By Lourdes O. Pilar, Researcher

LISTED BANKS rose in the third quarter propelled by higher loan growth thanks to cheaper borrowing costs that boosted net interest income.

The Philippine Stock Exchange index (PSEi) gained 13.4% on a quarter-on-quarter basis in the third quarter of 2024, a reversal from the 7.1% drop in the second quarter. Year on year, PSEi climbed by 15.1%.

Meanwhile, the financials subindex, which included the banks, inched up by 19.4% quarter on quarter at the end of the July-September period, a turnaround from the 5.4% decline recorded in the second quarter.

The subindex, however, rose by 23.4% annually.

Out of 15 banks covered in the third quarter of this year, 13 banks’ stock performance rose.

Quarter-on-quarter top performers were Security Bank Corp. (SECB, 52.5%), Bank of Commerce (31%), China Banking Corp. (27.5%), Philippine National Bank (27.3%), and BDO Unibank, Inc. (BDO, 23.2%).

Philippine Trust Co. and Philippine Business Bank performed poorly as their stock prices in the third quarter declined by 3.2% and 5.6%, respectively.

Aggregate net income of universal and commercial banks went up by 51.9% to P271.73 billion as of end-September from P178.91 billion last year, data from the Bangko Sentral ng Pilipinas (BSP) showed.

Gross total loan portfolio of these big lenders rose by 14% to P13.81 trillion as of end-September from P12.11 trillion a year ago.

The big banks’ gross nonperforming loans (NPLs) ratio, however, edged up to 3.18% in September from 3.09% in September the previous year.

The big banks’ net interest margin (NIM) — a ratio that measures banks’ efficiency in investing their funds by dividing annualized net interest income to average earning asset — grew to 4.06% in the third quarter from 3.83% recorded in the same period in 2023.

“Most of the banks under our coverage posted double-digit growth in the bottom line, attributable to high net interest margins and lower provisions for losses amid benign asset quality,” Wendy B. Estacio-Cruz, Unicapital Securities head of Research, said in an email.

Ms. Estacio-Cruz said that Union Bank of the Philippines and Bank of the Philippines (BPI) posted high net income growth in third quarter alone with 77% and 28% year-on-year growth, respectively.

UBP’s bottom line was driven by high top line growth and managed operating expenses and for BPI, high trading income contributed to the growth.

BDO Securities Corp. First Vice-President and Head of Research Abigail L. Chiw said that most banks reported stronger loan growth, stable lending margins, and improving asset quality, which contributed to record high incomes.

“The big banks continue to do well, as they registered above-average industry loan growth given their extensive branch network and expanding digital presence, strong asset quality with low NPL ratios and solid profitability with robust double-digit return on return on equities (RoEs),” said Ms. Chiw.

“During the third quarter, majority of banks booked trading gains which helped push noninterest income higher. This was the result of lower interest rates in the period. On the other hand, majority of banks continue to enjoy high net interest income margin as majority continue to grow consumer loan book which is high yielding in terms of assets,” said Kervin Laurence Sisayan, Maybank Securities Philippines, Inc. head of Research.

Mr. Sisayan also said that SECB stood out given the very strong loan growth year on year. Meanwhile, BDO and Metropolitan Bank & Trust Co. (MBT) continued to show high NPL coverage and stable NPL ratio, implying sustained asset quality.

RCBC Securities, Inc. said that the main factor for the performance of listed banks during the third quarter was the double-digit loan growth under the consumer segment, as business confidence improved along with the BSP’s rate cut.

“BDO and MBT stood out because both managed to improve their asset quality while increasing topline and beating industry loan growth. Their ability to make it happen provides them a shield from inflationary risks or flexibility to deal with slower interest rate cuts,” RCBC Securities said.

BANK STOCK PICKS
In choosing bank stocks, analysts said that traders and investors should continue to monitor market conditions that may affect loan demand and asset quality of banks.

“Uncertainties with regard to the potential impact of protectionist policies from US president-elect Donald J. Trump may temporarily weigh on credit appetite and temper loan growth for banks,” said Ms. Chiw.

Ms. Chiw also added that the risks of reaccelerating inflation and interest rates remaining high and restrictive could also have knock-on effects to the ability of borrowers to repay their debts.

“Traders should watch potential rate changes, loan demand stability, and credit quality trends. Digital transformation will also be pivotal in enhancing banks’ competitiveness and profitability,” said Arielle Anne D. Santos, an equity analyst at Regina Capital Development Corp.

Investors should keep an eye on the movement on NIMs given that they saw more policy rate cuts, Maybank’s Mr. Sisayan said.

“Eventually when we see a more pronounced decline in interest rates as inflation continues to ease, then we could also start looking more closely at an acceleration on loan growth,” Mr. Sisayan said.

Ms. Estacio-Cruz said that they are cautiously optimistic about the banking sector and believe that operating income is likely to peak in mid-2024.

“We anticipate a 20-bps decline in NIMs for the banks within our coverage, given the ease of interest rates. However, we expect that strong asset quality and improved loan growth will help to partially offset the effects of these rate cuts next year, thereby supporting the sector’s RoE,” Ms. Estacio-Cruz added.

“Year-to-date, the financials index remains the most outperforming index and rose 28% compared to the PSEi’s gain of 3%. Nevertheless, we advise a selective approach, particularly considering banks with substantial discounts,” said Ms. Estacio-Cruz.

RATE CUTS
This year, the BSP has delivered a total of 50 basis points (bps) worth of rate cuts in increments of 25-bp reductions at its August and October meetings.

BSP has signaled a possible interest rate cut in December, following the slower-than-expected economic growth in the third quarter and the within-target inflation print in October. Further rate cuts could be expected in 2025, BSP said.

“Rate cuts are expected to compress banks’ net interest margins, which may weigh on short-term profitability. However, they could also stimulate loan demand, potentially benefiting banks with diversified loan portfolios like BDO and BPI,” said Ms. Santos.

She added that lower rates might support asset quality by easing debt burdens, a factor investor may view positively.

“Overall, rate cuts could have a mixed impact on bank stocks, balancing margin pressure with potential gains from loan growth and improved asset quality,” said Ms. Santos.

For BDO Securities, the negative impact of rate cuts to margins can be offset by the positive impact of the reserve requirement ratio (RRR) reductions, such that banks are largely expecting NIMs to remain stable.

“Lower interest rates or borrowing costs are also seen to potentially lift consumer and business sentiment, which in turn, could translate to better investment spending and faster loan growth, which are positive for bank earnings,” Ms. Chiw said.

“We believe that there is room to cut another 25 bps in the last month of the year. So, for the 25-bps cut, this could lead to lower interest rates and lower asset yields,” Mr. Sisayan said.

Meanwhile, Ms. Estacio-Cruz expects net interest margins stable for this year as banks manage to lower cost of funds while keeping asset yields steady.