Elevated benchmark rates may continue to boost bank profits

BANKS’ PROFITS may grow further this year as expectations of elevated benchmark rates until the second half may drive their interest income and as robust economic growth could boost loan demand, analysts said.

“If you’re talking about profitability, higher interest rates will be favorable for them,” Reyes Tacandong & Co. Senior Adviser Jonathan L. Ravelas said in a Viber message.

Banks could see their profits grow by 10-15% as economic growth could spur loan demand, Mr. Ravelas added.

As of end-September 2023, the Philippine banking industry’s net earnings climbed by 11.3% to P272.557 billion, driven by higher interest income and lower losses on financial assets, central bank data showed.

“Considering the prevailing high interest rate environment, the outlook for the banking sector appears favorable. Higher interest rates typically boost NIMs (net interest margins), positively impacting banks’ profitability,” Regina Capital Development Corp. Head of Sales Luis A. Limlingan said in a Viber message.

“Overall, a cautious but optimistic stance on the banking sector is advisable, given the current macroeconomic backdrop,” he added.

For her part, First Metro Investment Corp. Head of Research Cristina S. Ulang said bank earnings may have already peaked in 2023.

“For investors and traders, profit opportunity lies in share price volatility driven by positive news flow on easing credit conditions and resilient loan growth,” Ms. Ulang said in a Viber message.

“Borrowing would remain to be constrained and banks would also be challenged in profiting from [loans],” Oikonomia Advisory & Research, Inc. President and Chief Economist John Paolo R. Rivera said in a Viber message.

Elevated interest rates could also lead to higher non-performing loans (NPL), he added.

As of end-October 2023, the banking industry’s gross NPL ratio inched up to a five-month high of 3.44% in October from 3.4% in the previous month and 3.41% a year prior.

This was the highest bad loan ratio since 3.46% in May 2023.

The Bangko Sentral ng Pilipinas (BSP) last month kept its policy rate unchanged at a 16-year high of 6.5% for a second straight meeting.

The central bank raised benchmark interest rates by a cumulative 450 basis points from May 2022 to October 2023 to help bring down elevated inflation.

Even as the market expects the Philippine central bank to begin easing its policy stance within this year, BSP Governor Eli M. Remolona, Jr. last month said they are unlikely to cut rates in the coming months and is leaning towards keeping borrowing costs higher for longer until inflation is comfortably within their 2-4% annual target.

In the first 11 months of 2023, headline inflation averaged 6.2%, still above the BSP’s 6% forecast and 2-4% goal for the year, latest government data showed. — A.M.C. Sy