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Banks to outperform Asian lenders as interest margins widen

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By Melissa Luz T. Lopez, Senior Reporter

PHILIPPINE BANKS will continue to outperform their Asian peers given wider interest margins, with a more aggressive rate hike from the Bangko Sentral ng Pilipinas (BSP) to give lenders another boost.

Analysts at JPMorgan Chase & Co. said domestic players will remain stellar performers compared to other banks in the region, and has recommended taking positions on these banks.

“Philippine banks have outperformed Asia banks by 4% in last three months after underperforming by 23% year-to-date,” bank analysts Harsh Wardhan Modi, Daniel Andrew Tan and Jeanette Yutan said on Friday.

Local lenders are expected to maintain their luster as domestic interest rates climb further after the Bangko Sentral ng Pilipinas (BSP) raised key rates by 50 basis points (bp) this week, a stronger tightening move to temper price pressures.

“We see the outperformance widening after Thursday’s 50bps hike from BSP,” JPMorgan said. “Each 25bps adds 4-6bps to net interest margins and 2-3% to EPS (earnings per share) for large banks, based on our sensitivity. We recommend adding positions.”

The central bank fired off its strongest policy adjustment in a decade as inflation remains elevated, having hit a fresh high of 5.7% in July versus a 2-4% target for the full year. Prices of widely-used goods have surged by 4.5% for the first seven months, with hints that inflation could remain elevated even until 2019.

The latest policy tweaks has brought benchmark rates to a 3.5-4.5% range. JPMorgan said the higher rates have “begun to show up” in the margins imposed by banks, which would mean bigger yields even if loan growth could ease.

“We see the positive trend continuing given ample (rather than excessive) liquidity and more rational pricing behavior. On the other hand, the consistent increase in rates could lead to moderation of loan growth from 19.1% (June 2018) to mid-teens in 2H18, where it would be more sustainable,” the bank economists said.

Despite the rising interest rate regime, banks are unlikely to see loans turn sour amid ample money supply. However, the global bank flagged “potential risks” in the small business segment.

Still, JPMorgan said they remain upbeat on large Philippine banks as they turn more profitable.

Universal and commercial banks made a cumulative P77.364 billion net income as of end-June, according to latest central bank data. This is 7.7% higher than the P71.842 billion they booked during first six months of 2017.

Lenders who have reported their first-semester profits have said that double-digit lending growth continued to drive bigger incomes amid rising margins, although some said that weak trading gains as well as higher documentary stamp taxes fed into their earnings.