UnionBank expects improved net interest margin if interest rates dip

UNION BANK of the Philippines, Inc. (UnionBank) expects its net interest margin (NIM) to improve next year as interest rates are expected to decline.

The Aboitiz-led bank said in an e-mail that a declining interest rate environment would result in it having better net interest margins “since it would have the ability to price deposits at a lower rate.”

“This assumes that inflation continues its downward path and no new upside surprises occur,” it added.

As of the third quarter, UnionBank’s NIM stood at 5.3%, higher than 4.7% in the same period last year.

For its base case forecast, the bank expects the Bangko Sentral ng Pilipinas (BSP) to begin its easing cycle in the third quarter of next year, following the US Federal Reserve.

The BSP last week kept its policy rate steady at a 16-year high of 6.5% for a second straight meeting but said it remained cautious amid lingering upside risks to inflation.

The Monetary Board has raised benchmark interest rates by 450 basis points (bps) since it began its tightening cycle in May 2022.

Meanwhile, the US central bank kept the Fed funds rate steady at the 5.25%-5.5% range for a third straight time during its last meeting for the year on Dec. 12-13, with Fed Chair Jerome H. Powell saying they are likely done hiking borrowing costs.

It raised rates by a total of 525 bps from March 2022 to July 2023.

UnionBank said the lower rates will help improve NIMs as most of its loan book is focused on consumers.

“UnionBank is mostly focused on consumer loans, which typically have fixed rates (e.g. credit card rates are capped, so are salary/personal loans),” UnionBank said.

The bank also said its loan book is expected to grow by double digits next year, as well as this year, due to lower borrowing costs.

“The Philippine economy is largely driven by consumption and the expectation is for a growing middle class. As such, demand for consumer loans (cards, mortgage, auto, etc.) will continue. This will be the segment that the Bank will focus on. We expect mid-teen growth in consumer loans,” UnionBank said.

Based on its current outlook, the bank also said it sees no need to issue bonds next year.

Earlier this month, UnionBank raised P18.168 billion from its offerings of 1.5-year Series F Bonds due 2025 and three-year Series G Bonds due 2026.

UnionBank saw its net income drop by 58.99% year on year to P1.65 billion in the third quarter as the bank set aside more loan loss provisions in the period versus the prior year.

The bank’s shares went down by 70 centavos or 1.17% to close at P59 apiece on Tuesday. — Aaron Michael C. Sy