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Bank borrowing remains robust in Q3: Hefty rate hikes to be felt in 2023 — analysts

By Ana Olivia A. Tirona, Researcher

LISTED BANKS saw their loan books increase in the third quarter as the economy further reopened but analysts warned the massive rate hikes to curb multi-year high inflation could dampen this next year.

The Philippine Stock Exchange (PSEi) fell by 6.7% in the third quarter, a slower quarter-on-quarter contraction from the 14.5% in the second quarter but a reversal from the previous year’s 0.7% growth.

Meanwhile, the financials subindex, which includes the banks, grew by 1.7%, slightly reversing the 14.9% decline in the previous quarter and the 6.3% fall in third quarter 2021.

“Most banks reported faster loan growth amid improving economic activity, better lending margins as interest rates rise, and continued downtrend in nonperforming loans (NPLs), which allowed them to substantially reduce provisioning costs. The aggregate impact of these factors boosted bank earnings during the quarter,” BDO Securities Corp. said in an e-mail.

Latest available data by the Bangko Sentral ng Pilipinas (BSP) showed aggregate net income of universal and commercial banks (U/KBs) grew by 45.7% to P227.11 billion as of end-September from P155.86 billion a year ago.

Meanwhile, provision for credit losses by U/KBs fell at a slower pace by 12.3% to P71.29 billion versus the P81.28 billion last year.

Gross total loan portfolio of the big banks also rose to 12.7% annually to P11.31 trillion as of end-September from P10.04 trillion in 2021.

Nonperforming loans ratio further improved to 3.10% in September from 3.19% in August and the 3.99% last year.

Regina Capital Development Corp. Head of Sales Luis A. Limlingan said in an e-mail that main factors which drove listed banks’ stock performance in the period were rate hikes by the Monetary Board and the “non-reimposition of a stricter alert level in the National Capital Region.”

In the third quarter, the Monetary Board raised its interest rates four times. Year to date, a total of 300 basis points (bps) was raised by the central bank to curb high inflation. Since March of this year, the Metro Manila and the rest of the country operated under Alert Level 1.

In another separate interview, Globalinks Securities and Stocks, Inc. Head of Sales Trading Toby Allan C. Arce said the slowing global economy and quickening inflation also influenced the performance of listed banks in the third quarter.

“The banking sector has remained resilient amid shocks on the back of their strong capital positions. The sector’s good capital position and provisioning cushioned against any moderate rise in credit stress from higher inflation and a rising interest rate environment,” Mr. Arce said in an e-mail.

Inflation reached 6.9% in September, a much faster pace than the 4.2% seen in the previous year. In the nine-months to September, headline inflation averaged 5.1%. As of this writing, latest inflation data from the Philippine Statistics Authority reported inflation rose to 8% on November, highest in 14 years since the global financial crisis in 2008.

BANK STOCK PICKSThe third quarter saw six out of 16 listed banks stock prices decrease on a quarter-on-quarter basis. The Philippine Bank of Communications (PBC) led with a 27.6% decline in its share price from P17.98 in the previous quarter. This was followed by East West Banking Corp. (EW, -13.9%), Security Bank Corp. (SECB, -11.4%), China Banking Corp. (CHIB, -5.8%), Philippine National Bank (PNB, -5.5%), and Asia United Bank (AUB, -4.0%).

On the other hand, top gainers in the July to September period were Rizal Commercial Banking Corp. (RCB, 10.2%), Bank of Commerce (BNCOM, 10%), UnionBank of the Philippines (UBP, 8.2%), Philippine Business Bank (PBB, 7%), and Bank of the Philippine Islands (BPI, 5.5%).

China Bank Securities Corp. Research Director Rastine Mackie D. Mercado said overall price movement of banks were mixed in the third quarter as the market turned volatile.

“However, price performance between the end of the third quarter to end-November was generally more upbeat as market conditions improved. Furthermore, a robust third-quarter earnings season provided incremental tailwinds, with some banks now trading close to their year-to-date highs,” Mr. Mercado said in an e-mail.

Meanwhile, Rachelleen A. Rodriguez, research analyst at Maybank Investment Banking Group-Philippines, picked out BDO and BPI as outperformers in the July-to-September period.

“BDO’s September-end earnings beat our expectations due to its higher-than-expected fee income. For BPI, although its year-to-date operating income was within expectations, it delivered above-peers loan growth of 15.4% year on year,” Ms. Rodriguez said in an e-mail.

For Cristina S. Ulang, research head at First Metro Investment Corp. (FMIC), Metropolitan Bank & Trust Co. (Metrobank, MBT) was notable due to its consistent “strong capitalization with the highest capital adequacy ratio (CAR) of 18% and earnings growth year-to-date, beating market expectations.”

OUTLOOKAnalysts point out the probable effects of further policy tightening on banks as this could potentially drive net interest margin (NIM).

“Investors should pay close attention to the future actions of the US Federal Reserve and how the BSP will react on such,” Mr. Limlingan said.

“Usually, it paves the way for NIM expansions for banks but at the same time it introduces more odds of having higher bad loans. Additionally, the holiday season is expected to impact the lenders’ performance in the fourth quarter. However, the positive impact that it may have might be deterred by inflation,” Mr. Limlingan added.

The NIM of universal and commercial banks — a ratio that measures banks’ efficiency in investing their funds by dividing annualized net interest income to average earning asset —increased to 3.38% in the third quarter from the 3.29% in the April-to-June period.

Similarly, Ms. Rodriguez sees better NIM expansion in the coming quarters which would be driven by a hawkish US Fed stance and the BSP’s decisions to defend the Philippine peso.

“Nevertheless, we are closely monitoring the impact of a steep and accelerated rate hike on businesses, which may decide to defer expansion plans. This could lead to a deceleration in credit growth, which would heighten competition among banks, ultimately reducing their pricing power or ability to pass on rate hikes. Rising commodity prices is likewise a double-edged sword,” Ms. Rodriguez said.

For Mr. Mercado, U/KBs should refine foreign fund flows as this may lead to better performance.

“Especially against prospects of easing macro uncertainties. Nevertheless, a significant deterioration in offshore market sentiment is likely to still lead to negative spill over effects in the domestic market,” Mr. Mercado said.

“In terms of stock price effect, expectations of a further weakening in the peso may affect foreign funds’ appetite for local equities given that prospective currency returns form part of their total return considerations,” Mr. Mercado added.

Ms. Ulang sees a robust loan spread for banks as interest rates increase while loan demand will continue to pick up due to further economic reopening.

“Retail banking and microfinance are picking up too as banks compete with fintech and small entrepreneurs require higher working capital. Corporate capital expenditure programs continue to be upbeat in step with the strong GDP (gross domestic product) growth which means higher loan demand and need for capital market access, funding raising through IPOs (initial public offering) and bonds,” Ms. Ulang said.

“Only one weak spot is [the] property development lending due to higher mortgage rates, undermining affordability of housing loans and higher construction cost nudging up residential unit prices,” she added.

However, Mr. Arced said loan demand would be dampened by further monetary policy tightening as inflation continues to increase.

“But banks should see improved margins as loans are repriced, which will sustain healthy revenue growth for the full year. Large banks are in a good position to weather incremental asset quality weakness resulting from higher interest rates over the next 12 months, supported by their loan loss buffers. Therefore, an improving outlook on the banking sector is maintained,” Mr. Arce said.

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