Moody’s warns of rising risks as banks expand retail lending

MANILA, Philippines — Philippine banks are expected to benefit from the rapid growth in retail lending, but Moody’s Ratings has cautioned that this expansion also brings elevated asset quality risks in the short- term, particularly due to untested borrowers and rising levels of unsecured consumer debt.

In a report, Moody’s said retail loans in the Philippines such as credit cards and personal loans have grown significantly faster than non-retail loans since 2022.

Retail lending accounted for 21 percent of total banking system loans as of end-2024 and is projected to climb to 25 percent over the next three years, up from just 18 percent in 2021.

“A large proportion of retail loans is untested through economic cycles and some borrowers with higher indebtedness could struggle in an unexpected economic downturn. Therefore, the strong retail loan growth in recent years has raised asset risks for Philippine banks,” the credit watcher said.

Moody’s said several of the new borrowers entering the retail lending market lack established credit histories, making it harder for banks to assess their creditworthiness. With the country’s credit bureau infrastructure still developing, the risk of default remains high.

The debt watcher also said debt accumulation is outpacing income growth in the Philippines, indicating that retail loans are growing in an unsustainable manner and the ability to service debt would become increasingly difficult.

As of December 2024, the non-performing loan ratio for credit cards increased to 4.4 percent from 3.9 percent in 2022. The NPL ratio for personal loans also rose to 5.3 percent from 4.9 percent over the same period.

“We expect delinquencies for these two products to increase over the next 12 to 18 months as more credit cards enter repayment phases and as more personal loans mature. In addition, discussions with market participants indicate that a significant 30 percent of credit cardholders only repay the minimum amount each month,” Moody’s said.

Banks that have aggressively expanded into retail lending are expected to face higher credit costs over the next 12 to 18 months. Union Bank of the Philippines, Security Bank Corp., Rizal Commercial Banking Corp. and Bank of the Philippine Islands (BPI) were identified as more vulnerable to prolonged stress in the retail portfolio due to weaker buffers.

Notably, Moody’s recently lowered UnionBank’s credit rating to “Baa3” from “Baa2” previously. The debt watcher said the downgrade was attributed in part to its rapid retail loan growth and resultant asset quality pressures.

Despite these risks, banks like Philippine National Bank and BPI remain committed to growing their retail portfolios, with the latter targeting 30 percent of its loan book for retail in the coming years.

In the medium term, Moody’s said retail lending would ultimately strengthen the Philippine banking sector.

By diversifying away from corporate clients, banks can lower concentration risk and earn higher net interest margins. Retail loans also come with increased fee income from services like credit cards and insurance cross-selling.

“Retail loans are higher yielding than corporate loans and increased exposure to retail loans will drive the net interest margins of banks higher. Banks’ fee income will also increase,” Moody’s said.

It expects the Philippines to grow by six percent in 2025 and 2026, providing a favorable backdrop for loan demand.

The BSP’s push for financial inclusion, including expanding access to transaction accounts and developing Islamic finance, is also expected to support sustained retail lending growth.