Bank margins may narrow

The net interest margins (NIM) of banks could narrow as loan demand is expected to remain tepid and with the Bangko Sentral ng Pilipinas (BSP) seen to cut rates next year.

“Even with rate cuts, borrowers’ appetite to take up loans are likely to stay muted for longer. That will put pressure on the NIM of banks,” Moody’s Analytics Economist Sarah Tan said in an e-mail.

Ms. Tan said while loan demand might increase if the central bank cuts rates, this will not be enough to boost margins.

Moody’s Analytics expects the BSP to begin its policy easing by the first quarter of next year.

The BSP last week kept its benchmark interest rates steady for a third straight meeting, but signaled that it is prepared to resume tightening if needed amid risks to inflation.

The central bank left its overnight reverse repurchase rate unchanged at 6.25%. Interest rates on the overnight deposit and lending facilities were maintained at 5.75% and 6.75%, respectively.

The BSP has raised borrowing costs by 425 basis points from May 2022 to March 2023 to tame inflation.

Banks could mitigate the impact of lower borrowing costs on their margins through the dynamic pricing of loans and other instruments, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

He added that lower rates could result in an at least 10% increase in loan disbursement.

Latest data from the BSP showed that outstanding loans by big banks, net of reverse repurchase placements with the central bank, expanded by 9.4% to PHP 10.9 trillion in May from PHP 9.97 trillion a year ago.

This was slower than the 9.7% expansion in April, and was the slowest credit growth in 15 months or since the 8.9% print in March 2022.

Month on month, bank lending grew by 0.7% in May.

University of the Philippines Los Baños senior lecturer Enrico P. Villanueva said in a social media message that retail-dominant banks will see a “lower and slower” impact from the expected policy easing.

“Rate cuts in general encourage more lending, so there is still a positive effect on loan growth. Net interest margin will just not be a high as before, he said.

Meanwhile, Fitch Asia-Pacific Financial Institutions Director Tamma Febrian said in an e-mail that banks will likely be able to maintain their profitability even if the BSP cuts rates, as they have in earlier monetary easing cycles, like in 2020.

“Lower yields on loans will be partly mitigated by their growing share of higher-yielding consumer loans, corresponding but delayed decline in funding costs and higher balance-sheet leverage,” Mr. Febrian said.

Profits will also be boosted by an increase in loan demand amid lower interest rates, especially for longer-dated corporate loans and residential mortgages, Mr. Febrian said.

“On the other hand, rates on credit card receivables are less influenced by policy rates and their growth are likely to be influenced more by consumer spending than interest rates,” he added. — A.M.C. Sy