THE recent cut in banks’ reserve requirements is likely to keep net interest margins (NIMs) elevated in the short term, the Maybank Investment Banking Group said.
The Bangko Sentral ng Pilipinas’ (BSP) reduction of banks’ reserve requirement ratio (RRR) is effective October 25.
The reserve requirement for universal and commercial banks, and nonbank financial institutions with quasi-banking functions will be slashed by 250 basis points (bps) to 7.0 percent, 200 points to 4.0 percent for digital banks, and 100 bps to 1.0 percent for thrift banks and rural banks, and zero percent for cooperative banks.
“Given that the policy rate cut and RRR cut offset each other in terms of NIM impact, there is a strong likelihood that net interest margins would remain elevated in the near term,” Maybank said in a statement.
“This should be positive for the banking sector as it would help support loan growth and keep NIMs elevated amid a falling interest rate environment.”
Maybank pointed out that reserve requirement cuts generally benefit banks by boosting net interest margins.
For major banks like Banco de Oro (BDO), Bank of the Philippine Islands and Metropolitan Bank & Trust Co. (Metrobank), a 100-basis-point reduction in RRR typically leads to a 4-5 basis-point increase in NIMs annually.
Hence, the recent 250-basis-point cut is expected to result in a 10-12 basis-point improvement in NIMs, potentially raising net interest income by 2.0 to 3.0 percent, assuming other factors remain unchanged.
“Our top pick in the banking sector is BDO as it would likely benefit [from] an acceleration in loan growth in 2025 on lower rates, coupled by potentially more upcoming PPPs (public-private partnerships),” Maybank said.
On the other hand, policy rate cuts affect large banks negatively by putting pressure on asset yields and net interest margins, Maybank added.
Leading banks estimate that a 25-bp cut in policy rates could result in a 4.0- to 9.0-bp decline in NIMs.
As the BSP started cutting rates by 25 bps last month, Maybank expects another 25-bp cut can occur in the fourth quarter, potentially leading to an 8.0- to 18-bp reduction in NIMs.
Maybank, however, countered this is viewed as positive for smaller banks like Security Bank and Union Bank of the Philippines, which have been more affected by deposit competition. The investment and securities firm argued that a lower interest rate environment could ease deposit costs for these banks and boost their NIMs.
“This will have a more pronounced impact on consumer-related loans as rates here are more sticky,” according to Maybank’s statement.
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