modalhoki @ seketer88 Banking sector seen steeled on central bank positioning
AMID inflationary pressures and fiscal risks grappling the year 2024, the local banking sector has been steeled for further headwinds in the coming year; thanks to actions of the Bangko Sentral ng Pilipinas (BSP).
These actions relate to the BSP’s mandate to maintain price, monetary and fiscal stability, implemented mainly through setting policy rates.
After raising interest rates by 50 basis points in February 2023 to 6 percent (from the 5.5 percent posted in December 2022), the Monetary Board (MB) began loosening its tight grip on monetary policy. It has reduced the country’s policy rate by a total of 75 basis points, delivered in 25 basis point increments.
The BSP began its easing cycle in August with a 25 basis point cut, lowering the key interest rates to 6.25 percent from 6.5 percent. This was followed by another 25 basis point reduction in rates in October which brought down the policy rate to 6 percent from 6.25 percent.
The BSP continued its monetary policy easing with the last 25 basis point cut in December that placed interest rates at 5.75 percent, the first time rates were sub-6 percent in the country since 2023.
“We hope to get the benefit of the easing in monetary policy rates. Consumption, consumer expectations, business expectations will benefit from that and it could translate to more investments moving forward,” BSP Monetary Policy Sub-Sector Assistant Governor Zeno Ronald R. Abenoja told the BusinessMirror mid-December. “This should support the recovery of the economy. But, at the same time, it is also important to note that the BSP remains focused on inflation.”
Much-needed liquidity
THE central bank did not stop with reducing rates as it also reduced the reserve requirement ratio (RRR) for banks nationwide; allowing local financial institutions leeway to adjust their lending and investments.
In September, the BSP decided to reduce the RRRs (how much cash banks must hold) by 250 basis points (bps) for universal and commercial banks (UKBs) and non-bank financial institution with quasi-banking functions (NBQBs). The reduction starting October 25, 2024 effectively brought the RRR down to 7 percent from the current 9.5 percent.
Apart from UKBs and NBQBs, the BSP will also reduce the RRR for digital banks by 200 bps as well as thrift banks (TBs) and for rural banks and cooperative banks (RCBs) by 100 bps. The reduction brought down the ratios to 4 percent for digital banks and TBs to 1 percent.
Meanwhile, RCBs will no longer have a reserve ratio by October 25, 2024, after the RRR was reduced for these institutions.
“The central bank lowered the reserve requirement ratio by 250 bps to 7 percent, infusing much-needed liquidity into the financial system and reducing the cost of intermediation,” Bank of the Philippine Islands (BPI) Senior Vice President and Lead Economist Emilio S. Neri Jr. told the BusinessMirror.
Cost of intermediation
HOWEVER, Neri said that despite the easing of policy rates and the lowering of the RRR, local equities continue to underperform relative to fixed income securities.
He noted that the Philippine Stock Exchange Index (PSEi) is currently up by two percent year-to-date but the 1-year Treasury bill at the beginning of the year offered a net yield of approximately 4.59 percent, providing better returns for investors.
“[The year] 2024 marks the seventh year that the risk-free interest rate has beaten the local equity market,” Neri stressed.
Nonetheless, he said the lower interest rates allowed the banking sector to focus more on consumers as there was “substantial growth” in personal loans, auto, housing loans as swell as credit card loans.
