Global credit rating agency Fitch Ratings has revised its outlook for the Philippine banking sector from ‘neutral’ to ‘deteriorating,’ warning that recent macroeconomic pressures will likely weaken borrowers’ repayment capacity and compress bank earnings.

In a June 25 commentary, Fitch noted that risks to domestic lenders’ asset quality are mounting due to persistent headwinds buffeting the Philippine economy.

According to the rating agency, the revision reflects its projections of “higher credit impairments associated with a significant slowdown in economic growth, as well as the impact of higher inflation on household finances and debt-servicing capacity.”

Domestic economic growth slowed to a five-year low of 2.8 percent in the first quarter of 2026, weighed down by the fallout from a high-profile flood control corruption scandal. The controversy triggered tighter oversight of public infrastructure spending and dampened business, investor, and consumer confidence.

Consequently, President Marcos’s economic team has cut its gross domestic product (GDP) growth forecast to a range of 3.5 to 4.5 percent, markedly lower than the original 2026 target of 5.0 to 6.0 percent.

Compounding the growth slowdown, inflation accelerated to 7.2 percent in April before easing slightly to 6.8 percent in May. This spike reflects global commodity price shocks and supply chain disruptions stemming from the prolonged U.S.–Iran conflict.

Beyond macroeconomic hurdles, Fitch highlighted specific vulnerabilities within bank portfolios, particularly the aggressive expansion into high-risk consumer segments.

“Banks’ rapid expansion in unsecured credit card receivables is a vulnerability due to the higher intrinsic risks of the product,” Fitch said, noting that this segment now accounts for roughly eight percent of total system lending.

Fitch expects this vulnerability to hit lenders' bottom lines through increased provisioning rather than a sudden spike in reported non-performing loan (NPL) ratios. Because consumer defaults are typically written off quickly and ongoing regulatory relief measures may mask underlying asset quality issues, credit deterioration is more likely to manifest as higher credit costs. As a result, “higher credit costs are likely to weigh on bank profitability as banks ramp up provisions” throughout the remainder of 2026.

The outlook is not entirely bleak, however. Fitch emphasized that the industry’s financial performance “should recover gradually in 2027 as the country’s medium-term economic prospects remain intact.”

The country's dominant lenders are poised to lead this recovery. Fitch specifically expects earnings at BDO Unibank and Metropolitan Bank & Trust Co. (Metrobank) to rebound in 2027, driven by wider net interest margins and tapering credit provisioning expenses. Furthermore, a “strong funding and liquidity profile positions the banks to benefit from shifts in monetary policy,” while industry capitalization is projected to remain stable.

The near-term environment remains challenging. With inflation staying elevated since the outbreak of the war, the Bangko Sentral ng Pilipinas (BSP) recently raised its full-year headline inflation forecast to 6.4 percent—well above its 4.0 percent target ceiling.