Colfinancial.com expects a contraction in net interest margins (NIM) of some banks by the middle of next year following Bangko Sentral ng Pilipinas’ (BSP) policy easing since August.
“Given that interest rates typically operate with a lag, we expect to start seeing the impact on NIM by the middle of next year,” it said, noting the varying impact of rate cuts across the sector.
Colfinancial said banks that carry large proportions of consumer loans should enjoy a positive impact on NIM.
“Since consumer loan yields are less sensitive to changes in the policy rate, these banks should see spreads increase as funding cost goes down,” it said.
Banks with heavier reliance on time deposits for funding, meanwhile, are expected to benefit from lower rates, the online stockbroker said.
“In contrast, banks which benefited from having substantial low-cost deposit bases as rates went up would be more likely to see NIMs decline as their loan portfolios reprice with lower yields,” it said.
However, Colfinancial said the negative impact of rate cuts on those banks’ NIM would likely be lessened by the change in the banks’ balance sheets since the rate hike cycle began in 2022.
“We would highlight the build-up of the banks’ investment securities with high yields as a mitigating factor against NIM contraction,” it said.
Colfinancial said with the economic expansion as a result of the rate cut, the dent on NIM can be offset by the potential increase in loan volumes.
This is very likely given the BSP’s plan to further cut banks’ reserve requirement ratio (RRR) this month, it added.
The RRR of universal and commercial banks (U/KBs) will decrease by 250 basis points (bps) to 7 percent, while the RRR for digital banks will be cut by 200 bps to 4 percent.
Thrift banks and rural and cooperative banks will both see a reduction of 100 bps, bringing their respective RRRs to 1 percent and 0 percent.
“According to BSP Governor Eli Remolona, the central bank is considering further reductions to bring the RRR down to 5 percent in the coming years,” Colfinancialsaid.
The stockbroker estimates a 250 bps cut will introduce to the banking system P400 billion worth of additional liquidity.
“From a big picture perspective, the decrease in RRR frees up funds that were not generating income for the bank. Thus, the release of these deposits to be lent out to clients or invested in other interest-earning assets provides an incremental tailwind for bank earnings,” Colfinancial. said.
“More specifically, for the largest three banks, we are expecting to see 3-5bps improvement in NIM for every 100bps reduction in the RRR, equivalent to 7.5-12.5bps benefit for the 250bps cut. For the smaller banks, we estimate that NIM could increase by 5bps or slightly more for every 100bps RRR cut,” it added.
