RAPID consumer lending growth and the potential fallout from an ongoing corruption probe could put mild pressure on Philippine banks’ asset quality but the system remains resilient, Moody’s said on Monday.
“We maintain a stable outlook for the Philippines’ (Baa2 stable) banking system, underpinned by a stable operating environment and adequate loan-loss buffers,” the debt watcher said.
Still, asset quality will likely deteriorate moderately over the next 12 to 18 months as banks face “unseasoned risks” from retail loans that expanded sharply in recent years.
Retail lending was said to have grown at an annualized rate of about 20 percent in the first nine months of 2025, much faster than the overall loan book.
“Unsecured products accounted for most of the growth in retail loans, so credit costs will likely increase as this portfolio seasons,” Moody’s said.
At the same time, ongoing investigations of anomalous flood control projects could delay payments to construction firms and related industries, weakening cash flows and repayment capacity and potentially increasing problem loans.
Moody’s said that since these sectors were labor-intensive, “any contraction could lead to job losses and elevate default risk on retail loans.”
“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 2024 and 2025,” it said.
Despite these, Moody’s said it remained optimistic about the strength of Philippine banks.
The ratings firm expects the operating environment to remain supportive with the Philippine economy forecast to grow by 5.5 percent in 2026, rebounding from a slowdown to 4.4 percent in 2025.
Moody’s said that 2026 growth was expected to be driven by strong household consumption, stable remittances, a gradual rebound in public investment and ongoing reform efforts.
“We see downside risks to economic growth arising from global trade policy uncertainty, the more frequent and severe effects of extreme climate events, and weaker investment sentiment amid the ongoing probe into flood control projects,” it said.
“Nonetheless, a more accommodative monetary policy stance will help support private consumption and ease the debt servicing costs of some borrowers.”
Philippine banks are well placed to manage the challenges, Moody’s said. Profitability is expected to remain stable as wider net interest margins offset the impact of higher loan-loss provisions.
“Some banks are increasing exposure to project finance, which offers longer tenors and higher yields, further supporting margins,” the debt watcher said.
“Several banks have also extended the duration of their investment portfolios, boosting returns on securities,” it added.
“Meanwhile, fee income is expected to rise alongside the continued growth in credit card lending. However, these benefits to earnings will be partially offset by higher credit costs stemming from asset quality deterioration.”
Moody’s expects banks to stay well capitalized, with internal capital generation broadly matching capital consumption. Loan growth is projected to slow to around eight percent to nine percent over the next year to year and a half, easing pressure on capital needs.
“While the rise in long-tenor project financing introduces funding risks from maturity transformation, Philippine banks have consistently maintained steady net stable funding ratios, a trend we expect will continue,” it said.
“Strong liquidity positions, primarily in cash and government securities, will also remain stable and help address short-term funding gaps.”
