Moody’s lowers outlook on Philippine banks to negative

By Katherine K. Chan, Reporter

MOODY’S RATINGS downgraded its outlook on the Philippine banking sector to “negative,” warning that the fallout from the Middle East conflict could slow credit growth and put pressure on asset quality.

This came just over four months after the global debt watcher affirmed its “stable” outlook on rated Philippine lenders.

A negative outlook means Moody’s might downgrade the credit rating of its rated local banks over the next 12 to 18 months.

“This reflects our expectation that the Middle East conflict and resultant inflation shock will further pressure the country’s already slowing economic growth, despite the recently announced memorandum of understanding between the United States (Aa1 stable) and Iran,” the credit rater said in its outlook published on Friday.

“Elevated inflation, combined with markedly slower public investment disbursement amid the ongoing flood control probe, will further dampen credit demand and business sentiment,” it added.

Moody’s noted that tighter economic conditions meant a weaker operating environment for the banking industry.   

After the Middle East war broke out on Feb. 28, the country saw inflation in March accelerate past the Bangko Sentral ng Pilipinas’ (BSP) 2%-4% goal for the first time in nearly two years.

Inflation averaged 4.5% in the first five months, as the latest headline clip remained above target at 6.8% in May.

Meanwhile, the lingering effects of last year’s flood control mess and oil shocks from the Middle East conflict weighed on the economy in the first quarter, dragging its gross domestic product  growth to a new post-pandemic low of 2.8%. 

Moody’s sees the Philippine economy growing between 4% and 4.5% this year.

According to the debt watcher, monetary policy tightening aimed to temper inflationary pressures from the energy crisis will dampen demand for loans.

The BSP shifted to a tightening path in April, delivering its first 25-basis-point (bp) hike in two-and-a-half years as a preemptive move to control the second-order effects of elevated oil prices. Last week, it raised the benchmark rate anew by 25 bps to 4.75%, citing persistent inflation risks.

BSP Governor Eli M. Remolona, Jr. said the central bank has “a lot” of space to tighten further but noted that they will likely hike by 25 bps at a time to prevent disrupting markets.

However, he also left the door open for a larger 50-bp increase should inflation spillovers worsen.

“In a rising interest rate environment, credit demand will slow in 2026 while debt servicing costs will increase,” Moody’s said.

Domestic lenders posted a double-digit loan growth in April, with big banks’ total outstanding loans net of reverse repurchase agreements climbing by 11.4% year on year to P14.755 trillion.

Based on the BSP’s latest Senior Bank Loan Officers’ Survey, 53.8% of banks polled expect businesses’ loan demand to remain steady in the second quarter of the year, while 52.9% see stable credit demand from households.

However, faster inflation will also weigh on the repayment capacity of borrowers, particularly in the retail loans segment, which could affect banks’ asset quality, Moody’s added.

“Asset quality will deteriorate because of higher inflation, unseasoned risk in the retail portfolio and impact of flood control probe,” it said, flagging early risks seen in higher credit costs and write-offs in the first quarter.

This comes even amid the sector’s stable nonperforming loan ratio, the credit rater noted.

Banks’ latest bad loan ratio rose to an eight-month high of 3.37% in April, worsening from 3.29% in March but improving from 3.39% a year ago.

The BSP has said that inflation will remain elevated over the medium term. It sees the headline clip settling above its target at 6.4% this year, 4.5% in 2027 and 3.1% in 2028.

Meanwhile, Moody’s noted that Philippine banks are likely to maintain their strong capital position over the next year.

“We expect banks’ tangible common equity ratios to remain stable as internal capital generation will be in line with capital consumption,” the credit rater said.

“However, there is downside risk to banks’ regulatory Common Equity Tier 1 (CET1) ratios due to pressures from the unrealized losses from securities investments, amid significant increase in government bond yields,” it added.

On the other hand, domestic lenders may remain profitable with stable funding and liquidity, driven by higher borrowing costs and growth in higher-yielding retail loans, as well as their solid loan-to-deposit ratios, Moody’s said.

BSP data showed banks’ net income rose by 2.86% annually to P104.816 billion in the first quarter.

Also, Moody’s said it expects the government to extend support for Moody’s-rated banks amid challenging times as it prioritizes systemic stability. 

“The government is unlikely to adopt a bail-in regime in the next 12 to 18 months,” it added.

Moody’s currently rates eight commercial banks in the country, namely, BDO Unibank, Inc., Metropolitan Bank and Trust Co., Bank of the Philippine Islands, China Banking Corp., Rizal Commercial Banking Corp., Philippine National Bank, Security Bank Corp., and Union Bank of the Philippines.

All eight rated Philippine banks have a weighted average baseline credit assessment of “baa2” from Moody’s Ratings, each with a “stable” outlook. This is a notch below the global weighted average of “baa1.”

These lenders hold about 69% of the sector’s total assets as of the first quarter of 2026.