The local banking system faces a more severe threat from escalating Middle East tensions than in previous economic shocks, as a pivot toward lending to small businesses and consumers creates new pockets of vulnerability, according to Fitch Ratings.

Jonathan Cornish, Fitch Ratings managing director and head of APAC banks, warned that the domestic lending landscape has undergone a structural shift that makes the financial system more susceptible to external shocks.

“For the Philippines, spillover into micro and SME loans and into 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 on large conglomerates,” Cornish told a press briefing last week.

Fitch said in a commentary that a persistent conflict in the Middle East could hurt the credit profiles of banks in emerging markets, including those in the Philippines. “A more prolonged conflict would intensify pressure in countries with greater exposure to commodity prices and trade disruption—including the Philippines,” it said.

Fitch identified these borrower groups as the primary concern in the near term, with Cornish saying it expects “to see the deterioration come through, first of all, in MSME and consumer loan segments, adding that these have historically shown more volatility and vulnerability.

Investors and stakeholders should prepare for these effects to surface in the coming months, as “you’d probably expect to see some of that deterioration more evident throughout the second half of this year.”

Fitch also said the banking sector’s sensitivity to the Middle East is exacerbated by the country’s reliance on remittances from overseas Filipino workers (OFWs).

Cornish pointed out that a “sizable share of remittances is notable in the banking sector in the Philippines,” with a larger portion of those funds coming from the region.

This disruption is not expected to be experienced evenly across the industry, as “risks are likely to be greater in the smaller banks than in the larger banks.”

Despite these escalating risks, the debt watcher maintains confidence in the banking system’s overall resilience. Cornish noted that the outlook on Philippine lenders is “stable,” adding that “there still are buffers and ratings headroom in place.”

While the Philippine banking system maintains a higher concentration of loan or credit exposures to large conglomerates, Fitch does not expect those entities to be significantly affected unless the conflict is protracted.

Lending by big banks, or universal and commercial banks (U/KBs), rebounded in February from the near two-year low seen in January, even as foreign loan contraction worsened.

Data from the Bangko Sentral ng Pilipinas (BSP) showed loan growth accelerated to 9.5 percent in February from 9.3 percent in January, the slowest pace since February 2024.