The banking system’s profitability ratios decreased in the first quarter this year compared to same period in 2023 despite sustained income growth and manageable non-performing or soured loans.

Based on data from the Bangko Sentral ng Pilipinas (BSP), banks’ return on assets (ROA) and return on equity (ROE) declined on a year-on-year basis.

ROA, which is the percentage of net profit or loss to average assets, dropped to 1.47 percent as of end-March from 1.52 percent same time last year. Total assets covered amounted to P25.649 trillion which was 10.8 percent higher than P23.147 trillion in 2023.

Banks’ ROE or the percentage of net profit or loss to average capital, also fell to 12.15 percent versus 12.60 percent in the first quarter 2023. Total capital covered was at P3.123 trillion, up 12 percent from P2.787 trillion last year.

Both profitability metrics ROA and ROE continued to show Philippine banks’ resiliency amid the sustained expansion in assets, deposits, and profit, as well as stable capital, liquidity buffers and ample provision for credit losses, according to a BSP report.

At the end of the first quarter, the banking industry reported combined net profits of P92.107 billion, up by 2.97 percent compared to P89.47 billion same time in 2023 due to higher interest income.

Meanwhile, the industry cost-to-income ratio which measures banks’ efficiency in their operations, increased to 56.71 percent as of end-March from 54.97 percent same time last year.

The BSP has said that cost-to-income ratio has been maintained at below 60 percent since the pandemic. This ratio ranged between 60.3 percent and 64.7 from 2015 to 2019 and 54.9 percent and 59.1 percent from 2020 to 2022. Cost-to-income ratio is the percentage of non-interest expenses, net of impairment losses, to total operating income.

Banks’ net interest margin (NIM) increased to 4.21 percent end-March versus 3.86 percent same time in 2023. NIM is the percentage of net interest income to average earning assets.

As for banks’ earning asset yield, this improved to 5.99 percent in 2024 compared to 4.88 percent in 2023.

Funding cost also increased to 2.02 percent at the end of the first quarter from 1.16 percent same time in 2023.

Banks’ interest spread, taking into consideration the earning asset yield and funding cost, rose to 3.97 percent from 3.72 percent in 2023.

The percentage of interest income to average earning assets is the earning asset yield while the funding cost is the percentage of interest expenses to average interest-bearing liabilities. The difference between the two is the interest spread.

In a report, S&P Global Ratings said they expect  Philippine banks to boost its earnings, capital and assets this year on the back of a recovering economy and on expectation that interest rates will decline.

S&P noted that bank earnings will “normalize with lower asset yields” amid expectation that the BSP will start reducing its 6.5 percent target reverse repurchase (RRP) rate or the policy rate in the second half of 2024.

Based on the report, with improving economic conditions, this will translate to a 10 percent to 12 percent credit growth this year from five percent to six percent in 2023, while gross non-performing loan (NPL) ratio is expected to remain around 3.5 percent.

Banks’ ROA, meanwhile, is seen to drop to 1.3 percent this year from 1.4 percent in 2023 while low cost deposits to total deposits is 70 percent.

Local banks’ asset quality is also expected to remain stable this year amid lower inflation and rate cuts that should support loan repayments, said the credit rating agency.