Online brokerage firm Colfinancial.com said it expects banks to post a combined earnings growth of 4 percent this year amid positive prospects for the sector.
It also projects that earnings growth for next year could hit 11.2 percent.
“Despite the subdued growth in 2020, we expect robust core income growth, underpinned by both faster credit growth and slight improvement in net interest margins,” Colfinancial.com said.
“In our view, loan growth should recover in light of the stronger macro-economic outlook this year on the back of the timely passage of the 2020 budget and benign inflation rate outlook. In fact, economists are forecasting GDP (gross domestic product) to expand by 6.1 percent in 2020 and 6.3 percent in 2021,” it added.
It also cited the Bangko Sentral ng Pilipinas’ (BSP) move to cut policy rates by 75 basis points (bps) last year, so lending rates have started to decline.
As a result, businesses “should be able to increase their borrowings to finance their capital expenditures and working capital requirements in light of the lower borrowing costs,” Colfinancial.com said.
It added that banks may grow their loan portfolio by 11.8 percent this year and 12.8 percent next year, faster than the 8.9 percent growth registered as of the third quarter of 2019.
This in turn can result in banks posting “double digit growth rates in lending income, with net interest income growing by 12.8 percent this year and 12.4 percent next year,” Colfinancial.com noted.
“Similarly, we expect steady growth in fee-based revenues on the back of the increase in economic activity. Based on our estimates, industry fees could grow by 9.7 percent in 2020 and 9.6 percent in 2021,” it said.
At the same time, banks’ funding cost will continue to improve this year amid last year’s normalization of inflation rate, coupled with the phased reduction in the reserve requirement ratio to 14 percent from 18 percent.
Colfinancial.com however noted a lag on passing on the lower rates to depositors.
“Furthermore, we expect bond rates to be generally stable for the year on the back of the benign inflation rate outlook. Note that economists are forecasting the 10-year bond rate to end just slightly higher in 2020 to 4.6 percent from 4.5 percent as of end-December 2019,” it also said.
Colfinancial.com expects a recovery in the banks’ CASA (current account, savings account).
“Meanwhile, on the asset side, we believe there will be pressure on loan yields to decline, particularly on the corporate and middle market segment, in light of the BSP’s guidance of a 50 bps cut in policy rate for 2020,” it also said.
It noted that competition may intensify as funding cost has already started normalizing.
“Nevertheless, we expect the decline in the yields of corporate and middle market to be tempered by a) further cuts in the reserve requirement ratio and b) effort to continuously expand the higher yielding consumer loans,” Colfinancial.com said.
These could result in slight improvement in banks’ net interest margin by 14 bps in 2020 and 10 bps in 2021, it said.
Colfinancial.com expects the banks’ trading gains to normalize following a surge last year.
“Recall that all banks booked robust trading gains last year following the sharp decline in bond rates. We believe banks have already realized most of the gains in their portfolio.
Furthermore, as previously mentioned, the outlook for bond rates is largely stable, which could limit trading opportunities next year. As such, we are forecasting the sector’s trading gains to fall from P23.1 billion in 2019 to a normalized level of P4.7 billion in 2020,” it said.
