PHILIPPINE BANKS will benefit from a brighter outlook for the economy, S&P Global Ratings said, with stronger domestic activity to fuel increased lending for local players.

Ivan Tan, director for financial institution ratings at S&P, said the financial system is likely to get a lift from the debt watcher’s more optimistic view on the Philippines.

Last month, S&P revised upward its rating outlook for the Philippines to “positive,” hinting at a possible credit upgrade in the coming months.

“Our view on the Philippines banking system is pretty much aligned with our view on the government as well. We are equally optimistic on the Philippines banking system as a whole,” Mr. Tan said in a webcast last week.

A higher credit rating improves the chances for a country to borrow funds from foreign sources at cheaper rates.

The Philippines currently holds a “BBB” rating from S&P, which is a notch above minimum investment grade. The rating has been on a “stable” outlook since April 2015 prior to this revision, with S&P drawing confidence from the country’s improved fiscal policies following the enactment of tax reform.

“We are seeing this positivity feeds through to the conglomerates and the corporate sector. Banks in the Philippines typically lend to the large corporates and medium-sized enterprises as well,” Mr. Tan said. “Basically, the banking sector is a face or representation of the economy there and when the economy does well, the credit profile of the banking system will improve as well.”

Universal and commercial banks made a cumulative P39.768-billion net income during the first quarter, spelling a 17.8% increase from P33.745-billion profits booked in the same period last year, according central bank data. This came on the back of an 18.4% surge in lending to hit nearly P8 trillion.

Despite the rapid credit growth, S&P said asset quality is likely to remain strong as problem loans account for a measly share relative to rapidly expanding loan books.

Mr. Tan added that the solid footing of Philippine banks remain largely dependent on corporate borrowers, even though the industry is now opening up to increased retail lending.

“[T]he fate of the banking system will be more closely tied to how well the family-owned conglomerates in the Philippines are performing,” the analyst said despite an industry-wide push towards greater consumer lending.

The rosier view taken by the debt watcher also hinges on the ambitious infrastructure spending plans of the Duterte administration, which will boost the country’s bid as a middle-income economy.

“Extremely strong” household spending will also serve as a key engine for gross domestic product (GDP) growth, which S&P expects to clock in at 6.7% this 2018, sustaining the pace clocked in last year although short of the state’s 7-8% goal.

“The economy is pushing a 7% GDP growth this year, one of the highest in the region as a whole,” Mr. Tan added