Metropolitan Bank & Trust Co. (Metrobank) and Security Bank Corp. posted steeper unrealized losses and faced greater pressure on their core capital buffers in the first quarter of the year, driven by their outsized exposure to volatile fixed-income holdings, according to Moody’s Ratings.

The credit rating agency said in a June 24 report that the two Philippine lenders underperformed their domestic peers because they held the largest proportions of fair value through other comprehensive income (FVOCI) securities as a percentage of total assets.

High concentrations of FVOCI assets leave balance sheets vulnerable to market swings, particularly during aggressive monetary tightening cycles or spikes in market yields.

Under standard accounting rules, these debt holdings must be updated regularly to reflect current market prices, creating paper losses that immediately chip away at a lender’s capital adequacy math before the assets are ever sold.

The capital erosion comes amid a volatile macroeconomic environment. Domestic consumer prices surged following an escalation of hostilities in the Middle East, which quickly filtered through to local retail markets.

To combat these mounting price pressures and track global risk premiums, sovereign debt yields climbed sharply, with the benchmark Philippine government bond yield hitting a peak of 7.8 percent in May. That spike triggered a sharp correction in fixed-income valuations across the banking sector.

As a consequence of the bond rout, local banks saw their common equity tier 1 (CET1) ratios—a critical gauge of solvency and unexpected loss absorption capacity—deteriorate through March. While the entire industry felt the weight of rising yields, Moody’s noted that the strain from cumulative unrealized FVOCI losses fell heaviest on Security Bank.

Security Bank’s cumulative paper losses reached 7.5 percent of its CET1 capital in the first quarter. Bank of the Philippine Islands (BPI) ranked as the second most affected at 5.4 percent, followed closely by Metrobank at 4.7 percent.

Despite the erosion of these core capital shields, Moody’s indicated that local banks’ tangible common equity ratios will remain stable through the remainder of 2026, signaling that broader institutional capital structures possess enough structural resilience to weather current headwinds.

The regulatory environment shifted on Friday, June 19, when the Bangko Sentral ng Pilipinas introduced a temporary accounting carve-out. The central bank's new guideline allows lenders to exclude valuation losses on peso-denominated government securities from their regulatory capital calculations. This emergency policy buffer is explicitly aimed at dampening the balance-sheet fallout from the ongoing Middle East conflict and preserving credit flows to the broader economy.