PH Midsize Banks More Vulnerable to Bad-Debt Shock, S&P Says

MANILA, Philippines — Some midsize Philippine banks could be more exposed than the country’s largest lenders if bad debts doubled, S&P Global Ratings said, warning that the rapid growth of unsecured retail loans could imperil asset quality. In a note Tuesday, S&P said its stress test showed that two of the 10 largest Philippine banks by assets could post pretax losses under a severe scenario in which nonperforming loans doubled from 2025 levels. READ: Bad loans fell to 6-month low in June The two banks had relatively high levels of existing bad loans and significant exposure to unsecured consumer lending, a higher-yielding but riskier segment, the debt watcher said. For the other banks tested, pretax profits could decline by 25 percent to 75 percent as credit costs rise to an average of 1.5 percent to 2 percent of total loans, S&P said. The firm said most Philippine banks have robust earnings to absorb higher provisions. The impact on capital would be greater for midsize banks. The average common equity Tier 1 ratio of the five largest banks by assets would decline by only 40 to 45 basis points, compared with a 130- to 140-basis-point drop for the five midsize banks that follow. The sharper impact on midsize lenders reflects their greater provisioning burden from unsecured loans, S&P said. Banks’ regulatory capital is likely to remain resilient to shocks from rising nonperforming loans, although their buffers would narrow, S&P said. Common equity Tier 1 ratios should remain above regulatory minimums, but two or three banks could see their ratios fall to 12 percent or below. While still compliant, that level is close to the thresholds many regional banks use to trigger capital replenishment, S&P said. “The upcoming quarters will be a critical litmus test for the Philippine banking sector,” said Nikita Anand, a banking analyst at S&P Global Ratings. “Banks will work to balance the pursuit of high-yield unsecured lending against the necessity of rigorous risk controls and capital preservation.” READ: BSP wants easier rules on banks’ liquidity facility S&P expects domestic loan growth to stabilize at 7 percent to 8 percent in 2026 before accelerating to 9 percent to 10 percent over the following two years. Consumer loans, which account for 23 percent of total loans, will lead the recovery, fueled by stronger growth in unsecured lending. “Asset quality will be tested. The credit divergence between banks will also likely widen,” Anand said. “In such circumstances, underwriting discipline will be the primary driver of credit outcomes.” /pai