Central bank rate cuts could raise Philippine banks’ earnings by 2.6%

Every 100bp rate cut would free PHP106b of liquidity.

Philippine banks could be looking at their earnings rising by up to 2.6% combined if they played their cards right, according to a report by Maybank Securities.

Local regulator Bangko Sentral ng Pilipinas (BSP) is reportedly looking to cut their rates by 200 basis points (bps) for as early as Q3, Maybank analyst Racheleen Rodriguez said in a report. Each 100bp cut could equate to an earnings raise of between 0.9% to 1.3% for the banks.

This could release liquidity of up to PHP212m ($3.8m) by the banks.

“Our sensitivity analysis shows that for every 100bps reduction in RRR, a total of PHP106b of liquidity is released by the banks under our coverage. Suppose that the banks, at the very least, reinvest this freed up capital in government securities, which have yields of 3.5% to 4%, the banks’ net incomes could rise by 0.9 to 1.3% annualized,” Rodriguez wrote in the report.

However, banks with heavy exposure to micro, small and medium enterprises (MSMEs)– namely BPI and UnionBank– may not benefit as much from the increased liquidity as COVID-era relief for MSMEs expire on 30 June.

Overall, the expiration of MSME-related incentives are not expected to have any material effect on Philippine banks. MSME loans as a percentage of total universal/ commercial bank loans dropped to 4.5% in FY 2022, from 6.4% in FY 2019.