Bank stocks thrive amid higher-for-longer policy rates

By Mariedel Irish U. Catilogo, Researcher

THE LISTED BANKS continued to flourish, fueled by higher interest rate level despite slowing loan growth in the third quarter, analysts said.

The Philippine Stock Exchange index (PSEi) went down by 2.3% in the third quarter, faster than the 0.5% quarter-on-quarter contraction in the second quarter. On an annual basis, the benchmark rose by 6.5% at the end of the third quarter.

The financials subindex, which includes the banks, grew by 0.8%, easing from the 2% growth in the previous quarter and the 25.4% in the third quarter last year.

“The high interest rate level following the Bangko Sentral ng Pilipinas’ (BSP) monetary tightening has made borrowing costlier, in turn resulting in a bank lending growth slowdown,” Philstocks Financial, Inc. Senior Research Analyst Japhet Louis O. Tantiangco said in an e-mail.

The BSP kept its benchmark interest rate at 6.5% at its Nov. 16 policy meeting, while interest rates on the overnight deposit and lending facilities were also maintained at 6% and 7%, respectively.

Abigail Kathryn L. Chiw, head of research at BDO Securities Corp., said in an e-mail that high inflation and borrowing costs stifled credit demands in the third quarter.

“Nonetheless, banks are still able to deliver robust net interest income growth on higher loan margins and additional yield income from investment securities,” she said.

Outstanding loans by universal and commercial banks (U/KBs), net of reverse repurchase placements with the BSP, expanded by 6.5% year on year to P11.17 trillion in September, slower than the 7.2% growth in August, data from the BSP showed.

The September print was the slowest in 21 months or since the 4.8% seen in December 2021.

September inflation quickened to 6.1%, making it the 18th straight month that the inflation exceeded the BSP’s 2-4% target.

BSP data showed total net income of the big banks reached P314.10 billion as of end-September, up by 12.7% from the P278.69 billion in 2022.

Gross total loan portfolio of these big banks grew by 7.1% to P12.11 trillion as of end-September from P11.31 trillion in the same period last year.

Meanwhile, gross nonperforming loans (NPL) ratio of U/KBs fell to 3.09% in September from 3.11% in August and 3.10% in September 2022.

The big bank’s net interest margin (NIM) — a ratio that measure banks’ efficiency in investing their funds by dividing annualized net interest income to average earning asset — improved to 3.90% in the July-to-September period compared with the 3.74% NIM in the second quarter and the 3.38% in the third quarter of 2022.

Provision for credit losses by these big banks reached P57.24 billion, down by 19.7% from the P71.29 billion in the same period in 2022.

Rachelleen A. Rodriguez, head of research at Maybank Investment Banking Group – Philippines, said that the listed banks’ price performance in the third quarter was mainly affected by overall stock liquidity and earnings performance.

“Investors appear to favor banks with more pricing power and scale as this would eventually lead to NIM preservation and would also help maintain or even improve market share in both lending and deposit-taking,” Ms. Rodriguez said in an e-mail.

The third quarter saw eight out of 15 listed banks stock prices decrease on a quarter-on-quarter basis. Union Bank of the Philippines (UBP) led with a 13.9% drop in its share price from the P74.90 in the second quarter. This was followed by Philippine Bank of Communications (PBC, -9%), Philippine Trust Co. (PTC, -4.8%), Security Bank Corp. (SECB, -4.3%), Philippine Savings Bank (PSB, -3.3%), Metropolitan Bank & Trust Co. (MBT, -3.1%), Philippine National Bank (PNB, -1.4%), and Rizal Commercial Banking Corp. (RCB, -0.2%).

On the other hand, seven listed banks saw gains in their share prices in the third quarter.

East West Banking Corp. led the gainers with 37.7% increase in its share price quarter on quarter. Other lenders also posted share price increases including Philippine Business Bank (PBB, 16.2%), Bank of Commerce (BNCOM, 8.6%), BDO Unibank, Inc. (BDO, 3.1%), Bank of the Philippine Islands (BPI, 2.9%), China Banking Corp. (CHIB, 1.2%), and Asia United Bank (AUB, 0.2%).

BANK STOCK PICKS
Analysts said that market players should monitor closely the interest rate movements and economic trends that affect credit demand and the overall economic recovery.

“The BSP is expected to keep a hawkish monetary policy stance in the near term to combat inflation. This will likely continue to benefit banks in term of higher interest income,” Globalinks Securities and Stocks, Inc. Head of Sales Trading Toby Allan C. Arce said in an e-mail.

“However, if interest rates remain elevated for an extended period, it could also lead to increased loan defaults and higher NPLs,” he said.

Mr. Arce also expressed optimism to those banks who are investing in artificial intelligence and blockchain in improving their products and services.

“The overall economic recovery and regulatory changes could influence the performance of listed banks in the near term,” Regina Capital Development Corp. Head of Sales Luis A. Limlingan said in an e-mail.

The  Philippine economy expanded by 5.9% in the third quarter, bringing the year-to-date economic growth to an average of 5.5%, still below the government’s 6-7% 2023 target.

Meanwhile, Philstock’s Mr. Tantiangco said that banks are likely to earn from the consumer and commercial segment for the rest of the year.

“Both the commercial and consumer segment has still been posting loan growth this year with latter at a fast pace. These together with the high interest rates are seen to help in banks’ earnings,” he added.

OUTLOOK
With the BSP’s continued hawkish stance in raising key policy rates, analysts cautioned gloomy market sentiment to the financial index on the back of sustained slower bank loan growth for the rest of the year.

“The overall impact of domestic and global markets on listed bank stocks in the coming quarters is likely to be mixed. Banks with strong deposit base and a focus on retail lending are likely to be more resilient to challenges… however, banks that are more exposed to corporate lending or international markets may be more vulnerable to risks such as increased loan defaults and global market volatility,” Globalinks’ Mr. Arce said.

For Maybank’s Ms. Rodriguez, the risk of increasing tensions in the Middle East region between Israel and Palestine has no significant effect to the Philippine banking sector but noted that spillover effects may arise in the global oil prices which could offshoot inflation.

“Philippine banks businesses are highly domestic-driven, hence, weakness seen in other countries would not significantly impact the business,” she added.

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