit negative,” Moody’s Ratings said, as the measure could mask some of the pressure that rising interest rates and inflation have placed on lenders’ balance sheets.
In a note dated June 24, Moody’s said the measure was designed to shield banks’ Common Equity Tier 1 (CET1) ratios from declines caused by unrealized losses on government securities, whose market values have fallen as bond yields have surged since the Middle East war.
The pressure is seen as significant because Philippine banks are heavily invested in government debt. Government securities accounted for about 30 percent of banking system assets as of March—among the highest shares in Asia—while roughly 40 percent of those holdings were classified as fair value through other comprehensive income.
The rest are booked in held-to-collect portfolios, which are not marked-to-market. As a result, Philippine banks recorded unrealized losses that are deducted from their CET1 ratios.
Figures from the Philippine Dealing System Holdings showed that 10-year government bond yields had risen to a high of 7.8 percent in May, before easing to around 7 percent in June, but still above the 6-percent average in 2025.
“The increase in government bond yields has pressured Philippine banks’ capital ratios because they hold a large number of long-duration government securities,” Moody’s said.
“The magnitude of unrealized losses ranged from 1.2 percent to 4.3 percent of CET1 capital in the first quarter of 2026, while the overall cumulative unrealized losses on CET1 capital ranged from 1.3 percent to 7.5 percent,” it added.
According to the BSP memo, retroactive application of the relief may be implemented on the April and May 2026 capital figures of banks. The document explained that the relief was “afforded in view of the impact of the [Middle East] conflict on market yields and asset valuations.”
Despite the decline in CET1 ratios, Moody’s said Philippine banks remain well-positioned to absorb the pressure. It expects lenders’ tangible common equity-to-risk-weighted-assets ratio—a capital measure that excludes unrealized gains and losses—to remain broadly stable this year as earnings continue to replenish capital.
“We expect capital requirements to ease as corporate credit demand remains muted amid weak business sentiment, while credit supply for retail loans slow amid banks’ tightening underwriting standards,” the agency said.
“Consequently, Philippine banks will remain well capitalized against the weaker operating environment and higher asset risk,” it added.
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