BMI hikes bank lending growth forecast for Philippines

MANILA, Philippines — BMI, a unit of Fitch Solutions, has raised its forecast for bank lending growth in the Philippines this year but warned that higher borrowing costs and sluggish economic activity could slow credit expansion through 2027.

In a report, BMI revised its end-2026 credit growth forecast to 10 percent from 8.5 percent previously, citing stronger-than-expected lending activity.

Credit growth measures the annual increase in loans extended by banks to households and businesses, providing an indication of borrowing demand and economic activity.

Based on data from the Bangko Sentral ng Pilipinas (BSP), outstanding bank loans grew by 11.9 percent to P15.12 trillion in August from a year earlier, exceeding BMI’s previous expectations.

However, BMI expects lending growth to moderate toward the end of 2026 before slowing further to nine percent by end-2027 as elevated interest rates and weak economic conditions weigh on demand.

“Tighter financial conditions should increasingly weigh on credit growth,” BMI said.

The research firm noted that the BSP has raised its benchmark interest rate by 25 basis points at each of its past three policy meetings, bringing the rate to five percent.

BMI expects another 25-basis-point increase in October as the BSP seeks to contain inflation expectations and prevent higher prices from triggering further increases in wages and other costs.

Government bond yields have also risen across different maturities since the US-Iran conflict, adding to pressure on financing costs.

According to BMI, sustained increases in borrowing costs could prompt banks to tighten lending standards to prevent a deterioration in loan quality, further limiting credit expansion.

Consumer lending is already showing signs of moderation as elevated food and energy prices squeeze household purchasing power.

Higher interest rates can further discourage consumers from taking out new loans, particularly as families allocate more of their income to essential expenses.

Beyond slower credit growth, the firm warned that weak economic conditions could put additional pressure on banks’ loan portfolios.

The gross nonperforming loan (NPL) ratio, which measures the share of bank loans that borrowers are struggling to repay, has remained around 3.4 percent, higher than the 2.6 percent average recorded in the decade before the pandemic.

BMI said elevated inflation and unemployment could strain borrowers’ ability to meet debt payments, potentially resulting in more delinquent loans.

It warned that rapid credit expansion has so far masked the growing stock of bad loans, but this effect could diminish as lending growth slows.

Despite these risks, BMI said the Philippine banking system remains supported by strong liquidity and adequate capital buffers.

Banks’ capital adequacy ratio, which measures their financial cushion against potential losses relative to risk-weighted assets, stood at 15.2 percent in the second quarter, comfortably above the 10 percent regulatory minimum.

However, BMI cautioned that the ratio has declined in recent quarters and should be monitored closely, particularly if the downward trend continues through the rest of 2026 and into 2027.