Philippine banks face a potential surge in sour loans as escalating tensions in the Middle East threaten to disrupt the domestic economy and weaken the repayment capacity of households, according to S&P Global Ratings.

Nikita Anand, S&P Global Ratings director and lead analyst for South and Southeast Asia, told a virtual press briefing on Wednesday, April 15, that the ratio of non-performing loans to total books could climb by as much as one percentage point under a downside scenario.

A downside case assumes a protracted escalation of the Middle East conflict, which would weigh more heavily on the Philippines than its regional peers due to its status as a net oil importer.

While the base-case assumption remains a more modest rise, with the NPL ratio increasing by about 50 bps, a protracted conflict would create a much harsher environment.

Anand noted that, without the Middle East war, S&P was expecting credit losses to decline as government spending picks up in 2025.

Under the downside scenario—which assumes Brent crude to peak at about $200 per barrel—the Philippines emerges as more vulnerable than many of its regional peers.

Anand warned that “the second-order impact could be relatively higher for the Philippines compared to some of the other countries in South and Southeast Asia due to the country’s position as a net oil importer.”

S&P sees the “sharper impact” translating into deteriorating repayment capacity among lower-income and average-income households, as well as small and medium-sized enterprises (MSMEs).

Anand also said repayment capacity could decline because several Filipino households are dependent on remittances from the war-affected region. She added that unsecured consumer loans, a major growth driver in recent years, may see an increase in NPLs.

While the banking sector’s direct exposure to the war is limited, its indirect exposure to domestic industries such as airlines, refining, chemicals, and agriculture warrants monitoring, though S&P said the “banking sector’s combined exposure to these sectors is under five percent.”

S&P has assigned a ‘stable’ outlook for Philippine banks despite these risks, citing strong capitalization levels and significant provisioning buffers built up last year.

For the credit rater, potential “loan restructuring and state support for the MSME sector in the form of guarantees could prevent a spike in the reported NPL ratio,” providing a crucial safety net for the economy.

Philippine banks’ bad-loan ratio climbed to 3.33 percent in February, its highest in six months—a level that remains manageable but warrants closer monitoring if higher interest rates persist.