Philippine banking sector to see limited direct impact from war

THE ONGOING Middle East war has minimal direct impact on the Philippine banking system, the Bangko Sentral ng Pilipinas (BSP) said, with the industry seen prepared to weather the crisis armed with its strong buffers, although asset quality risks could emerge in specific sectors.

In its latest semestral report on the Philippine financial system, the central bank said the conflict will mainly affect banks’ operating environment as it hits the broader economy.

“Latest supervisory assessments likewise indicate that the banking system’s direct exposures to geopolitical tensions in the Middle East remain limited, with risks largely transmitted through indirect channels such as higher oil prices, inflationary pressures, foreign exchange (FX) movements, and tighter global financial conditions,” the BSP said.

“Banks’ strong capital and liquidity positions, diversified funding bases, and proactive risk management practices provide cushions against these external spillovers, supporting overall system resilience amid heightened global uncertainty.”

This, as the central bank said the sector continued to exhibit resilience in the second half of 2025 despite economic headwinds from a graft scandal last year and global uncertainties.

Philippine banks saw stable funding conditions and balance-sheet expansion, as well as robust capital and liquidity buffers during the period, it said.

“Banks benefited from easing macroeconomic conditions and the BSP’s monetary policy cycle, which supported prudent portfolio rebalancing toward high-quality, liquid instruments while preserving flexibility in risk management. Core operations remained anchored on stable, resident deposit funding, providing a reliable and low-cost source of liquidity. Strong earnings from core and ancillary activities supported organic growth, enabling banks to reinforce buffer-building capacity through retained earnings and sustain lending and investment activities.”

The sector’s combined assets grew 8.9% annually to P29.9 trillion at end-December, outpacing the economy’s expansion. Deposits rose by 7.4% year on year to P21.9 trillion.

Banks maintained P3.7 trillion in capital as of end-December, up 8.9% year on year.

“Capital and liquidity positions are strong,” the central bank said. “As of end-December 2025, the ‘solo’ capital adequacy ratio (CAR) was recorded at 15.8%, while the ‘consolidated’ CAR, which covers banks and their subsidiaries, at 16.2%, both exceeding the BSP’s 10% minimum requirement.”

BSP Governor Eli M. Remolona, Jr. told BusinessWorld last month that several Philippine banks have expressed worries about their capital amid the Middle East war, but noted that the concerns were “not systemic.”

“Liquidity indicators were also above the 100% regulatory minimum, with universal and commercial banks’ ‘solo’ liquidity coverage ratio at 172.3% and ‘solo’ net stable funding ratio at 132.7%.”

ASSET QUALITY RISKS
Meanwhile, robust domestic demand continued to support credit growth. However, geopolitical shocks and weakening domestic and external conditions could lead to asset quality risks, the BSP said.

“Lending expanded by 11.7% year on year P17.1 trillion, driven by households, electricity, real estate, and wholesale sectors. Banks adopted more selective growth strategies, reallocating exposures toward these segments while moderating lending to more volatile or externally exposed activities. Together with manufacturing, these sectors accounted for 61.9% (P10.6 trillion) of total banking system loans, underscoring banks’ continued role in supporting domestic economic activity.”

Credit to priority and underserved sectors also increased, with loans to micro, small and medium enterprises rising by 6.4% to P580.1 billion. Lending to barangay micro business enterprises jumped by 47.4% to P169.8 million.

“Banks likewise exceeded the mandated 25% allocation for agriculture, fisheries, and rural development, surpassing both regulatory requirements and prior-year levels,” the BSP said, adding that these loans stood at P2.8 trillion in the period.

Even as lending activity stayed robust, asset quality was healthy, with the system’s nonperforming loan (NPL) ratio at 3.1% at end-2025 from 3.3% the prior year. Buffers against losses also remained high as NPL coverage ratio was at 97.2%.

“System-wide nonperforming loan dynamics showed measured improvement, supported by easing macroeconomic conditions and sustained prudential oversight by the BSP. These also contributed to slower NPL formation and a continued moderation in the overall NPL ratio,” it said. “Latest BSP data indicate that while the absolute level of NPLs increased, the gross NPL ratio declined by end-2025, reaching its lowest levels in recent years. This suggests that loan expansion and improved repayment behavior have outpaced the growth in problem loans, reflecting broadly stable underlying credit conditions.”

However, the central bank said the sector could face loan loss risks from softer domestic growth momentum, external headwinds, and “sector-specific vulnerabilities — particularly in unsecured consumer lending and selected corporate exposures.”

It noted that NPLs were more pronounced in credit card receivables, although portfolio-level risks remained low, with the overall consumer NPL ratio at just 5.4% at end-2025.

“Corporate asset quality risks likewise remained manageable, albeit with pockets of vulnerability. Exposures to real estate and construction stayed within risk appetite but remained sensitive to market conditions, while manufacturing and other trade-related sectors continued to face external headwinds. Current indicators point to broadly stable repayment capacity, although downside risks could emerge should external conditions weaken,” the BSP said.

“In the context of ongoing geopolitical tensions, banks have identified heightened sensitivity in fuel- and supply-chain-dependent sectors such as transportation, manufacturing, wholesale and retail trade, construction, and utilities.”

Still, results of the regulator’s stress tests show that banks’ capital and liquidity buffers remain sufficient under baseline and moderate shock scenarios.

“At the same time, these highlight the need for continued vigilance against valuation effects, funding cost pressures, and potential credit deterioration should external shocks persist,” the BSP said.

“Banks maintain adequate provisioning and loss-absorption buffers, supported by prudent risk management frameworks and BSP surveillance tools, including stress tests. These factors underpin the system’s resilience, although evolving domestic and global conditions continue to warrant close supervisory monitoring.”

Meanwhile, the report also showed that BSP-supervised nonbank financial institutions continued to grow in the second half of 2025, with expanding credit and asset management services among trust and foreign currency deposit units.

The BSP chief said they will continue to advance the expansion of Philippine banks while safeguarding Filipino financial consumers.

“Banks and non-bank financial institutions play a vital role in mobilizing funds to different economic activities,” Mr. Remolona said.

“The BSP remains committed to fostering a regulatory environment that supports their continued growth and resilience while advancing the interest of Filipino financial consumers.” — K.K. Chan