By Luisa Maria Jacinta C. Jocson, Reporter

BANK LENDING GROWTH hit a 20-month high in August, data from the Bangko Sentral ng Pilipinas (BSP) showed.

Outstanding loans of universal and commercial banks rose by 10.7% year on year to P12.25 trillion in August from P11.07 trillion a year ago.

This was also the fastest growth rate since the 13.7% logged in December 2022.

On a seasonally adjusted basis, big banks’ outstanding loans inched up by 0.8% month on month. Bank lending grew by 10.4% in July.

Central bank data showed outstanding loans to residents picked up by 10.9% in August from 10.4% a month earlier. On the other hand, the growth of loans to nonresidents sharply slowed to 1.5% from 9.2% in July.

Loans for production activities climbed by 9.4% year on year to P10.47 trillion in August from P9.58 trillion a year ago. It was also faster than the 8.8% clip in July.

“This growth was largely driven by loans to key industries such as real estate activities (13.2%); wholesale and retail trade, repair of motor vehicles and motorcycles (10.7%); manufacturing (9.8%); transportation and storage (23.4%); electricity, gas, steam & air-conditioning supply (7%),” the BSP said.

Double-digit increases were also seen in loans for water supply, sewerage, waste management and remediation activities (44.9%); professional, scientific and technical services (22%); and mining and quarrying (21.7%).

Meanwhile, the growth in consumer loans to residents eased to 23.7% in August from 24.3% a month prior.

This as slower loan growth was recorded in credit cards (27.4% in August from 28.2% in July), motor vehicles (19.3% from 19.9%), and salary-based general purpose consumption loans (16.4% from 16.5%).

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said the jump in lending growth was due to the BSP’s rate cut in August, its first policy reduction in close to four years.

The central bank in August reduced the target reverse repurchase (RRP) rate by 25 basis points (bps) to 6.25% from the over 17-year high of 6.5%.

The Monetary Board has two remaining meetings this year, on Oct. 16 and Dec. 19. BSP Governor Eli M. Remolona, Jr. has signaled the possibility of cutting by 25 bps at the next two meetings.

Easing inflation and further rate cuts would also “help spur greater demand for loans or credit due to lower borrowing costs,” Mr. Ricafort added.

Headline inflation eased to 1.9% in September from 3.3% in August and 6.1% a year ago. This was also its slowest print in over four years or since the 1.6% print in May 2020.

MONEY SUPPLY
Meanwhile, separate BSP data showed that domestic liquidity (M3) rose by 5.5% in August, slower than the 7.3% posted a month ago.

M3 — which is considered as the broadest measure of liquidity in an economy — increased to P17.4 trillion in August from P16.5 trillion a year earlier. Month on month, M3 slipped by 0.1%.

Domestic claims jumped by 10% in August, slower than the 11.4% expansion in July.

“Claims on the private sector grew by 11.9% in August from 12% in July (revised), driven by sustained expansion in bank lending to nonfinancial private corporations and households,” the BSP said.

“Net claims on the central government increased by 8.5% from 14.1% in the previous month (revised), due to continued borrowings by the National Government,” it added.

Central bank data showed net foreign assets (NFA) in peso terms went up by 2.4% year on year in August, much slower than 11.2% in the previous month.

“The BSP’s NFA grew by 7.7%, while the NFA of banks contracted, largely due to higher bills and bonds payable.”

Mr. Ricafort said that domestic liquidity growth could pick up after the latest cut in banks’ reserve requirement ratio (RRR).

The central bank last month said it will cut big banks’ RRR to 7% from 9.5% effective on Oct. 25.

Mr. Remolona has said that they are looking to reduce the ratio to zero within his term, which ends in 2029.

“Any further RRR cuts, which add more peso liquidity in the financial system, would be gradual in the coming years,” Mr. Ricafort added.

BAD LOANS
Meanwhile, separate BSP data showed the banking industry’s gross nonperforming loan (NPL) ratio continued to rise in August, hitting a fresh two-year high.

