PHILIPPINE banks could see pretax profits fall by as much as 75 percent if nonperforming loans (NPLs) double, although the sector’s strong capital buffers should help it withstand the shock, S&P Global Ratings said.
In its latest stress test of the Philippine banking sector, the international credit rating agency said two of the 10 largest financial institutes it assessed could post pretax losses under a severe scenario, while profits at other lenders could decline by 25 to 75 percent due to higher credit costs.
The scenario assumes NPLs double from 2025 levels, with banks setting aside provisions equivalent to 65 percent of additional bad loans. Provisioning requirements vary, depending on existing coverage and exposure to unsecured lending.
S&P estimated that credit costs could rise to an average of 1.5 to 2 percent of total loans under the severe scenario, sharply weighing on earnings.
Despite the potential profit decline, most banks have sufficient pre-provision earnings and strong capitalization to absorb higher losses, S&P said.
However, it flagged growing risks from banks’ increasing exposure to unsecured consumer lending — which rose to 11 percent of total bank loans at the end of 2025 from just 5 percent in 2019.
S&P expects credit costs to remain at around 1 percent of total loans over the longer term, above the historical average of 0.5 to 0.7 percent, reflecting the shift toward higher-yielding but riskier consumer credit.
Signs of stress have already emerged in auto loans, credit cards, and personal loans. Weak loans are seen to increase to between 6 and 7 percent of outstanding loans over the next two years from 5.6 percent in June this year.
Midsize banks with heavier exposure to consumer lending face greater risks and could see credit costs rise significantly above the industry average, resulting in weaker profitability.
Under S&P’s severe scenario, the average common equity Tier 1 (CET1) ratio of the five largest banks would decline by about 40 to 45 basis points. The five midsize banks tested could suffer a larger decline of 130 to 140 basis points because of their greater provisioning requirements, particularly for unsecured loans.
Still, the banks’ CET1 ratios would remain above regulatory minimums. The banking sector’s Tier 1 capital ratio stood at 15 percent, providing a substantial buffer against unexpected losses.
Large banks have begun tightening lending standards for consumer and small and midsize enterprise loans, and strengthening collection efforts.
S&P said the coming quarters would test banks’ ability to balance the pursuit of higher-yielding unsecured lending with tighter risk controls and capital preservation.
“In such circumstances, underwriting discipline will be the primary driver of credit outcomes,” S&P said.
