Large companies' heavy reliance on bank loans, particularly from major local banks, could amplify vulnerabilities within the Philippine financial sector, according to the 2024 Financial Stability Report (FSR).

"Corporates’ heavy reliance on bank funding could amplify credit risks to the financial sector. The provision of credit to corporates and households creates an interdependence where shocks from one sector could have destabilizing effects on other sectors," the report, published Thursday, March 27, stated.

It pointed out that "vulnerabilities could be triggered by increased leverage and funding mismatches."

As it stands, the report noted that corporations are "reliant on bank funding," and the close ties between corporates and Domestic Systemically Important Banks (DSIBs) "amplify risks within the financial network."

"If any of these large corporates experience financial distress due to elevated leverage, funding mismatches, or refinancing difficulties, asset quality and capital adequacy of banks can decline," the report warned.

Rising debt and ongoing funding gaps among large companies would expose big businesses to heightened debt-servicing risks.

This presents local risks, despite the business and industry sectors' demonstrated resilience in the dynamic economic environment. The report even noted that corporate earnings are "reverting to pre-pandemic levels."

Specifically, certain non-financial companies within large conglomerates face heightened risks.

According to the Financial Stability Coordination Council (FSCC), these risks stem from businesses' debt repayment and a looming "maturity wall."

"Dampened consumption and investment may increase credit risk. Firms with large short-term debt may face refinancing concerns," the report said.

Debt refinancing can be risky when there's a "maturity wall," meaning a large amount of debt is due at the same time. This puts pressure on firms to quickly repay their debt, which can be difficult if credit conditions tighten.

FSCC Chair and Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. stressed that the local financial system must adapt to fluctuating global conditions.

However, he also highlighted the country’s performance, noting that "in a year full of change, the Philippine financial system demonstrated strength, backed by an improved understanding of market dynamics."

"In an interconnected market, individual decisions can create ripple effects. Systemic risk management is a collective effort."

To ease pressure on the banking sector, the FSCC suggested expanding the capital market to reduce businesses’ reliance on bank loans. Capital markets offer businesses an alternative funding source besides banks and other financial institutions.

The FSCC noted that "the preference on bank loans as a source of funding persists in the corporate sector." Large businesses are also increasingly borrowing in foreign currencies, mainly US dollars, which elevates currency risks.

Therefore, "enhancing the capital markets would strengthen the resilience of the financial system as a whole."

The FSCC further stated that "monetary easing can bolster real sector resilience," noting that the shift towards an accommodative interest rate environment "could encourage investment in capital-intensive projects, business expansion, and household consumption."

"Looser financing conditions could pave the way for enhanced credit availability for businesses and consumers to ramp up investments and rebuild savings as a buffer to shocks," it added.