Preliminary data from the BSP showed the banking industry’s gross NPL ratio went up to 3.59% in August from 3.58% in July and 3.41% a year ago.

This was also the highest bad loan ratio in 26 months or since 3.6% in June 2022.

Bad loans inched up by 0.9% to P512.7 billion in August from P508.1 billion in July. Year on year, it rose by 15.8% from P442.6 billion.

Loans are considered nonperforming once they remain unpaid for at least 90 days after the due date. These are deemed as risk assets since borrowers are unlikely to pay.

In August, past due loans were up by 0.9% to P631.4 billion from P625.7 billion in July and by 19.6% from P527.9 billion a year ago.

This brought the past due ratio to 4.42% in August, higher than 4.4% in July and 4.15% a year earlier.

Restructured loans went up by 0.7% to P293.2 billion in August from P291.1 billion a month prior. Year on year, it declined by 4.2% from P306 billion.

Restructured loans accounted for 2.05% of the industry’s total loan portfolio, steady from a month ago but lower than 2.36% last year.

Banks’ loan loss reserves increased by 0.7% to P482.5 billion from P479.2 billion a month ago. It also rose by 5.8% from P456 billion year on year.

This brought the loan loss reserve ratio to 3.37%, steady from July but lower than 3.52% in August 2023.

Lenders’ NPL coverage ratio, which gauges the allowance for potential losses due to bad loans, slipped to 94.11% in August from 94.32% in July and 103.02% a year ago.

THE LATEST September inflation print and improving outlook will give the Bangko Sentral ng Pilipinas (BSP) more than enough room to cut benchmark rates further, analysts said.

“With an even better inflation outlook on the horizon, the risk of the BSP cutting its policy rate again twice this year is largely increasing,” HSBC economist for ASEAN (Association of Southeast Asian Nations) Aris D. Dacanay said in a report.

The consumer price index (CPI) sharply slowed to 1.9% in September from 3.3% in August. September marked the first time in over four years that inflation was below 2%.

“In terms of monetary policy, the decline in headline inflation reinforces our view that BSP will continue to cut rates this year after kicking off its easing cycle early,” Nomura Global Markets Research analysts Euben Paracuelles and Nabila Amani said in a commentary.

The BSP in a statement on Friday said the September print affirms its outlook that inflation will continue its downward trend in the succeeding quarter.

The Bank of the Philippine Islands (BPI) in a commentary said that inflation may have reached its lowest this year and could potentially rebound in the fourth quarter amid fading base effects.

“Nevertheless, we expect inflation to remain under control, potentially staying below 3% in the absence of supply shocks. This favorable condition could extend into 2025,” BPI said.

‘BATTLE IS FINALLY OVER’
In the first nine months, headline inflation averaged 3.4%, which is also the central bank’s full-year forecast for 2024.

“Last time inflation was this low, the Philippines was in lockdown due to the COVID-19 (coronavirus disease 2019) pandemic. It almost feels too good to be true as the Philippine economy went through an inflation surge that lasted for almost two years,” Mr. Dacanay said.

“But we think the September CPI marks the day that the BSP’s inflation battle is finally over — all because of a mix of both hard work and luck.”

Mr. Dacanay attributed this to both monetary and nonmonetary measures over the past year, such as the BSP’s aggressive tightening cycle from May 2022 to October 2023 and lowering of trade barriers for key commodities.

Moving forward, he said inflation would ease further after India lifted trade restrictions on non-basmati white rice.

“This comes at an opportune time for the Philippines since retail rice prices haven’t decreased yet, even with the tariff rate cut in July. A better outlook for the global supply of the grain should help grease things up for retail rice prices to finally slide,” Mr. Dacanay added.

In September, rice inflation sharply slowed to 5.7% from 14.7% in August and 17.9% last year partly due to low base effects. This also marked the lowest rice inflation since the 4.2% print in July 2023.

Meanwhile, Nomura expects inflation to settle at 3.1% this year and 2.3% in 2025.

“Our forecast pencils in CPI inflation at around 1.9% by fourth quarter 2024, slightly below the BSP’s 2-4% target,” it said.

