Fitch, S&P see prolonged Middle East war hurting Philippine banks’ loan quality

CREDIT RATERS expect the asset quality of Philippine banks to deteriorate further as the Middle East conflict hits the economy.

The debt watcher downgraded the Philippine banking sector’s outlook to “deteriorating” from “neutral,” as the country faces higher inflation and weaker growth due to its heavy reliance on oil imports from the Gulf area.

“Weaker domestic demand and tighter policy settings are likely to drive credit deterioration in the region’s more vulnerable markets. In the Philippines, significantly higher inflation is hurting a consumption-led economy,” Fitch said in a note on Wednesday.

“We also expect weaker loan growth, higher credit costs and lower operating profitability, even if higher rates provide some support to margins.”

Fitch in April already cut its outlook for the Philippines’ sovereign rating to “negative” from “stable” as it expects the Iran war and the global energy shock to weigh on the country’s economic prospects.

“Fitch expects economic growth to broadly ease among many of the major banking systems in APAC (Asia-Pacific), with more robust growth prospects in emerging markets generally supporting their intrinsic profiles, with some exceptions. Banking systems have relatively sound bases upon which they can weather a weakening of the operating environment, albeit rising risk appetites in recent years can weigh further on the banks’ Viability Ratings in the event of less benign operating conditions in future,” Jonathan Cornish, Fitch Head of APAC Bank Ratings, said in a media briefing in Hong Kong.

“At this juncture, we see little ratings impact in 2026, but the longer the conflict or impact drags on the greater the potential to weaken bank credit profiles, subject to policymakers’ intervention or support.”

HIGHER PROVISIONING
S&P Global Ratings said Philippine banks are expected to ramp up their loan-loss provisioning as they could see credit losses of around 1% to 1.2% of total loans over the next two years from 1% in 2025 and 0.7% in 2024.

This is due to most banks’ increased focus on the consumer segment for better margins, S&P Analyst and South and Southeast Asia Director and Lead Nikita Anand said in a webinar on Wednesday.

“Our view is that some of the pressure in the initial stages could come from unsecured consumer loans. The sector has seen a very high growth in this segment in the last two to three years, and the portfolio has ramped up pretty fast here in the last two to three years, and some of the portfolio may not even be seasoned.”

Ms. Anand said elevated inflation and the resulting high interest rate environment could lead to tighter credit and financial conditions, which could affect loan repayments, especially for unsecured personal loans.

“We expect banks which have higher exposure to the unsecured consumer loans… have to set aside higher provisioning more than banks which have a more balanced portfolio.”

Weaker remittances could also affect bank deposits, she added.

“The other second-order impact, for example, is that the labor markets in the South are disrupted. It could affect remittance, which could in turn erode deposits more, increasing their capacity. This is especially true for the Philippines, India, and Bangladesh, because these three countries have meaningful diaspora living in the Gulf and sending in money back to their households in each country.”

Philippine banks are also more exposed to mark-to-market losses from rising interest rates given their high share of government bond holdings at around a quarter of their total assets, Ms. Anand added. — A.M.C. Sy