PH bank profits face mounting pressure – Fitch

MANILA, Philippines – Despite the onset of the central bank’s rate-hiking cycle, Philippine banks are likely to see some erosion in profitability as the economic fallout from the Middle East conflict weighs on borrowers and raises risks to loan quality, Fitch Ratings said.

In a note, Fitch downgraded its sector outlook on domestic banks to “deteriorating” from “neutral,” citing the Philippines’ vulnerability to higher inflation and weaker economic growth as the war drags on.

READ: BSP on guard as digital banks face profit strain

“Weaker domestic demand and tighter policy settings are likely to drive credit deterioration in the region’s more vulnerable markets. In the Philippines, significantly higher inflation is hurting a consumption-led economy,” the debt watcher said.

“We also expect weaker loan growth, higher credit costs and lower operating profitability, even if higher rates provide some support to margins,” it added.

Data from the Bangko Sentral ng Pilipinas (BSP) showed local banks netted a combined amount of P104.82 billion in the first quarter, growing by nearly 3 percent from a year earlier. That was the industry’s highest first-quarter net profit based on available data dating back to 2008.

The gains were driven largely by net interest income, which climbed 12.44 percent to P310.59 billion as sticky borrowing costs lifted lending margins. Even so, the sector saw an 8.7-percent spike in noninterest expenses—like compensation, taxes, impairment losses and provisions—which reached P207.73 billion.

Meanwhile, nonperforming loans (NPL), or debts overdue by at least 90 days and at risk of default, accounted for 3.37 percent of the local banking sector’s total lending portfolio as of April. That marked the highest gross NPL ratio since August 2025, when the share stood at 3.5 percent.

That happened as consumer prices rose 6.8 percent in May from a year earlier, easing from April’s 7.2 percent pace and coming in below market expectations. Even so, inflation remained above the BSP’s 2-percent to 4-percent target range for a third consecutive month.

READ: Surprise! PH inflation slowed to 6.8% in May

The BSP has said it would “take necessary actions to ensure that inflation returns to its 3-percent target, in keeping with its primary mandate to ensure price stability.” The central bank has also said inflation may average 6.3 percent this year and 4.3 percent in 2027.

The BSP has already responded by raising its key policy rate by a quarter point to 4.5 percent at its April 23 meeting amid a “deteriorating” inflation outlook.

“Asia-Pacific banks face a split in credit conditions in mid-2026, as higher energy prices and weaker growth exert pressure on some banking systems more than others,” Fitch said. INQ