FITCH Ratings has lowered the Philippine banking sector’s outlook to “deteriorating” from “neutral” as rising inflation and slower economic growth stemming from the escalating US-Iran conflict threaten lenders’ profitability and asset quality.
In a report released this week, the ratings agency said higher energy prices triggered by geopolitical tensions in the Middle East were expected to weigh on several Asia-Pacific banking systems, particularly those heavily dependent on oil imports.
Tagged as the most affected are the Philippines and Sri Lanka, whose banking-sector outlooks were revised downward at Fitch’s mid-year review.
“APAC’s high dependence on oil and gas imports from the Gulf Cooperation Council renders the region vulnerable to higher inflation and weaker growth in the wake of the US-Iran conflict,” Fitch said.
For the Philippines, the ratings agency warned that significantly higher inflation was posing risks to the country’s consumption-driven economy, which has been a key driver of growth in recent years.
“We also expect weaker loan growth, higher credit costs and lower operating profitability, even if higher rates provide some support to margins,” it said.
The revised outlook signals that operating conditions for Philippine banks could worsen over the next 12 to 18 months as elevated fuel prices feed through to transportation, food and other consumer costs, reducing household purchasing power and borrowing demand.
“Weaker domestic demand and tighter policy settings are likely to drive credit deterioration in the region’s more vulnerable markets,” Fitch said.
The ratings agency’s assessment contrasts with developments in several other banking markets across Asia, where outlooks have either stabilized or improved despite the geopolitical uncertainties.
China’s banking-sector outlook was upgraded to “neutral” from “deteriorating,” supported by stronger-than-expected economic growth, easing deflationary pressures and robust exports.
Hong Kong’s banking-sector outlook was likewise revised to “neutral” as stronger capital-market activity and sustained cross-border wealth flows help offset ongoing pressures from commercial real estate exposures.
Taiwan, whose outlook was upgraded earlier this year, is expected to remain resilient due to continued demand for technology-related exports, while Japan retained an “improving” outlook supported by strong corporate profits, wage growth and higher domestic interest rates.
Other regional banking systems viewed as relatively resilient include South Korea, India and Indonesia, all of which maintained “neutral” outlooks despite the risk of elevated energy prices.
Thailand remained on a “deteriorating” outlook as Fitch expects asset quality and profitability to weaken further amid sluggish economic growth, while Sri Lanka joined the Philippines in receiving a downgrade due to higher interest rates and exchange-rate volatility.
