PHILIPPINE banks could face rising credit risks if the impact of the Middle East conflict spills over to more vulnerable sectors, particularly micro, small and medium enterprises (MSMEs) and consumer lending, Fitch Ratings said.
Asset quality pressures are likely to stem from segments with weaker buffers against external shocks, especially as higher oil prices, supply chain disruptions and softer demand weigh on borrowers.
“The areas that we expect to see the deterioration come through, first of all, would be micro and SME and consumer loan segments,” said Jonathan Cornish, head of APAC banks at Fitch, in a briefing last week.
These sectors, he noted, have historically shown greater vulnerability during periods of economic stress.
Philippine banks have increasingly expanded into these segments in recent years as part of efforts to diversify away from large conglomerates. However, this shift has also increased sensitivity to shocks, as smaller businesses and households tend to have less capacity to absorb rising costs and income disruptions.
“Areas where banks, particularly smaller banks, have been growing a larger percentage of their loan book in recent years as they diversify away from the larger conglomerates. And they have shown more volatility or vulnerability in the past, including during Covid,” Cornish said.
“So, that’s where they will come through. And you’d probably expect to see some of that deterioration more evident throughout the second half of this year. If the conflict is even more prolonged, then they’ll start to impact larger borrowers.”
He also said that consumer loans could come under pressure as inflationary effects from elevated energy prices erode household purchasing power, potentially affecting repayment capacity.
Despite these risks, Fitch emphasized that the overall impact on banks will not be immediate. Instead, the deterioration in asset quality is expected to emerge over time, with clearer signs likely appearing later in 2026.
“You’d probably expect to see some of that deterioration more evident throughout the second half of this year,” it said.
Cornish said that Philippine banks still had adequate buffers and rating headroom, which should help cushion the impact of rising credit risks. Current metrics, such as non-performing loan ratios, remain within acceptable levels relative to rating sensitivities.
But he warned that risks could intensify if the external shock becomes more prolonged. In such a scenario, credit pressures could extend beyond SMEs and retail borrowers to larger corporates, particularly given the banking system’s exposure to major conglomerates.
The Philippines is also among the Asia-Pacific economies with higher exposure to the spillover effects of the Middle East conflict, including through oil price volatility, supply chain disruptions and remittance flows.
Smaller banks, in particular, may be more vulnerable to these risks due to their relatively higher exposure to MSMEs and consumer lending, compared with larger banks that tend to have more diversified portfolios.
Even so, Cornish said rating downgrades were not currently expected as many banks continue to benefit from sufficient capital buffers and, in some cases, potential support from the government or shareholders.