Low interest rates seen to cut into bank profits

MANILA, Philippines–THE Bangko Sentral ng Pilipinas said the growth in the profit of local banks in 2012 may be dampened by the expected decline in interest rates.

The local banks’ fate is shared by banks in other economies given the global trend of falling interest rates amid efforts of central banks to counter the ill-effects of the global turmoil on their respective economies.

Nonetheless, the BSP said that banks in the Philippines are still likely to post decent gains, albeit at a more moderate pace compared to 2011, as demand for loans and other services will remain significant.

The BSP has signaled it may cut its key policy rates in the first quarter of 2012, hoping that low rates would boost demand for loans and thus speed up consumption and investments.

The BSP’s policy rates, which influence commercial interest rates, currently stand at 4.5 percent and 6.5 percent for overnight borrowing and lending, respectively.

Additional income arising from higher demand for loans may be partly offset by the effects of the decline in interest rates.

The latest banking sector income data from the BSP showed that the combined net income of universal and commercial banks operating in the Philippines amounted to P69.63 billion in the first three quarters of 2011, up by 12.3 percent from P62.03 billion in the same period of the previous year.

BSP Governor Amando Tetangco Jr. said profit growth may moderate, especially given the likely adverse impact of a weak global economy.

But Tetangco also said banks in the Philippines will withstand any significant external effects.

A stress test conducted by the BSP showed that under a scenario where 20 percent of outstanding loans of universal and commercial banks to conglomerates suffer from defaults as a result of the problems in the global economy, the capital adequacy ratio of the banks will decrease from the existing 15 percent but will remain above the 10-percent minimum requirement by the BSP.

Meantime, Tetangco said the BSP will closely monitor portfolio investments by banks in 2012 to make sure they will not be overly exposed to risky assets.

He said the potential slowdown in income from loans as a result of lower interest rates may encourage some banks to increase their portfolio investments to boost overall income.

“At low levels of interest rates worldwide, there could be pressure on banks to achieve profitability through increased trading turnover. There may also be temptation for them to chase after yields,” Tetangco said.

“Given these, the BSP actively monitors the exposures of banks to ensure that they remain safe and sound,” the BSP chief added.

He said that over the years, even at the height of the global crisis in 2009, the Philippine banking system remained healthy given their prudent lending standards and reasonable amount of exposure to foreign portfolio assets.

Tetangco said the BSP will continue to keenly monitor investment activities of Philippine banks to protect their gains over the years from the ill-effects of the global turmoil.

“The Philippines has stayed above the fray of global difficulties because our banks have the discipline of maintaining credit standards and being cognizant of evolving risks. We expect no less moving forward,” Tetangco said.