Why banking stocks might be a surprise opportunity right now

Banking stocks have been trending lower since mid-year, dragged down by fears that falling interest rates would squeeze margins and that rising provisions signaled deteriorating asset quality.

But based on the latest earnings results, these concerns look overblown.

Despite the Bangko Sentral ng Pilipinas cutting policy rates by a cumulative 100 basis points (bps) this year, banks’ net interest margins (NIM) have actually improved.

In the third quarter alone, the median NIM of listed banks rose by 12 basis points quarter-on-quarter and by 27 basis points year-on-year.

Three key factors drove this resilience:

• First, the BSP’s aggressive reserve requirement ratio (RRR) cuts freed up significant liquidity.

After slashing the RRR by 250 bps in late 2024 and another 200 bps in early 2025—bringing the ratio down to 5 percent—banks were able to deploy more funds into higher-yielding assets, boosting interest income.

• Second, funding costs have been falling faster than lending rates.

As market rates dropped, banks reduced time deposit rates more sharply than loan rates.

BSP data shows average time deposit rates fell by about 46 bps year-on-year as of end-September, while average lending rates declined by just 17 bps. This positive spread widened margins.

• Third, banks now have greater exposure to consumer loans, which typically command higher yields and are less sensitive to rate cuts. Consumer loans accounted for around 28 percent of listed banks’ portfolios in the third quarter, up from just 22 percent in early 2022.

On provisions, the sharp 52 percent year-on-year increase in the first nine months may appear alarming, but is largely a normalization story. Banks had slashed provisions in 2024—down to 54 bps of total loans from 70 to 80 bps pre-2024—after building large buffers during the pandemic that ultimately weren’t needed.

The rebound to 83 bps this year looks elevated only because it is coming off an unusually low base.

While current provisioning levels sit above the prepandemic range of 30 to 60bps, the increase is appropriate given banks’ larger consumer loan books, which naturally carry higher default risk and require higher loan-loss reserves.

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Crucially, asset quality remains solid.

The median nonperforming loan (NPL) ratio of listed banks held steady at 2.7 percent in 3Q, while NPL coverage stayed healthy at about 91 percent as of end-September.

Taken together—rising margins, stable asset quality and more compelling valuations—the recent pullback in bank stocks looks less like a red flag and more like a buying opportunity.

Patient investors may want to consider accumulating banking names while prices remain depressed.