Moody’s Ratings turns ‘negative’ on PH banks

MANILA, Philippines – Moody’s Ratings lowered its outlook on the Philippine banking system to “negative” from “stable,” citing a weaker operating environment for lenders and mounting risks to their asset quality as the economic fallout from the war in the Middle East threatens to weigh on growth and borrowers’ ability to repay loans.

In a report dated June 19, the global debt watcher warned that the economy would remain under pressure despite the recently announced memorandum of understanding between the US and Iran.

READ: Moody’s keeps ‘Baa2’ rating on 3 Philippine banks

The firm forecasts Philippine economic growth of 4 percent to 4.5 percent this year, compared with 4.4 percent in 2025. It said elevated consumer prices and sluggish government spending linked to an ongoing corruption investigation could dampen household consumption and loan demand, creating a more challenging environment for banks.

“As such, asset quality deterioration will be more acute than we previously expected, with retail loans already facing higher impairments from rapid growth in recent years. Consequently, we anticipate higher credit costs,” Moody’s said.

“Although the headline nonperforming loan ratio is stable, risks to banks’ asset quality are rising, as evidenced by higher credit costs and write-offs in the first quarter of 2026,” it added.

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed that nonperforming loans, or debts overdue by at least 90 days, accounted for 3.37 percent of banks’ total loan portfolio in April, the highest level since August 2025, when the ratio reached 3.5 percent.

The deterioration has coincided with high inflation. Consumer prices rose 6.8 percent in May from a year earlier, slowing from April’s 7.2 percent pace and coming in below economists’ forecasts. Still, inflation remained above the central bank’s 2-percent to 4-percent target range for a third straight month.

READ: Nomura: PH inflation seen falling faster on lower oil prices

The BSP has said it would “take necessary actions” to ensure inflation returns to its 3-percent target. Last week, the Monetary Board raised its benchmark interest rate by a quarter percentage point to 4.75 percent, extending a tightening cycle that has now delivered a cumulative 50 basis points of increases.

Looking ahead, Moody’s said it expects loan growth to moderate in 2026 as weaker business and consumer confidence dampens credit demand. Combined with banks’ tightening their underwriting standards and slowing growth in their retail segments, capital requirements will ease, it added.

Meanwhile, the higher interest rate environment coupled with the growth in higher-yielding retail loans will help sustain banks’ margins, the agency noted. At the same time, fee income is expected to rise alongside the continued growth in credit card lending, though these gains will be partially offset by higher credit costs stemming from asset quality deterioration.

Moody’s likewise said local banks maintain healthy loan-to-deposit ratios, indicating sufficient liquidity to support credit demand.

“While Philippine banks will continue to be largely funded by sticky deposits, strong deposit competition is increasing banks’ reliance on short-term and structured funding,” the firm said. “The rise in long-tenor project financing also introduces funding risks from maturity transformation.” INQ