Banks seen to turn to other debt instruments

The recent rate cuts on the central bank’s special deposit account (SDA) facility may induce banks to go to other instruments, including higher yielding government bonds, or extend more loans to clients, according to DBS Group.

Last week, monetary authorities reduced the SDA rates by 50 basis points to 2.5 percent across all tenors. It was the second SDA rate cut since the year started.

The Bangko Sentral ng Pilipinas said the reduction in the SDA yield was part of its efforts to fine-tune its monetary policy tools.

“The benign inflation outlook and the improving growth prospects provide room for the reduction in the SDA rate,” the BSP said.

On Friday, DBS said in a research note that the move would help the BSP dampen the inflows of speculative capital as well as reduce the cost of absorbing liquidity in the domestic market.

“At these levels (of SDA rates), commercial banks may be inclined to adjust their asset mix,” the financial services provider said.

Banks tend to favor the higher-yielding SDA of the BSP over other instruments, including government securities.

“However, with the current low rate of return, SDA funds may instead be channeled to higher-yielding government bonds. Banks may also opt to extend more loans,” DBS said.

The Singapore-based group noted that lending more these days would not diminish the quality of banks’ assets.

DBS noted that bank lending grew at a three-month high of 16.6 percent in January. With the SDA rate cuts, it was expecting  further growth in bank lending in the coming quarters.

“At this point, the pace of loan growth is still moderate… We are not concerned about the potential deterioration of asset quality just yet,” the bank said.

“(But) the situation is likely to change by the end of the year and the BSP may need to cool the economy,” it added.

Even then, DBS projects that the BSP will use a combination of “mild (policy) rate hikes” as well as increases in banks’ reserve requirement ratios.

DBS said in previous notes that policy rates might not change until the fourth quarter when a 25-basis point hike was expected.