Lower interest rates seen to dampen banks’ earnings

December 7, 2024 | 12:00am

MANILA, Philippines — Philippine banks are likely to feel one of the largest impacts of declining interest rates in Asia-Pacific, with Fitch Ratings projecting significant pressure on local lenders’ profitability.

In a report, Fitch Ratings said that Philippine banks would likely face the greatest pressure from reduced policy rates, assuming no strategic countermeasures are taken to bolster earnings.

“Fitch Ratings believes lower interest rates in Asia-Pacific will have the most impact on the profitability of banks in China and the Philippines, assuming no remedial action is taken by banks to boost earnings,” it said.

Fitch expects interest rates in the Philippines to fall by about 200 basis points by the end of 2026. If realized, this will be the largest decline in borrowing costs across the Asia-Pacific.

This policy shift, driven by easing inflation and central bank efforts to stimulate economic growth, is expected to compress net interest margins in Philippine banks by 20 to 40 basis points. Banks in Hong Kong, Singapore, China  and India could also experience a similar reduction in NIMs.

Fitch also forecasts that operating profit relative to risk-weighted assets ratio – a key metric for profitability – will decline by 31 basis points in the Philippines over 2023 to 2026 amid large policy rate cuts in the next two years.

“However, this is still 25 basis points above 2021 levels, as banks in the Philippines tend to pursue higher-margin lending to support profitability.”

Rate cuts will also be gradual as inflation is still moderately above pre-pandemic levels in most markets.

“We believe the easing cycle will be gradual and spread out over the next few years, allowing most banks to still benefit from some of the margin expansion in the steep tightening cycle in 2022 and 2023,” Fitch said.

Robust loan growth, which Fitch projects will sustain double-digit expansion over the next few years amid steady economic activity, would also support profitability, it added.

The profit of banks operating in the Philippines rose by 6.4 percent to P290.1 billion from January to September compared to last year’s P272.6 billion, central bank data showed.

For universal and commercial banks, their net income increased by seven percent to P271.73 billion in the first nine months from a year-ago level of P253.87 billion.