Middle East conflict may erode Philippine banks’ asset quality — Fitch Ratings

PHILIPPINE BANKS’ viability ratings (VR) could be at risk as nonperforming loans of small businesses and consumers could rise due to the economic impact of the Middle East conflict, Fitch Ratings said.

The debt watcher expects banks in South and Southeast Asia to face credit risks as the conflict continues as this could affect their borrowers, Fitch Ratings Head of Asia-Pacific Banks Jonathan Cornish said in a webinar on Thursday.

“Higher energy prices, supply-chain disruption and weaker remittance flows would weigh most on emerging-market banking systems, where borrower resilience is lower and exposure to inflation and external shocks is greater. The key credit question is not whether banks face immediate stress, but which systems and loan segments deteriorate first if the shock persists,” it said in a separate April 9 statement.

“Asset-quality pressure would be likely to appear first in vulnerable retail, micro-enterprise and small and medium-sized enterprise (SME) loan books. Fitch’s 2026 banking sector outlooks already incorporate expectations of some asset-quality deterioration in several APAC (Asia-Pacific) markets, but a more prolonged conflict would intensify pressure in countries with greater exposure to commodity prices and trade disruption — including the Philippines, India and Thailand — and to a lesser extent Singapore.”

Mr. Cornish said during the webinar that this effect may be more pronounced in the Philippines in comparison to other markets as banks in the country now have higher exposures to these sectors.

“For the Philippines, though, spillover into micro and SME loans and to consumer loans may be more impactful than in the past, because a meaningful share of loan growth in recent years has come from those segments as banks reduce concentrations to large conglomerates.”

He said a prolonged conflict could lead to a material deterioration in smaller banks’ asset quality in the second half.

“The areas that we expect to see the deterioration come through, first of all, would be for the micro and SME and consumer loan segments, 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. They have shown more volatility or vulnerability in the past, including during COVID,” Mr. Cornish said.

“You’ll 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 it will start to impact larger borrowers,” he added.

Fitch added that emerging-market banks’ VRs are more vulnerable compared to more developed markets.

“VRs could weaken if operating conditions deteriorate beyond Fitch’s current scenarios, especially if higher fuel costs and supply disruption reduce borrower cash flow for long enough to push up impaired loans and credit costs. The sectors most exposed are those with weaker pricing power and higher energy intensity, including refiners, chemicals, energy-intensive manufacturing and parts of retail,” it said.

“SMEs remain more vulnerable to an economic downturn than larger corporates, although support for state-owned or strategically important borrowers in some markets could limit bank losses indirectly.”

Despite these risks, Mr. Cornish said the impact on banks’ issuer default ratings (IDR) would be limited amid strong government or shareholder support.

“Around two-thirds of emerging-market APAC bank IDRs are underpinned by government or shareholder support, which means weaker standalone credit profiles do not automatically lead to IDR downgrades.”

Fitch rates several government-owned and private banks in the Philippines, with most having IDRs at par with the sovereign’s BBB rating and “stable” outlook. — A.M.C. Sy