GOOD treasury gains will help the Philippine banking sector improve profitability in 2020 despite successive cuts in benchmark interest rates by the Bangko Sentral ng Pilipinas (BSP) that could ease loan yields and moderating credit growth, S&P Global Ratings said in a report.

In a Nov. 18 Global Banking Country-by-Country Outlook 2020 report e-mailed to journalists on Friday, S&P Primary Credit Analyst Nikita Anand said: “Although reduced interest rates will lower loan yields, albeit with a lag, we believe the banking sector’s profitability will benefit from good treasury gains,” in reference to reductions in benchmark interest rates totaling 75 basis points this year.

The BSP kept monetary policy steady in its Nov. 14 policy review and is expected to maintain settings in its last policy meeting for the year on Dec. 12.

It increased policy rates by a cumulative 175 bps last year in the face of surging inflation that averaged a near-decade-high 5.2% for 2018.

“Banks had passed on the policy rate increases from last year to some extent, which is seen in the higher margins and delinquencies. Loan yields will start to trend down along with cost of funds as banks pass on the recent policy rate cuts,” the report read.

S&P said it expected the remaining increases in policy interest rates to be dialed back by next year.

Monetary authorities have also slashed banks’ reserve requirement ratio (RRR) by a total of 400 bps this year after 200-bps cuts in 2018.

“RRR cuts will also help banks improve their profitability in a falling interest rate environment. In our opinion, banks will channel these freed-up funds to grow or pay-down high-cost time deposits, any of which will improve net interest margins.”

And while S&P expects “credit growth to be 10-12% in 2020, compared to 15% in 2018, due to slight deterioration in macroeconomic conditions… [p]olicy rate cuts could spur demand and RRR reduction will provide additional liquidity.”

“Passing of key infrastructure projects will also support credit growth via the multiplier effect until 2022,” the report read further. — L. W. T. Noble