Higher rates to cut loan growth, bank profit – BMI

MANILA, Philippines — An impending interest rate hike by the Bangko Sentral ng Pilipinas (BSP) would weigh on loan growth and eat into the profitability of banks over the coming quarters, according to BMI Research.

In its latest industry trend analysis titled “Stable outlook but loan growth to slow,” the research arm of the Fitch Group said the BSP would likely gradually unwind its loose monetary policy stance over the coming quarters as global interest rates and domestic inflation continue to rise.

“This will likely weigh on loan growth to some extent, while credit stress could start to rise, and eat into the profitability of banks over the coming quarters,” it said.

The BSP’s Monetary Board has maintained an accommodative stance over the past three years to support the country’s growing economy through low interest rates. It last raised interest rates by 25 basis points in September 2014.

BMI said the central bank’s decision to reduce the reserve requirement ratio of banks starting with the one percentage point cut to 19 percent last March 2 would release more funds into the financial system.

“Liquidity remains ample and the BSP’s move to reduce reserve requirement of banks should help to free up more liquidity. That said, we expect interest rates to rise in the Philippines, which is likely to weigh on loan demand,” it added.

BMI said the Philippine central bank may raise interest rates by 50 basis points this year to safeguard macroeconomic stability as inflation kicked up to 4.3 percent in March from the revised 3.8 percent in February due to the impact of the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law.

“This should see banks adjust their lending rates higher, leading to a slowdown in loan demand. A higher interest rate environment could, in turn, see credit risk increase in the medium term as it impacts borrowers’ cash flow and ability to service debt, while also weighing on the value of collateral supporting the loan,” BMI said.

The unit of the Fitch Group said the expansion of bank loans would slow down to 15 percent this year and further to 13 percent in 2019.

“We expect this to slow over the coming quarters as interest rates start to rise on the back of tighter monetary policy by the BSP,” it said.

Bank loans amounted to P7.18 trillion as of end-December, 19 percent higher than the P6.03 trillion recorded in end-December 2016. Loans released for production activities registered a steady growth of 18.5 percent to P6.38 trillion and accounted for 88.9 percent of the loans disbursed by the banking sector.

The Philippines has registered an uninterrupted growth for the past 76 quarters as the gross domestic product (GDP) grew 6.7 percent last year from 6.9 percent in 2016.

BMI said the GDP expansion would further ease to 6.3 percent in 2018 and 6.2 percent in 2019 due to a weakening business environment and a gradual reversion of growth back to its longer-term potential.