Global debt watcher Moody’s Ratings has downgraded its outlook on the Philippine banking system to negative from stable, warning that lackluster economic growth could raise credit costs while elevated inflation and emerging risks weaken asset quality.

“We have revised our outlook for the Philippines’ banking system to negative from stable,” Moody’s wrote in a June 19 report. Notably, the agency recently retained both the sovereign’s Baa2 investment-grade rating and its “stable” outlook.

The outlook shift was driven by the deteriorating operating environment, marked by sluggish economic growth and intensifying domestic headwinds. The country’s gross domestic product (GDP) growth clocked in at a five-year low of 2.8 percent in the first quarter of 2026.

For the full year, Moody's projects GDP growth to remain muted at around four percent—falling significantly short of the government's minimum five-percent target and sharply slowing from the 4.4 percent expansion recorded in 2025.

This slowdown is expected to directly dampen credit demand across the local banking system. Furthermore, persistent price pressures and specific government disruptions are adding to the economic strain.

“Higher inflation will weigh on private consumption and credit demand,” Moody’s noted. Meanwhile, an ongoing probe into high-profile flood control corruption acts as a major friction to the re-acceleration of public works. The agency warned that the “ongoing flood-control probe will slow public investment disbursement and weigh on private investment decisions.”

The banking sector also faces a shifting risk profile as domestic lenders move away from large corporate clients toward individual consumers. “Strong growth in retail exposures presents unseasoned loan risk, while elevated inflation weakens retail borrowers’ repayment capacities,” Moody's said.

Additionally, the corruption probe “may lead to a slowdown and payment delays in construction-related sectors,” potentially hurting the asset quality of banks heavily exposed to builders and contractors.

While the system’s overall problem loan ratio is forecast to hold steady at 3.1 percent, the cost of maintaining these assets is expected to climb. Moody’s cautioned that “credit costs will increase amid asset quality stress,” which could eat into the net income of major banks.

Even with these headwinds, bright spots remain. Higher interest rates continue to support banks’ earning power, with Moody’s noting that “policy rate hikes and increasing exposure to retail loans will support net interest margins (NIMs).”

The sector also maintains a strong liquidity and capital position, as “banks will remain largely funded by sticky deposits” and “continue to maintain large holdings of high-quality liquid assets.”

Reflecting this underlying resilience, major lenders—including BDO Unibank, Metropolitan Bank & Trust Company, and Bank of the Philippine Islands—all maintain stable individual outlooks and “Baa2” ratings, even as the broader system outlook turns cloudy. Other banks holding stable outlooks include China Banking Corp. (Baa2), Rizal Commercial Banking Corp. (Baa3), Philippine National Bank (Baa2), Security Bank Corp. (Baa2), and Union Bank of the Philippines (Baa3).