Fitch Ratings has issued a stark warning that Philippine banks are increasingly vulnerable to loan quality deterioration, driven by the ongoing conflict in the Middle East which threatens to keep oil prices elevated and disrupt vital remittances from the Gulf region.
Jonathan Cornish, head of Fitch’s Asia-Pacific bank team, highlighted during a recent webinar that lenders' growing exposure to higher-yielding but riskier household borrowers in recent years could significantly impact asset quality during economic stress. "They (the retail segment) have shown more volatility and vulnerability in the past, including during Covid," Cornish noted. "So that’s where you probably expect to see some of that deterioration more evident throughout the second half of the year."
Risks could deepen if a prolonged US-Iran conflict begins to strain the cash flow of corporate borrowers as well, where bank lending is heavily concentrated.
Analysts warn that the war could temper credit growth, as higher oil prices squeeze household budgets and prompt banks to adopt more cautious lending practices to avoid a surge in unpaid loans. This comes as domestic inflation hit a 20-month high of 4.1 percent in March, breaching the central bank's target range of 2 to 4 percent.
Gareth Leather, senior Asia economist at Capital Economics in London, pointed out that the Philippines stands as an "outlier" in Asia, where price pressures have remained relatively benign. "The country’s weak fiscal position limits its ability to shield consumers as other parts of the region have done, so higher energy costs have fed through quickly," Leather explained in a client note.
Even prior to the conflict, nonperforming loans—debts overdue by at least 90 days and at risk of default—accounted for 3.33 percent of the banking sector’s total lending portfolio as of February, marking a six-month high. Concurrently, banks have reduced their buffers against unpaid loans, with the allowance for credit losses standing at 519.5 billion pesos, resulting in a coverage ratio of 93.83 percent, the lowest since November 2024.
Cornish added a cautious note, stating, "That’s when you might start to see some impairments come through. But we don’t expect that to be the case for the foreseeable future, even under this stress scenario."