S&P warns Philippine banks face prolonged volatility unless economy steadies

S&P Global Ratings has warned Philippine banks to brace for prolonged volatility if the economy does not regain its footing over the next year. The credit rater expects slower loan growth, rising nonperforming loans and weaker asset quality as high inflation and subdued GDP growth squeeze household

S&P Global Ratings has warned Philippine banks to brace for prolonged volatility if the economy fails to regain its footing over the next 12 to 18 months, the credit rater said in a report dated Sept. 7.

Banks are likely to post slower loan growth as red-hot inflation affects consumers, and could also see higher nonperforming loans (NPLs) and weaker asset quality if economic growth remains subdued in the near term, S&P said. “The Philippine banking sector faces weaker credit growth because of higher inflationary pressures,” said Nikita Anand, a banking analyst at S&P Global Ratings. “This tepid growth and a squeeze in household incomes could push up weak loan ratios to as high as 7 per cent from 5.6 per cent on June 30, 2026.”

Philippine gross domestic product grew 2.6 per cent in the first half of the year, with second-quarter expansion slowing to a new post-pandemic low of 2.3 per cent – below the government’s full-year target of 3.5 per cent to 4.5 per cent. Inflation remained above the Bangko Sentral ng Pilipinas’ 3 per cent target for the sixth straight month at 6.1 per cent in August, averaging 5.2 per cent so far this year. Since the Middle East war broke out in late February, the central bank has raised its benchmark interest rate by a cumulative 75 basis points to an over one-year high of 5 per cent.

S&P expects loan growth to ease to 7 per cent to 8 per cent this year as higher borrowing costs and stricter lending standards add pressure. Outstanding loans at Philippine universal and commercial banks reached P14.98 trillion as of July, up 10.4 per cent from a year earlier, with consumer loans – including residential real estate loans – rising 17.1 per cent to P2.062 trillion.

The rater sees NPLs rising 6 per cent to 7 per cent over the next two years, with midsize banks likely to be hit harder than large institutions, which are cushioned by strong profitability and capitalization. “We conducted stress tests on the Philippine banking sector and found institutions would be resilient in a severe scenario in which nonperforming loans double,” Anand said. “However, some midsize banks are more vulnerable than the largest institutions due to their higher exposure to riskier segments.”

S&P expects GDP to expand between 5 per cent and 6 per cent from next year until 2029 as inflation eases back to the central bank’s target of 2.9 per cent to 3.3 per cent during that period. “The outlook for the next few months remains challenging for banks,” Anand said. “Recovery in 2027-2029 will be driven by inflationary pressures easing and public and private spending rebounding, in our view.”