‘Banks face credit strain on prolonged Middle East crisis’

MANILA, Philippines — Philippine banks may begin to feel mounting credit pressure in the coming months as spillover risks from a prolonged Middle East conflict filter through vulnerable loan segments, Fitch Ratings said.

However, the debt watcher said the impact is expected to build gradually rather than trigger immediate stress.

In a webinar, Fitch said risks to local lenders are concentrated in micro, small and medium enterprises (SMEs) as well as consumer lending, reflecting a structural shift in banks’ loan books in recent years.

“The areas that we expect to see the deterioration come through, first of all, would be micro and SME and consumer loan segments,” said Jonathan Cornish, managing director and head of Asia-Pacific banks at Fitch.

He noted that these segments have expanded as banks “diversify away from the larger conglomerates,” but have historically shown greater vulnerability during economic shocks.

For the Philippines, Cornish said the impact could be more pronounced than in past episodes, as a meaningful share of loan growth in recent years has come from those segments.

Still, Fitch emphasized that pressures are unlikely to be immediate. Cornish said any deterioration in asset quality would likely become more evident throughout the second half of this year if external shocks persist.

The ratings agency also flagged the country’s exposure to remittances from the Middle East as a key transmission channel, which could weigh on borrowers’ repayment capacity if disruptions intensify.

“A good percentage of those come from the Middle East,” Cornish said, adding that risks “are likely to be greater in the smaller banks than will be the case in the larger banks, which we tend to rate.”

Despite these risks, Fitch said Philippine banks retain buffers and rating headroom, with current outlooks remaining stable. “Bear in mind that there still are buffers and ratings headroom in place. The outlooks on the Philippine banks are stable,” Cornish said.

He added that even under a stress scenario, rating downgrades are not imminent, with larger corporate exposures unlikely to be significantly affected in the near term.

Across South and Southeast Asia, Fitch warned that banks face rising credit risks from higher energy prices, supply chain disruptions and weaker demand linked to geopolitical tensions.

In a separate note, the ratings agency said “the clearest credit risk from a prolonged Middle East conflict” would emerge gradually, particularly in emerging markets where borrower resilience is weaker.

The key issue, Fitch said, is not whether banks face immediate stress, but “which systems and loan segments deteriorate first if the shock persists.”

Asset quality pressures are expected to surface first in retail, microenterprise and SME portfolios, which are more sensitive to inflation and external shocks.

Sectors with limited pricing power and high energy intensity – such as refiners, chemicals and energy-intensive manufacturing – are also seen as vulnerable.

“In terms of the sectors most affected by higher energy prices, by supply chain disruptions, by weak demand, those with least pricing power are likely to see pressures surface first,” Cornish said.

Fitch added that SMEs across the region remain “more vulnerable to an economic downturn than larger corporates,” although government support in some markets could help cushion losses.

Emerging-market banking systems, including those in the Philippines, India and Thailand, are particularly exposed due to greater sensitivity to commodity price swings and trade disruptions.