THE CENTRAL BANK is likely to continue its tightening cycle to tame inflation in the coming months, but it may deliver less aggressive rate hikes as the peso stabilizes against the dollar, Fitch Solutions Country Risk & Industry Research said.

Fitch Solutions said in a commentary dated Nov. 18 that they expect the benchmark policy rate to end at 5.5% this year and go up to a peak of 5.75% next year as the Bangko Sentral ng Pilipinas (BSP) continues its fight against inflation.

“The central bank will remain resolute in reining in high domestic inflation, which we expect to average 5.8% in 2022 before moderating slightly to 4.8% in 2023,” Fitch Solutions said, adding that inflation will likely remain above the BSP’s 2-4% target throughout the first half of 2023.

“Food inflation — which accelerated further to a four-year high of 9.4% y-o-y in October — will likely remain a significant source of upside risk. Adverse weather conditions have led to disruptions in food supply this year and remains a threat to prices,” it added.

Headline inflation quickened to 7.7% in October from 6.9%, marking the seventh straight month that inflation breached the BSP’s 2-4% target range. For the first 10 months, inflation averaged 5.4%, lower than the BSP’s revised 5.8% full-year forecast.

The BSP last week raised its key interest rate by 75 basis points (bps) to 5%, the highest in nearly 14 years. It has so far hiked rates by 300 bps since May to tame inflation.

“That said, a deteriorating economic outlook and an eventual stabilization in global monetary conditions mean the pace of hikes will slow over the coming months,” Fitch Solutions said.

It said it expects the central bank to deliver a smaller 50-bp rate hike on Dec. 15 and increase borrowing costs further to a peak of 5.75% in the first half of 2023.

“Since October, the peso has started to stabilize against the US dollar and is less overvalued on a real effective exchange rate basis. Moreover, we think that the US Federal Reserve will only raise interest rates by an additional 50 bps by end-2022 before keeping them steady throughout 2023,” it added.

“If we are right, then there will be less of a need for the BSP to lean towards aggressive rate hikes to defend the peso going forward. That said, we do see upside risks to our US interest rate forecasts,” it said. “Moreover, headwinds to economic growth are mounting. While the third-quarter growth outturn showed the economy expanding by a strong 7.4% year on year, underlying signs of weakness are apparent in the breakdown.”

The economy expanded by 7.6% in the third quarter, faster than the revised 7.5% in second quarter. Growth in the first three quarters of the year averaged 7.7%.

“Further ahead, we think that the lagged impact of persistent inflation, weaker external demand, and high interest rates will lead to a slowdown in growth, which we expect to slow from 7.4% in 2022 to 5.9% in 2023,” Fitch Solutions said.

The research firm noted there are risks to their policy rate forecast, skewed slightly to the upside.

“Indeed, larger-than-expected rate hikes by the US Fed could exacerbate downside volatility for the peso, prompting steeper interest rate hikes by the BSP to ensure currency stability,” Fitch Solutions said.

The US Federal Reserve has raised policy rates by 375 bps since March to curb inflation.

US inflation eased to 7.7% in October from the 8.2% print in September. While inflation is still elevated, this may prompt the Fed to consider slower monetary tightening. — K.B. Ta-asan

PHILIPPINE BANKS sustained their positive momentum in the third quarter as asset quality and loan growth stayed resilient despite macroeconomic challenges, CreditSights said on Monday.

CreditSights said in a report dated Nov. 18 that banks in the country have mostly built on the momentum they had during the first half in the third quarter.

“Net interest and fee incomes continued to provide good cushion for poor trading income, which continues to be down across the board due to rising rates, and sharply reduced credit costs kept profitability back at or near pre-pandemic levels,” it said.

The research firm said the central bank’s rate hikes in the third quarter have started feeding through first-tier banks’ net interest margins (NIMs) which supported their net interest income (NII).

However, second-tier banks did not experience the same uptick in NIM due to weaker deposit franchises. This prompted banks to pre-fund time deposits more aggressively amid current and savings account outflows as rates rise.

Philippine banks’ NII rose by 4% to 26% annually, driven by higher NIMs and high-single to mid-teen digits loan portfolio expansion, CreditSights said.

The exceptions were Rizal Commercial Banking Corp. (RCBC), which relied more on the growth of its securities portfolio, and Philippine National Bank (PNB), which recorded a flat NIM and modest loan growth, it said.

Meanwhile, the NII growth of UnionBank of the Philippines, Inc. (UBP) reflects the boost from the bank’s acquisition of Citigroup, Inc.’s Philippine consumer business, it added.   

“That said, NIMs are still likely to move higher in the coming quarters as the lag effect of the BSP’s (Bangko Sentral ng Pilipinas) hikes on loan yields come through. The banks have also been more active in growing their investment securities portfolios to take advantage of presently higher yields,” CreditSights said.

The BSP has hiked borrowing costs by 300 basis points (bps) since May as it seeks to get inflation under control.

Meanwhile, banks’ fee income remained steady, driven by the continued reopening of the economy, CreditSights said. Double-digit growth was recorded by all banks except for the Bank of the Philippine Islands (BPI) and PNB.   

Asset quality was also stable quarter on quarter, but CreditSights noted the higher nonperforming loan (NPL) ratio of Metropolitan Bank & Trust Co. (Metrobank) and that UnionBank did not disclose its own NPL ratio this quarter.

“Provisions were aided by write-backs in the first half particularly at the second-tier banks and thus came in much lower year-on-year at all the banks…”

Loan growth also decelerated from the previous quarter for first-tier banks, but was higher for second-tier lenders. Loan growth ranged between 3% and 6.5%, with the year-to-date expansion for banks that CreditSights covers at 5.5-8%.

“Policy tightening by the BSP has been aggressive and this is likely to damper growth momentum going forward,” the financial research firm said.

CreditSights said first-tier banks, namely BPI, BDO Unibank Inc. (BDO), and Metrobank, have stronger capital buffers and loss absorption, more benign asset quality, and larger business franchises compared to other banks.

“They benefit from a high exposure to large corporates which should be more resilient in a downturn, as well as their strong deposit franchises which temper the rise in deposit costs, allowing more uplift from the BSP’s rate hikes to their NIM,” it said.

“We acknowledge the headwinds facing the Philippines but see the risks as fairly captured in their current spreads, and thus retain our Market perform recommendation on BDO, BPI and MBT,” it added.

Meanwhile, the financial research firm said Security Bank Corp. and UnionBank lack size compared with the first-tier banks.

CreditSights also noted that UnionBank’s common equity tier 1 (CET1) ratio dropped to 11.9% in the third quarter as its acquisition of Citi’s consumer banking business officially closed in August.

Meanwhile, the research firm is considering to changed their “market perform” recommendation for RCBC after announcing that Sumitomo Mitsui Banking Corp. (SMBC) will hike its stake to 20% through a capital infusion.

“For RCBC, we view SMBC increasing its stake to 20% as a material credit positive as it provides an ~400 bp uplift to the CET1 ratio, and strengthens SMBC’s commitment to RCBC as the vehicle for its expansion into the Philippine market,” it said.   

“We see this level as somewhat wide but would look for signs of stabilization in its asset quality and credit costs before considering a change to our current Market perform recommendation on RCBC,” it added. — K.B. Ta-asan