Another BSP rates cut seen

For 2020, profitability of the banking sector should improve despite the anticipated lower interest rates. #BSPratescut

Although Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno had said they are done cutting policy rates for the year, sovereign debt watcher S&P Global Ratings expects another cut before the year-end.

S&P Primary Credit Analyst Nikita Anand said recent cuts executed by the BSP for its key policy rates have done a good job in supporting the profitability of the banking sector. While at it, they forecast another reduction of 25 basis points.

“The central bank has cut policy rate by 75 basis points so far in 2019, and we expect another 25 bps rate cut later this year. This should bring the overnight reverse repurchase rate to 3.75 percent,” Anand said.

Likewise, the analyst noted on an aggressive stance to be taken by the monetary authorities next year.

“We anticipate a total rate cut of 75 basis points in 2020.This would reverse the interest rate hikes during 2018 when capital outflow and inflationary pressures led the central bank to raise policy rates by 175 basis points,” she added.

The analyst then noted that for 2020, profitability of the banking sector should improve despite the anticipated lower interest rates.

“Although reduced interest rates will lower loan yields, albeit with a lag, we believe the banking sector’s profitability will benefit from good treasury gains. RRR (reserve requirement ratio) cuts will also help banks improve their profitability in a falling interest rate environment,” Anand said.

“In our opinion, banks will channel these freed up funds to grow or pay-down high-cost time deposits, any of which will improve net interest margins,” she added.

Meanwhile, the analyst affirmed the likelihood of achieving the government’s 6 to 7 percent gross domestic product (GDP) growth target for 2019 as capital spending begin to recover.

“The delay in passing the budget is likely to weigh on 2019 growth. However, we expect the ramping up of infrastructure spending to aid GDP growth, bringing it to about 6 percent for the full year,” she said.

“We anticipate that GDP will recover to 6.2 percent in 2020 as this year’s monetary policy easing takes effect. Banks had passed on the policy rate increases from last year to some extent, which is seen in the higher margins and delinquencies,” she added.