Fitch: Philippine banks face higher bad loan risks

MANILA, Philippines —  Philippine banks may see higher bad loans and weaker earnings in the near term as slower economic growth, high energy prices and rapid growth in unsecured consumer lending raise asset quality risks, Fitch Ratings said. In a report, Fitch said underlying credit risks are likely to persist, with the sharp rise in unsecured consumer loans leaving banks more vulnerable to slower income growth and high inflation.

“Fitch Ratings believes recent economic challenges in the Philippines are likely to drive higher credit impairments and lower bank profitability in the near term,” the debt watcher said.

Fitch earlier revised its 2026 outlook for the Philippine banking sector to “deteriorating” from “neutral,” citing weaker economic momentum and the inflationary impact of the energy shock driven by the Middle East conflict.

For banks, Fitch said pressure would likely appear more through higher write-offs and credit costs rather than a sharp rise in reported non-performing loans, partly due to regulatory relief measures introduced this year.

Fitch lowered its projection for system loan growth to nine percent this year from an earlier forecast of 12 percent as macroeconomic uncertainty, higher long-term interest rates and weaker corporate capital expenditures are expected to temper lending activity.

Banks are also likely to reduce their risk appetite, while unsecured consumer loans may see lower utilization and higher write-offs.

Credit card loans, in particular, could see a sharp rise in defaults, forcing banks to book higher impairment charges. Fitch said credit card loans have tripled since end-2020 and accounted for around eight percent of total system loans by end-2025.

Among large banks, BDO Unibank Inc. and Bank of the Philippine Islands both recorded a 32-percent rise in credit card balances in 2025. BDO’s credit card receivables posted a compound annual growth rate of 28 percent since 2021, while BPI’s grew by 33 percent. Metropolitan Bank & Trust Co. recorded slower growth of 20 percent, but from a higher base.

Unsecured lending accounted for 7.5 percent to 9.6 percent of the loan portfolios of the three largest private banks by end-2025.

“We believe these loans pose outsized credit risks because they are relatively unseasoned,” Fitch said, citing the rapid expansion of the segment, risks from borrowers rolling over card spending and the unsecured nature of the loans.

The agency expects impaired-loan ratios to rise only modestly by end-2026, as forbearance measures delay the classification of some loans as impaired until 2027. Unsecured consumer loans are also typically written off within 180 days of becoming past due.

Still, the agency said credit costs are likely to rise as banks set aside higher provisions ahead of the end of regulatory relief. BDO and Metrobank’s credit costs are projected to increase to around 100 basis points due to higher loan impairment charges, while BPI may see a more pronounced rise because of lower credit reserves and faster loan expansion in recent years.

Fitch also said the hit to earnings should be manageable for BDO and Metrobank, given their adequate loan-loss coverage and expectations that net interest margins will recover in 2027. It also expects margins of the three large banks to remain stable over the next two years, supported by rate hikes and higher government bond yields.

Capital buffers are expected to remain stable as slower balance sheet growth offsets weaker internal capital generation. Fitch said large private banks have sufficient earnings and dividend flexibility to keep common equity tier 1 ratios within their operating targets.

BDO, Metrobank and BPI are the three largest privately owned banks in the country, each with a 12-percent to 23-percent share of system loans and deposits as of end-2025. Their scale is significantly larger than the next biggest private peers, which hold market shares of only five percent to six percent.

More than 70 percent of the three banks’ loans are still extended to corporate or commercial borrowers, although the share has declined as banks expanded into retail lending.