(Part 2 of a series)

Last week, this column () updated the numbers behind BusinessWorld's April 2024 assessment of Pag-IBIG Fund (the government's housing and savings fund), "Doing good on mandates." The picture through calendar year 2025 and into the first half of 2026 was, on balance, a strong one: total assets have passed P1.32 trillion, housing loan releases and membership continue to grow, the fund has earned an unmodified audit opinion from the Commission on Audit (CoA) for a 14th straight year, and Modified Pag-IBIG 2 (MP2) — the fund's voluntary, five-year savings program — now accounts for more than half of all savings collections, with its dividend rate at a record 7.12% (an effective pre-tax rate of 8.54%) for 2025, payable in 2026. For members holding MP2 balances, that dividend rate is their direct return, which is why the question that follows is more than an accounting technicality.

That update also flagged two loose threads. First, 2025 was the first year net income fell (by 2.2%) even as the MP2 rate and the payout ratio both climbed to new highs. Second, the payout ratio — 98.6% of net income already declared as dividends — is now close to its ceiling. This second piece follows both threads to their logical question: Is there a point at which MP2's own runaway growth could start working against Pag-IBIG's net profitability, rather than for it?

Where the headroom is (or isn't) for further MP2 yield gains

The payout ratio mechanism that sustained 2025's dividend rate is close to exhausted as a lever. With 98.6% of net income already declared as dividends — against a 70% statutory floor, the minimum share of net income that regulations require to be declared as member dividends — only about 1.4 percentage points of net income remain undistributed. Repeating 2025's trick of raising the payout ratio to push the rate up even as income is flat or falling has essentially no room left to run. From here, a higher MP2 rate requires either higher net income or a different allocation of net income between Regular Savings and MP2 dividends — not a bigger payout ratio.

That shifts the emphasis back to the income side, and specifically loan quality. Pag-IBIG reports this as a "performing loan ratio" rather than the conventional inverse (NPL ratio); the implied NPL figures below are simply 100% minus the reported performing ratio.

The sharp decline in the NPL ratio from the pandemic years evidently contributed to income growth. For a lender of Pag-IBIG's scale, even a modest further reduction in nonperforming loans converts directly into more collectible interest income and lower provisioning expense.

Pag-IBIG's NPL ratio reduction looks impressive compared with the thrift bank industry, whose loan portfolios also include vehicle loans, credit cards and teachers' loans. The thrift bank sector maintained a steady NPL ratio in the 6–7% range post-pandemic, while Pag-IBIG showed a more dramatic improvement, from more than 20% in the pandemic years to the 6% range of the thrift bank industry.

In addition, a sustained effort to liquidate acquired assets led to a reduction in the acquired asset ratio from 6.15% in 2023 to 5.32% in 2024 and 4.10% in 2025. This combined improvement in nonperforming assets — NPLs plus acquired assets — deserves to be noticed and commended.

MP2's own success as a margin problem

There is a second, more structural tension that the payout-ratio and NPL discussion above does not capture. MP2 is booked as a financial liability, like a time deposit, because of its five-year term — per PFRS 9, the Philippine financial reporting standard on financial instruments, "due to its withdrawability feature," as the notes to the audited financial statements put it — and Pag-IBIG recognizes what it pays MP2 savers as an actual expense line, "investment contract benefit expense," not merely a discretionary dividend. That expense was P8.047 billion in 2023 and P10.981 billion in 2024, a 36.4% jump roughly tracking 2024's 36% net income growth that year. The expense is driven by the MP2 balance and rate, not by fund profitability.

MP2 expense grew another 32% to P14.536 billion in 2025, even as net income (before MP2 dividends) fell from P66.782 billion to P65.283 billion — the two lines moving in opposite directions for the first time in this data set, which is the shape of margin compression. However, the 24% growth in first-half 2026 income, at P41.35 billion, is a good sign of income re-acceleration.

The mechanism is a genuine mismatch on the asset side. Pag-IBIG's core lending is policy-priced low by mandate — 3% for socialized housing loans and 5.75–6.25% for standard repricing periods — and the H1 2026 release explicitly notes that net income grew 24% "despite the lowering of housing loan rates and increasing the maximum housing loan amount to P10 million." That is the fund deliberately compressing yield on its largest asset class for housing-affordability policy reasons, at the same time that MP2 — an increasingly large share of its funding base, above 50% of collections since 2023 — carries a cost of 7.1% or more.

The multi-purpose loan book (at 10.5%) and the investment portfolio — government securities, corporate bonds, and opportunistic placements like the 9% preferred shares in the 2025 Megawide housing deal — are the pieces of the balance sheet that can outyield MP2's cost; the core housing loan book, by policy design, largely cannot. H1 2026's net income growth being driven by a 47% jump in investment income rather than by the loan book is consistent with the fund leaning on the investment side to cover a widening lending-margin gap.

Is there an inflection point?

Structurally, yes — the point where growth in the MP2 benefit expense outruns growth in the income available to cover it, forcing a choice among:

• (a) a lower or flat MP2 rate;
• (b) a payout ratio below 98.6% — that is, retaining more income, which cushions the fund but disappoints members expecting a continued rise in dividend yields; or
• (c) declining net income after dividends, which erodes the equity base on which the fund's soundness rests.

2025 already shows the early symptom — MP2 inflows and the rate both still rising while net income fell — though the mismatch was still small enough, and the payout-ratio lever still had headroom, that neither the rate nor the fund's balance sheet strength visibly suffered. With the payout ratio now at 98.6% and structurally unable to absorb another such year, and with housing loan yields being pushed lower rather than higher by policy, the two moving pieces — a still-growing, tax-advantaged 7%+ liability and a shrinking-yield asset base — point toward that inflection getting closer rather than farther away.

The bottom line

None of this contradicts last week's finding that Pag-IBIG remains, by the numbers, a well-run and financially sound institution — its 14th straight unmodified CoA opinion and re-accelerating 2026 net income say as much. The management team headed by President and CEO Marilene Acosta deserves commendation and thanks from its members.

But the mechanism behind MP2's headline-grabbing dividend yield has shifted from "the fund is getting more profitable" (true through 2024) to "the fund is distributing nearly everything it earns" (true by 2025), at the same time that policy is pushing the yield on its core lending business lower rather than higher. That combination is sustainable only for as long as investment income and loan-quality gains can keep outrunning the growing cost of MP2 itself — a race worth watching, not a crisis already arrived, but one where the fund has meaningfully less room to maneuver than it did when the original 2024 assessment was written. The indicators to track in each new reporting period are the ones this analysis has relied on: the spread between MP2 benefit expense growth and net income growth, the share of income growth coming from investments, and any movement of the payout ratio away from its 98.6% level.

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Alexander C. Escucha is a past president of the Philippine Economic Society (PES 2005), a fellow of the Foundation for Economic Freedom (FEF), a board trustee and chairman of the UP Visayas Foundation (2014–2026), and a retired senior vice president of China Banking Corp.