Philippine banking outlook downgraded to negative — Moody's

MANILA, Philippines – Moody’s Ratings has downgraded its outlook on the Philippine banking system to “negative” from “stable,” warning that weakening economic conditions and rising loan impairments could strain lenders even as the US-Iran memorandum of understanding offered brief market relief.

In a report dated June 19, the credit agency projected the Philippine economy would expand by 4 percent to 4.5 percent this year, a slight pullback from the 4.4 percent recorded in 2025.

It attributed the softer outlook to elevated consumer prices and sluggish government spending — the latter linked to an ongoing corruption investigation — both of which risk dampening household consumption and loan demand.

Asset quality under pressure

The firm flagged asset quality as its primary concern, noting that deterioration would be “more acute” than previously anticipated. It pointed to higher credit costs and a rise in write-offs in the first quarter of 2026 as early warning signs — even as the headline nonperforming loan (NPL) ratio remains nominally stable.

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Bangko Sentral ng Pilipinas (BSP) data showed NPLs — debts overdue by at least 90 days — reached 3.37 percent of total loans in April, the highest reading since August 2025, when it hit 3.5 percent.

“Retail loans already face higher impairments from rapid growth in recent years,” Moody’s said, adding that the trend would push credit costs higher across the system.

Inflation and rate environment

The pressure on borrowers has coincided with persistent inflation. Consumer prices climbed 6.8 percent year-on-year in May, easing from April’s 7.2 percent but still above the BSP’s 2-to-4-percent target band for a third consecutive month.

In response, the Monetary Board last week raised its benchmark rate by 25 basis points to 4.75 percent, extending a tightening cycle that has now delivered a cumulative 50 basis points in increases. The BSP has signaled it will take further action as needed to return inflation to its 3-percent midpoint target.

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Moody’s said the higher rate environment, combined with growth in higher-yielding retail lending, should help sustain banks’ net interest margins. Fee income, particularly from credit card lending, is also expected to grow — though these gains would be partially offset by rising credit costs.

Loan growth, funding risks

Looking ahead, the agency forecast loan growth will moderate in 2026 as weaker business and consumer confidence curb demand.

Banks are also expected to tighten underwriting standards and slow retail segment expansion, which Moody’s said would ease capital requirements.

On liquidity, Moody’s noted that Philippine banks maintain healthy loan-to-deposit ratios, supported by a stable, deposit-driven funding base.

However, it raised concerns about intensifying deposit competition, pushing lenders toward short-term and structured funding, while the expansion of long-tenor project financing introduces maturity transformation risks.

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