To turn ablaze or keep going?

Oil shock paradox plaguing the Philippine banking sector

By Matthew Miguel L. Castillo, Researcher

A BARRAGE of missiles was heard around the world at the end of February as the United States and Israel struck Iran after prolonged diplomatic banter.

The explosive onslaught on Feb. 28, tagged “Operation Epic Fury,” was the first violent initiative drawn by American forces against Middle Eastern entities for the year.

It marked the start of the US-Israel war against Iran and a series of events to shake up world trade and economy.

The Strait of Hormuz, a waterway connecting oil-rich sources of the Middle East to the rest of the world, was among the most crucial elements held for ransom in the conflict as opposing parties demanded each other’s surrender for its reopening.

This came at the cost of skyrocketing fuel prices across the globe, including the Philippines, which saw gasoline prices rise by P43.50 per liter (/l), diesel by P67.35/l, and kerosene by P70.90/l from the start of the conflict to the first week of April.

To the Philippine economy, the sudden conflict and its expenses served as a blazing curveball to its 2026 outlook, which was initially expected to show recovery at the latter half of the year.

Inflation quickened to 4.1% in March, the fastest rate since reaching 4.4% in July 2024, an almost two-year high.

Juan Alfonso G. Teodoro, equity analyst at Timson Securities, Inc., said that the war indirectly affected the Philippine banking sector as its effect of higher oil prices curtailed consumer spending and business activity.

However, he noted that banks remained financially strong and have continually benefitted from high interest rates as the conflict broke out and raged on for the rest of the quarter.

Kervin Laurence Sisayan, head of research at Maybank Securities Philippines, Inc. (Maybank), said that banks remained resilient in the face of the conflict with nonperforming loan (NPL) ratios “quite low” despite pressures to grow the consumer loan book.

Michael O. de Jesus, president and chief executive officer of the Development Bank of the Philippines (DBP), said that the Philippine banking sector faced the conflict with “strength,” as it was “well capitalized, liquid, and profitable” at the time the war began.

He added that the conflict has yet to materially affect Philippine banks but has already weakened growth drivers and brought risks to margins and asset quality.

A TIMELY BUFFER
In a memorandum approved on April 14, the Bangko Sentral ng Pilipinas (BSP) allowed Bangko Sentral-supervised financial institutions (BSFIs) to avail of regulatory relief measures to relieve financial pressure from borrowers amid the ongoing energy crisis.

The measures include granting affected borrowers a grace period of up to six months for loan repayments and a temporary exemption from past due and NPLs for one year.

BSFIs may avail the offer any time within a year from its inception date, marked on March 24, or when the state of national energy emergency was declared by President Ferdinand R. Marcos, Jr.

The central bank implored BSFIs to exercise prudent judgment in availing these safety nets and ensuring that these are extended to borrowers with considerably weakened payment capacities.

American credit rating agency, S&P Global Ratings, said in a report that the BSP’s move could curtail bank profitability with peaking net interest margins and consistently high credit losses.

Mr. Teodoro added that the measures could slightly affect bank profitability in the short term.

He said that bank loan payment collections will be later than usual, as a result, and that banks may lose income from waived fees “which can affect cash flow and earnings, especially if many borrowers ask for relief.”

In addition, S&P said that NPLs may increase if the conflict is prolonged, particularly from smaller borrowers.

“Unsecured consumer loans (about 10% of total loans) have been a primary growth driver for banks in recent years and could ratchet up NPLs,” it said, citing the vulnerability of midsized corporations, businesses, and lower income consumers to possible strains and prolonged conflict spillovers.

SOME LEFT IN THE TANK
In the case of the DBP, Mr. de Jesus said that the bank is “well positioned” to implement these measures with its risk management infrastructure, inherent regulatory alignment, and overall developmental mandate.

However, he also recognized that the state-owned bank is set to face an elevated credit burden from the measures as it is “disproportionately exposed to the sectors targeted by relief interventions.”

On the other hand, Maybank said that it supports the central bank’s move citing it as a step to developing the banking sector and maintaining its financial soundness.

Despite the risks it warned of, S&P Global said that the outlook for Philippine banks amid the relief measures will likely remain manageable under its base trajectories.

It added that the Philippine banking sector is not significantly endangered by the Middle Eastern conflict with only up to 5% of exposures to affected industries.

Moreover, the credit rating agency cited that the local corporate sector is “dominated” by large conglomerates with diversified business profiles and access to domestic liquidity, implying a built-in resilience for adverse periods.

Mr. Teodoro said the measures may be beneficial to banks and borrowers in the long run as they would help the latter keep loan payments in check — subsequently keeping banks from incurring bad loans.

“The overall impact [of the measures] may affect bank profits in the short term but help keep borrowers and the banking system more stable,” he said.

Mr. de Jesus emphasized that the BSP’s intervention initiatives are more concerned with the banking system’s capacity to sustain credit intermediation rather than bank profitability.

“Current conditions indicate that the system remains resilient, but forward indicators suggest that sustained conflict could push the sector toward this threshold within the next one to two quarters,” he added.

FUELED EFFICIENCY
Mr. Teodoro said that banks could act preemptively to avoid the possible drawbacks entailing the central bank-approved wartime relief measures.

“Banks can offer loan restructuring or easier payment terms to clients who are only temporarily struggling, while still being stricter with borrowers who may no longer be able to pay,” he said.

Maybank highlighted its “strong risk management practice” that enables resilience and strengthens customer focus, adding that Philippine banks have risk mitigants and provisions for bad loans as members of a “regulated industry.”

To keep NPLs at bay, Mr. Teodoro said that banks would need to maintain loan-loss reserves, improve credit checks, and monitor sectors sensitive to fuel prices and slow economic growth.

However, he also called for more drastic action if the situation remains unfavorable for long.

“The BSP should step in if the pressure starts to [seriously] hurt the banking system — if bad loans keep rising, bank profits fall sharply, or banks become too cautious to lend to households and businesses,” he said.

For now, Mr. Teodoro recognizes the Philippine banking sector’s capacity to continue rolling with the relief measures, as it remains “well-capitalized, profitable, and stable despite the oil crisis.”

He added that the measures may be lifted once the central bank sees loosening pressure on borrowers and their recovering capacity to pay loans.

“If banks remain profitable, lending stays healthy, and fewer clients are asking for payment relief, that could be a good signal that banking operations can slowly return to normal,” he said.

THE NEXT PUMP
Mr. de Jesus said that the Philippine banking sector is expected to remain “fundamentally resilient throughout the year.”

He added, however, that an erosion of earnings momentum and a delayed rise of asset quality are still likely.

Maybank said that a sustained trend in inflation and fuel costs could increase the likelihood of slow economic growth moving forward.

Mr. Sisayan added that the second quarter may remain challenging for the Philippine banking sector, where “the full the full impact of high inflation to consumer and NPL formation,” may be seen.

“The second half of the year — particularly the third quarter — will be critical in determining whether the system transitions into manageable stress or requires more active regulatory intervention,” added Mr. de Jesus.

For Mr. Teodoro, the Philippine banking sector may remain stable but more cautious.

“Overall, banks are still in good shape, but the main thing to watch is whether bad loans start rising again,” he said.

“Hopefully, the Middle East conflict would end soon, or the government would increase infrastructure spending to keep the economy robust,” Maybank added.