The plastic that fuelled a decade of Filipino spending is starting to bite, just as the cost of money turns against the country's borrowers.

Bad loans across the banking system climbed to 3.37% of total lending in April, the highest since August 2025, after years in which the biggest lenders leaned ever harder on credit cards and other unsecured consumer credit. Card receivables and salary loans had been growing at close to 20% a year, well ahead of the wider loan book.

The turn matters because it is the first real test of a consumer-lending strategy the industry has built its recent profits on. For most of the past decade Filipino households borrowed cheaply and spent freely; now inflation is running near 7% and the central bank has been forced to reverse a rate-cutting cycle it began only in 2024.

“Lending spreads on card receivables have been sufficiently high to cover credit costs and keep them profitable in recent years, but we believe banks have become more susceptible to economic shocks from the growing exposure to the risky asset class,” Fitch Ratings said, warning that the portfolios remain relatively unseasoned.

From easing to emergency

The backdrop has flipped hard. The Bangko Sentral ng Pilipinas (BSP) had cut its benchmark rate by 150 basis points from August 2024, taking it down to 5%, with the banks' own economists split over how much further it could go. Then a Middle East oil shock drove prices sharply higher, and the central bank was pushed into reverse, lifting the policy rate by 25bp to 4.75% in mid-June.

Consumer prices rose 6.8% y/y in May and were still running at 6.2% in July, above the central bank's 4% ceiling for a third straight month. Growth, meanwhile, has buckled: gross domestic product expanded just 2.3% y/y in the second quarter, a post-pandemic low, dragged down by high-profile flood-control corruption scandals that unravelled late in 2025 and sapped investor confidence. BSP Governor Eli Remolona has said the Monetary Board will move “as much as necessary” to bring inflation back to its 3% target, though weak output has eased the pressure to tighten again at its August 27 meeting.

The strain has reached the sovereign. Fitch revised its outlook on the Philippines' rating to negative in April 2026, citing weaker medium-term growth after the disruption to public investment, and in turn downgraded its 2026 outlook for the banking sector to deteriorating from neutral.

A boom built on plastic

Credit had been the good-news story. Bank lending accelerated to 11.4% y/y in April, a nine-month high, with outstanding loans of PHP20.3 trillion ($330bn), and consumer loans covering credit cards, car finance and salary advances grew a punchy 19.6%. Unsecured lending now makes up around 9% of total bank credit, up from 5% in 2019, a shift that lifted returns while the economy was strong.

That engine is now cooling. Fitch cut its 2026 loan-growth forecast for the system to 9% from 12%, blaming elevated long-term rates and weaker corporate appetite for capital spending, and it expects the damage to show up not as a spike in reported non-performing loans but as heavier write-offs and rising credit costs. Higher provisions are likely to weigh on earnings this year before a gradual recovery in 2027, with capital positions holding as banks rein in balance-sheet growth.

Temporary repayment grace periods and regulatory relief introduced in April should keep headline bad-loan ratios from jumping, but the underlying risk is building rather than fading.

Still a fortress

For all the warning lights, the sector goes into the squeeze from a position of unusual strength. S&P Global Ratings reckons the top 10 banks, which hold 85% of industry assets, are well capitalised and stably funded, cushioned by loan books still dominated by higher-quality corporate credit and by an economy driven mainly by domestic demand. Non-performing loans are expected to stay below 6%.

BDO Unibank (PSE: BDO), the country's largest lender by assets and part of the Sy family's SM empire, sets the pace. Its asset quality remains pristine, with bad loans of 1.75% against system-wide coverage, and its funding reach is deep: a single peso sustainability bond in 2025 pulled in PHP115bn, more than 23 times oversubscribed, against an initial PHP5bn target. Bank of the Philippine Islands (PSE: BPI), controlled by the Ayala group, and Metropolitan Bank & Trust, or Metrobank (PSE: MBT), round out the big three that S&P singles out for profitability and risk controls.

Below them sits a crowded second tier - Security Bank, China Banking Corporation, Philippine National Bank, UnionBank of the Philippines and RCBC among them - alongside the state-owned Land Bank of the Philippines and Development Bank of the Philippines, whose ratings move in lockstep with the sovereign and which Fitch judges more exposed as Manila's own credit standing slips. The listed lenders anchor a stock market that brokers such as COL Financial expect financial names to lead, while insurers including Insular Life feed the same pool of household savings.

The digital flank

The other contest is being fought on the phone. A cohort of six licensed digital banks - led by Maya, which by mid-2023 already held more than 60% of the digital-bank market and over 2mn depositors - has been chasing the young and the underbanked that the incumbents long ignored. GoTyme, UnionDigital, Tonik and SeaBank make up the rest of the field.

Now a seventh is on the way. MariBank, the digital arm of Singapore's Sea Limited (NYSE: SE), plans to enter by buying a rural bank and securing an upgraded BSP licence, underwriting credit off Shopee e-commerce data to reach borrowers with no formal credit history. The newcomers remain small next to the majors, but they are pushing the whole system to sharpen its apps rather than cede the next generation of customers.

For now the picture is one of resilience under pressure. The big banks are still minting money and sit on some of the region's sturdiest balance sheets; the danger is concentrated in the unsecured corner of the loan book that grew fastest when times were good. Whether the sector's fortress walls hold through an inflation shock it did not see coming is the question that will shape Philippine banking for the rest of the decade.