PH banks’ loan quality at risk from oil shock
Philippine banks may come under pressure from the war in the Middle East, Fitch Ratings warned, saying a prolonged conflict could keep oil prices elevated and disrupt remittances from the Gulf—developments that could weaken borrowers’ ability to repay their debts.
At a webinar last week, Jonathan Cornish, head of Fitch’s Asia-Pacific bank team, said lenders’ growing exposure to higher-yielding but riskier household borrowers in recent years could weigh on asset quality in tougher times.
“They (retail segment) have shown more volatility and vulnerability in the past, including during Covid,” Cornish said. “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.
“That’s when you might start to see some impairments come through,” Cornish said. “But we don’t expect that to be the case for the foreseeable future, even under this stress scenario.”
Outlier
Latest data from the Bangko Sentral ng Pilipinas (BSP) showed that outstanding loans from large banks had risen by 9.5 percent from a year earlier to P14.3 trillion in February, a touch quicker than January’s 9.3-percent pace. Firmer demand from businesses helped offset a slower expansion in consumer borrowing, as households still felt the strain of stubbornly high interest rates.
Analysts have said the war in the Middle East could temper credit growth, as higher oil prices squeeze household budgets and prompt banks to lend more cautiously to avoid a surge in unpaid loans.
Domestic inflation already rose to a 20-month high of 4.1 percent in March, breaching the central bank’s 2-percent to 4-percent target range, This made the Philippines an “outlier” in Asia, where price pressures have remained relatively benign, said Gareth Leather, senior Asia economist at Capital Economics in London.
“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 said in a note to clients.
Even before the conflict erupted, 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, a six-month high.
Banks have also pared their buffers against unpaid loans, though the cushion remains sizable. Lenders set aside 519.5 billion pesos as allowance for credit losses, translating to a coverage ratio of 93.83 percent, the lowest since November 2024.
“In the Philippines, the effect may be more pronounced than in previous shocks because recent loan growth has shifted toward micro, SME and consumer segments as banks reduced concentrations to large conglomerates,” Fitch’s Cornish said.
