BSP: Lending growth to remain muted amid rate hikes, risk-off sentiment

By Katherine K. Chan, Reporter

LENDING GROWTH in the Philippines may remain subdued throughout the year amid higher borrowing costs and as uncertainties surrounding the Middle East war continue to fuel risk aversion, the Bangko Sentral ng Pilipinas (BSP) said.

“Credit growth is projected to remain positive but at a more measured pace, reflecting tighter financial conditions and more selective lending,” the Philippine central bank told BusinessWorld in an e-mailed response to questions.

“While survey-based indicators continue to point to sustained demand — particularly for inventory financing and household loans — actual credit disbursements may moderate following recent monetary tightening,” it added.

Despite the Middle East war, Philippine banks posted double-digit loan growth in March and April as lenders continued to finance residents’ consumption and business activities.

In April, bank lending grew by 11.4% annually to P14.755 trillion from P13.249 trillion, marking the fastest expansion in nine months or since July last year.

The central bank’s latest Senior Bank Loan Officers’ Survey showed 53.8% of banks polled see steady loan demand from businesses for the second quarter of the year, while 52.9% anticipate steady credit demand from households.

However, the BSP flagged early signs of credit deterioration in certain sectors.

Based on latest central bank data, lenders’ nonperforming loan (NPL) ratio jumped to its worst level in eight months at 3.37% in April from 3.29% in March amid tighter financial conditions due to the Middle East war.

“While the NPL ratio may inch up modestly due to pressures on certain borrower segments, particularly unsecured retail lending and energy-sensitive sectors, risks remain contained, with no evidence of broad-based deterioration,” the BSP said.

The central bank also noted that domestic banks have begun tightening lending standards for sectors exposed to higher fuel costs, logistics pressures, and foreign exchange volatility.

“Nonetheless, banks have adopted a more cautious stance, and increased focus on vulnerable sectors,” the BSP said.

The BSP monitors banks’ lending activities to track the transmission of monetary policy.

It reversed course in April as it tightened for the first time in over two years. Last week, the Monetary Board raised key interest rates by 25 basis points (bps) for a second straight meeting, bringing it to its highest since August 2025 at 4.75%.

BSP Governor Eli M. Remolona, Jr. left the door open for further rate hikes to address underlying pressures on consumer prices amid the recent energy crisis, saying they still have “a lot” of tightening space to bring inflation back to their 3% target.

However, he noted that the central bank will likely resort to “baby steps” or incremental 25-bp increases for now as it warned against potential market disruption should it act more aggressively.

“Looking ahead, decisions on further monetary action will depend on evidence of spillover effects and their extent, particularly on domestic prices and economic activity,” the BSP told BusinessWorld. “We will continue to closely observe evolving inflation dynamics and expectations.”

The Monetary Board will hold three more regular rate-setting meetings this year on Aug. 27, Oct. 22 and Dec. 17.

PROFITABILITY CONCERNS
Meanwhile, banks may also encounter profitability concerns amid elevated funding costs, narrowing margins, and valuation losses on financial assets, the BSP said.

“The recent rise in market yields — driven by global and geopolitical developments — has led to increased unrealized losses on fair value of securities, as higher yields reduce bond prices,” it said. “While these valuation losses are recognized in other comprehensive income and affect total capital, they may also weigh on overall financial performance.”

This comes after the industry saw slightly better earnings in the January-to-March period, with their combined net income up by an annual 2.86% year on year to P104.816 billion from P101.903 billion, according to preliminary data.

However, banks’ strong footing prior to the war, diversified income sources and current risk management measures may soften the blow of the energy crisis on its profitability, the central bank added.

The BSP also said the Philippine banking system is unlikely to face broad-based deterioration and may remain stable for the remainder of the year.

“Overall, the banking system is expected to remain stable, with adjustments occurring through measured credit growth, prudent risk repricing, and active balance sheet management rather than broad-based deterioration,” it said.

On the other hand, the central bank noted that uncertainties surrounding the Middle East conflict could continue to test financial markets, with risk aversion “keeping equities subdued, the peso under pressure, and domestic bond yields elevated in the near term.”

Meanwhile, strong demand for the greenback since the United States and Israel’s initial attacks on Iran in late February has weighed on the peso.

From the P58-per-dollar level prewar, the local unit has plunged to the P60 to P61 mark. It averaged P61.441 against the dollar in May as it fell to a new historic low finish of P61.75 on May 18 and 19.

Data cited by the BSP also showed that benchmark government security yields climbed by an average of 55.7 bps in the first quarter, with the term spread between the 1-year and 10-year government securities widening by 73.14 bps.

“These drivers are expected to persist in the near term, subject to developments in the Middle East and in global commodity and financial markets,” the central bank said.