Philippine banks could see their bad-loan ratio rise to as high as 7 percent from 5.6 percent as inflation squeezes household incomes, credit growth weakens, and riskier unsecured loans come under pressure, S&P Global Ratings said.
The warning comes despite the sector’s strong capital and profitability, which the ratings agency said should help banks absorb a severe deterioration in asset quality.
S&P’s stress tests found Philippine banks would remain resilient even if nonperforming loans doubled from end-2025 levels. Common equity Tier 1 ratios would stay above minimum regulatory requirements even if earnings fell sharply.
“This is largely because of strong capitalization at banks,” S&P analyst Nikita Anand said. “However, some midsize banks are more vulnerable than the largest due to their higher exposure to riskier segments.”
Two midsize banks could post pretax losses under the severe stress scenario, highlighting the uneven impact of worsening credit conditions across the sector.
S&P said economic growth in the first two quarters of 2026 has lagged its full-year forecast of 4.1 percent. Until a recovery firms up over the next 12 to 18 months, banks are likely to face continued volatility.
The agency expects Philippine growth to improve to 5 percent to 6 percent from 2027 through 2029 as inflationary pressures ease.
Still, asset quality is expected to weaken in several consumer and small-business segments. Lower-income households and small and midsize enterprises are facing higher living costs and unemployment, increasing repayment risks.
Auto loans, credit cards, and personal loans are among the segments expected to see moderate deterioration in asset quality.
“The sector’s ability to maintain stability will depend on how well banks manage rising credit costs and the increasing share of riskier unsecured loans in their portfolios,” Anand said.
The assessment leaves Philippine banks with substantial buffers against a downturn, but also highlights a growing vulnerability. Strong capital can absorb higher losses, but rising unsecured exposures could test that resilience if economic conditions remain weak.
