Philippine banks are likely to face higher credit losses and weaker profitability as economic headwinds intensify, according to Fitch Ratings. The agency expects deteriorating asset quality in the near term, although it believes the country's banking sector remains fundamentally resilient.

Fitch affirmed the Viability Ratings of the country's largest banks, including BDO Unibank and Metropolitan Bank & Trust, despite revising the outlook on the Philippines' sovereign rating to negative in April 2026. The downgrade reflected weaker medium-term growth prospects following disruption to public investment and higher energy prices.

The agency also revised its 2026 banking sector outlook to deteriorating from neutral. Even so, it expects the Philippines to remain one of the stronger-performing economies in the region over the medium term, supporting banks' growth and profitability.

Large private banks continue to benefit from loan books dominated by corporate lending, which generally carries stronger credit quality and better financial buffers than retail lending. Temporary repayment grace periods and regulatory relief introduced in April are also expected to prevent a sharp rise in reported non-performing loans.

However, Fitch believes underlying credit risks are increasing. Rapid growth in unsecured consumer lending, particularly credit cards, has left banks more exposed to slower income growth and persistent inflation. Rather than a significant jump in impaired loan ratios, the agency expects the deterioration to emerge through higher write-offs and increased credit costs.

Higher loan-loss provisions are likely to weigh on earnings in 2026 before a gradual recovery in 2027. Capital positions are expected to remain stable as banks moderate balance-sheet expansion in response to weaker economic conditions.

The state remains willing to support the banking system because of its systemic importance and policy role. However, the government's ability to provide support has weakened alongside the sovereign's negative outlook. The Long-Term Issuer Default Ratings of state-owned lenders Land Bank of the Philippines and Development Bank of the Philippines remain aligned with the sovereign rating, while the Government Support Ratings of private-sector banks sit one notch lower.

Fitch said BDO's and Metrobank's Long-Term Issuer Default Ratings are driven primarily by their standalone financial strength rather than expected government support. A downgrade to their Government Support Ratings alone would therefore not trigger lower issuer ratings. Their Viability Ratings could come under pressure if risk profiles deteriorate significantly or if common equity Tier 1 capital ratios remain below 12%.

Economic growth has slowed sharply. GDP expanded by 3.0% in the fourth quarter of 2025 and 2.8% in the first quarter of 2026, the weakest pace in five years, after public spending was cut amid investigations into corruption linked to infrastructure projects.

The Philippines has also been hit by higher energy costs because more than 90% of its crude oil imports come from the Gulf region. Limited fuel subsidies mean rising oil prices are quickly passed on to consumers, weighing on spending and business confidence.

Despite these pressures, Fitch expects growth to recover over the next 12 to 18 months as public capital expenditure gradually resumes and public-private partnership programmes attract greater private investment. Medium-term GDP growth is forecast to return to around 6%.

The agency lowered its forecast for banking system loan growth to 9% in 2026 from an earlier projection of 12%, matching estimated growth in 2025. Corporate investment is expected to slow, while demand for unsecured consumer lending is likely to weaken.

Credit cards remain the fastest-growing segment. Outstanding balances have tripled since the end of 2020 and accounted for around 8% of total banking system loans by the end of 2025. BDO and Bank of the Philippine Islands expanded credit card balances by 32% in 2025, while Metrobank also recorded strong growth from a larger base.

Fitch warned that the rapid expansion of unsecured lending increases vulnerability during an economic slowdown. Although lending margins have remained sufficient to offset higher credit costs, further growth in this asset class could weaken banks' risk profiles.

Net interest margins are expected to remain broadly stable after the Bangko Sentral ng Pilipinas reversed its easing cycle and raised its policy rate by 25 basis points in both April and June 2026 in response to rising inflation. Higher government bond yields should also support investment income.

Capital levels are expected to remain sound, helped by slower lending growth and strong earnings generation. Temporary regulatory relief allowing banks to exclude unrealised losses on peso-denominated government securities from regulatory capital until the end of 2026 is expected to provide additional support, although Fitch believes the measure is more significant for smaller banks than for the country's largest lenders.

Funding and liquidity remain key strengths for BDO and Metrobank, supported by large, low-cost current and savings account deposits. Fitch expects these institutions to continue attracting deposits during periods of market uncertainty because of their dominant positions in the banking system.