Southeast Asian banks’ face mixed outcomes from shallower rate decline

Philippine and Singapore banks will be key beneficiaries if rates are higher.

The interest rate decline in 2025 has the chance to be shallower than expected, which could benefit select banks in Southeast Asia, according to Fitch Ratings.

Banks’ capacity to cut deposit rates and manage wholesale funding costs will be key in determining outcomes, the ratings agency said.

Philippine and Singapore banks will be key beneficiaries if rates are higher than expected. Fitch’s rated banks in these countries have good funding profiles and are in liquid banking systems that can capitalise on yields staying buoyant whilst keeping deposit rates lean, it said.

“This should position them to enjoy modestly higher net interest margins (NIM) than in our base case, under this scenario,” Fitch said.

However, smaller Philippine banks may benefit less than their larger peers, as their weaker competitive advantage in chasing deposits and lending opportunities tends to constrain their NIM, it added.

Most banks in Vietnam and Indonesia, meanwhile, will not benefit from higher-than-expected interest rates. This is because their ability to resist higher funding costs is constrained by their less-developed deposit franchises, Fitch said.

“Their ability to pass on higher yields to borrowers is also curbed by competition and a relatively high share of fixed-interest lending. The scenario would thus be negative for sector NIMs, although large banks with better liquidity should fare better,” Fitch said.

Malaysian banks also face deposit competition and narrower NIMs in such a scenario, but not as impacted as Vietnamese and Indonesian banks.

“We believe the impact on southeast Asian banks’ asset quality from a shallower rate-cutting cycle or slight rate increases would mostly be limited, although Vietnamese borrowers tend to have weaker buffers than others in the region,” Fitch said.

“The region’s bank capitalisation levels are mostly ample, so the impact of higher-than-expected bond yields on valuations of securities is unlikely to be a significant rating consideration,” it added.