TIGHTER FINANCIAL conditions may curb demand for bank loans for the rest of the year and in 2027, Fitch Solutions unit B MI said.
In a report on Monday, BMI said weak economic activity and interest rate hikes by the Philippine central bank may increasingly weigh on credit growth.
“(We) expect loan growth to slow towards yearend as tighter financial conditions and weak economic activity dampen demand, before easing further to 9.0% by end-2027,” BMI said.
The Monetary Board in August raised the benchmark rate by 25 basis points (bps) to 5% in a preemptive move to rein in inflation risks from the severe El Niño episode set to last until next year, as well as the wage hike and global oil price swings.
However, BMI said lending has held up “better-than-expected” so far this year, prompting an upward revision of its bank lending growth forecast to 10% from an earlier forecast of 8.5%.”
“However, even with the upward revision, our forecast still implies a slowdown towards the yearend,” it said.
The latest Bangko Sentral ng Pilipinas (BSP) data showed universal and commercial banks’ total outstanding loans, net of reverse repurchase agreements, rose by 11% to P15.121 trillion at end-August from P13.618 trillion a year earlier. This was faster than the 10.4% expansion in July and the quickest lending growth seen in three months or since 12.1% in May.
The Fitch unit expects the BSP to deliver another 25-bp hike at its Oct. 22 meeting “to anchor inflation expectations and contain second-round effects.” If realized, this would bring the key policy rate to 5.25% and cumulative increases to 100 bps.
“As the effects of earlier easing fades, these hikes will start feeding through more prominently and weigh on loan demand. Bond yields have also steadily risen across the curve since the start of the US-Iran conflict,” BMI said.
“Sustained increases in borrowing costs will likely prompt banks to tighten lending standards to limit the extent of any deterioration in credit quality, reinforcing the slowdown in credit growth.”
BMI said the sustained rise in consumer prices and increasing borrowing costs will likely keep consumer loan growth muted until next year.
“Consumer loans, a key source of credit demand, are already showing signs of moderation,” BMI said.
“Elevated energy and food prices will continue to erode purchasing power, while higher borrowing costs further dampen households’ appetite for new loans. This will probably sustain further weakness in consumer loans,” it added.
However, BMI said an expected recovery in lending to the construction sector may provide some relief.
“These pressures will likely persist into 2027, although recovering construction lending should provide a partial offset,” the Fitch unit said.
“Construction loans have contracted since December 2025 as the flood control corruption probe slowed public capex (capital expenditure) and curtailed loan approvals. We expect lending to start picking up as scrutiny eases and delayed projects resume,” it added.
BMI also said that Philippine banks could see bad loans jump amid accelerating inflation and worsening labor market conditions.
“Elevated inflation and high unemployment will squeeze household finances, straining borrowers’ ability to service debt and increasing loan delinquencies,” it said. “So far, rapid loan growth has masked the rising stock of bad debt. However, as credit growth slows, that support will fade.”
However, BMI said financial stability risks are under control even as loan quality may deteriorate and the economy remains tepid but noted that the declining capital adequacy ratio warrants monitoring. — Katherine K. Chan