“We still assume the impact of the rice tariff cuts will become evident from October, but this could be partly mitigated by a likely snap back of those food items that provided the biggest drag in September,” it added.

On the other hand, BPI noted risks to this inflation outlook, citing the impact of La Niña and African Swine Fever (ASF).

“Inflation in the Philippines remains sensitive to climate conditions, and another extreme weather event could trigger a spike. On the other hand, stable commodity prices amid China’s economic slowdown may offset these risks. We now expect full-year inflation to settle at 3.2% in 2024 and 2.8% in 2025,” it added.

The “favorable” outlook on inflation gives the central bank the flexibility to continue its policy easing path, BPI said.

“We anticipate two more policy rate cuts in 2024, with more cuts likely in 2025, potentially bringing the policy rate down to 4.5% to 5% by the end of 2025,” it said.

BSP Governor Eli M. Remolona, Jr. last week said the Monetary Board can deliver a 25-basis-point (bp) cut at its Oct. 16 meeting, followed by another at its Dec. 19 meeting.

The central bank chief has said that they are seeking to slash the key rate to as low as 4.5% by end-2025 in order to support the economy.

“But with inflation risks largely dissipating, largely due to rice, the room to cut policy rates in both the October and December rate-setting meetings is vastly increasing,” Mr. Dacanay said.

Nomura likewise expects the BSP to cut by 25 bps each at the last two meetings of the year.

“Beyond that, we also expect BSP to cut in the first three meetings of 2025 before pausing. This would bring the RRP rate to 5% by May 2025 (i.e., a total of 150-bp cuts in this cycle).”

However, analysts noted that the BSP is unlikely to be aggressive in its policy reductions.

“There are several uncertainties right now in the current environment, with inflation risks tied to supply constraints both locally and globally, heightened by geopolitical risks. As such, we don’t expect interest rates to return to the low levels seen in the past decade,” BPI said.

“The Fed’s rate cuts also support further easing by BSP, but we still think BSP is unlikely to be more aggressive with 50 bp clips, like the Fed was last month,” Nomura said.

Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, Inc., also noted the possibility of delayed easing by the BSP.

“We think that BSP will not rescind its commitment to further easing. However, it may be delayed amidst a massive escalation of Middle East tensions that may bring global prices higher, unhinging inflation expectations in the short to medium term,” he said in a Viber message.

RRR CUTS
BPI Lead Economist Emilio S. Neri, Jr. said that the central bank’s latest decision to slash banks’ reserve requirement ratio (RRR) will also support the BSP delivering 25-bp-sized cuts.

“It’s possible that BSP’s substantial RRR cut sufficiently complements a measured approach in reducing the RRP 25 bps at a time so there may be no need to do a jumbo RRP reduction either in October or December,” he said in a Viber message.

The BSP last month announced that it would reduce the RRR for universal and commercial banks and nonbank financial institutions with quasi-banking functions by 250 bps to 7% from 9.5% effective on Oct. 25.

It will also cut the RRR for digital banks by 200 bps to 4%, while the ratio for thrift lenders will be reduced by 100 bps to 1%. Rural and cooperative banks’ RRR will likewise go down by 100 bps to 0%.

Mr. Remolona earlier said that the RRR could be brought down to as low as zero before his term ends in 2029.

“In addition to potential rate cuts, the inflation outlook may also allow the BSP to reduce the RRR further,” BPI said.

BPI said that a 1% cut in the RRR will free up P150 billion in deposits. “The recent 250-bp reduction is expected to release P375 billion in deposits. As a result, we expect intermediation costs to decline, which could drive down lending rates. This could also lead to improvements in the capital markets and banking system as banks will be able to allocate their resources more efficiently,” it added.

Further RRR cuts are also unlikely to stoke inflation, BPI said.

“The BSP has robust liquidity management tools in place to absorb any excess funds released into the system. These tools have been effectively utilized over the years, ensuring that liquidity levels remain within the BSP’s control,” it said. — Luisa Maria Jacinta C. Jocson