HIGHER-FOR-LONGER interest rates could benefit large Philippine banks as this would support their margins, Fitch Ratings said.
“We believe Philippine and Singapore banks will be key beneficiaries if rates are higher than we expected,” the credit rater said in a commentary dated Jan. 26. “Our rated banks in these markets have good funding profiles and are in liquid banking systems that can capitalize on yields staying buoyant while keeping deposit rates lean. This should position them to enjoy modestly higher net interest margins (NIM) than in our base case, under this scenario.”
Fitch said borrowing costs are expected to begin easing in most large economies in Southeast Asia this year.
“But we believe banks in some regional systems would benefit if the decline in rates is shallower than we expect,” it said. “Banks’ capacity to cut deposit rates and manage wholesale funding costs will be key in determining outcomes. This capacity tends, in turn, to reflect the strength of their deposit franchise and the diversity of their funding mix.”
Fitch flagged risks such as US President Donald J. Trump’s higher import tariffs and other protectionist policies, which could stoke inflation pressures and impact the US Federal Reserve’s rate-cutting cycle.
“This increases the risk that policy rate cutting cycles in Southeast Asia could be shallower than we had anticipated. There have already been some signs in Indonesia and Vietnam of local-currency liquidity tightening, raising wholesale funding costs for banks, which we believe is linked to official intervention in foreign-currency markets and associated sterilization efforts.”
Markets are on a wait-and-see mode on the US central bank’s next steps following Mr. Trump’s inauguration last week. Fed policy makers are largely expected to keep rates steady in their Jan. 28-29 meeting, marking the first pause in the rate-cutting cycle that began in September, Reuters reported.
Data since the Fed’s December meeting has kept intact the core view among Fed officials that inflation will continue to move steadily, if slowly, towards 2%, with a low unemployment rate and continued hiring and economic growth.
“Nevertheless, low rates of inflation in the region mean that policy makers have some headroom to accommodate weaker currencies without breaching inflation targets, supporting their rate-setting autonomy,” Fitch said.
The Bangko Sentral ng Pilipinas (BSP) began its easing cycle in August last year, slashing benchmark interest rates by a total of 75 basis points (bps) to bring its policy rate to 5.75%. Fitch expects the policy rate to be at 4.75% at end-2025 under its base case, which would mean 100 bps in reductions this year.
While less rate cuts from the BSP this year could support the margins of big banks in the Philippines, smaller lenders may not see the same windfall, the debt watcher said.
“However, smaller Philippine banks may benefit less than their larger peers, as their weaker competitive advantage in chasing deposits and lending opportunities tends to constrain their NIM,” Fitch said.
Latest data from the BSP showed the banking system’s net profit rose by 6.4% year on year to P290 billion in the first nine months of 2024, driven by a 14% jump in net interest income.
Of this, universal and commercial banks’ net income went up by 7% to P271.73 billion in the nine-month period.
“Banks in many regional markets have tended to preserve NIMs by shifting lending towards higher-yielding segments. However, this may affect their risk profiles unless loss-absorption buffers are also adjusted. We expect such dynamics to play out again in 2025 where NIMs come under pressure,” Fitch added.
The credit rater also noted that the impact of policy changes on Southeast Asian banks’ asset quality would likely be limited.
“Banks’ credit costs would be more vulnerable if there were external shocks to economic growth. Upside surprises to rates could aggravate existing asset-quality risks in vulnerable pockets of some banking systems, such as micro and small and medium-sized enterprise lending in Thailand. However, regional authorities could also deploy relief to cushion debt strains, as the Thai government has done recently,” Fitch said.
“The region’s bank capitalization levels are mostly ample, so the impact of higher-than-expected bond yields on valuations of securities is unlikely to be a significant rating consideration.” — Luisa Maria Jacinta C. Jocson with Reuters
