The country’s big banks view 2024 as better in market prospects and the potential to be more profitable than last year amid a moderating inflation environment and interest rates that are expected to come down in the second or third quarter.
With reduced price pressures and Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. signaling to cut the policy rate within the year, Metropolitan Bank & Trust Co. (Metrobank) is optimistic that the Philippines’ “good story” will be sustained.
“Hopefully, the external shocks will not affect us so much,” said Metrobank president and CEO Fabian S. Dee. He pointed to the declining inflation and other economic-related positive developments as basis for a better banking outlook in 2024.
“We’re talking to a lot of foreign funds that are interested in coming to our equity market again, so I think we have a good year ahead of us,” he said. He worried though about geopolitical risks that are still out there, and he’s also hoping it will be “quiet” in the Middle East. Geopolitical tensions disrupt global markets.
Bank of the Philippine Islands (BPI) president and CEO Jose Teodoro “TG” Limcaoco agreed that 2024 will be a good year for the banks.
“Inflation seems to be under control, even though the (BSP) Governor has come out and said yeah, maybe in the second quarter we’ll see a little spike, but that’s technical because of a low base last year. And since inflation is under control, it seems confidence is high from the banking sector,” he said.
Limcaoco said it helps to boost bankers’ confidence that among ASEAN nations, the country has the highest forecast for growth, based on several forecasting agencies. The average is six percent gross domestic product growth at least for 2024.
“(We’re) beginning to see borrowers come back with interest. Many people, many corporates had postponed decisions thinking rates were coming down. Now, they have decided we need to borrow already or they say things might be coming down by the second half. We believe rates will come down in the second half,” he noted.
Rizal Commercial Banking Corp. (RCBC) president and CEO Eugene S. Acevedo said that in terms of BSP policy, there is “less uncertainty” with the central bank being “much more transparent” than usual.
“I’m hopeful that we’re going to see an increase in the demand for banking services, especially in loans as interest rates are coming down,” he said.
He also has been seeing renewed interest “even before interest rates come down, because there’s an expectation that rates will be coming down in the near future, as communicated by some influential government officials.”
Union Bank of the Philippines president and CEO Edwin R. Bautista, similar with the other large lenders, is expecting improved prospects for this year, in terms of banking services and expansion.
“If the economy continues to grow fast which I think it will, and the interest rate go down, the stress on consumers will be less and so our NPLs (non-performing loans) will go down,” he said. With lower rates, it will be easier for consumers to deal with the high lending costs.
BPI’s Limcaoco, who is also president of the Bankers Association of the Philippines, said they have been seeing the return of demand and interest in borrowing and investments.
“We’re seeing the interest already. That’s good for the banking sector. Consumer spending is still high, credit card billings are still robust and strong. So, its going to be a good year. When you look at credit losses, it’s very controllable. NPLs are very manageable. It looks like 2024 will be a good year,” he said.
He added that, “certainly, I think towards the end of the year, margins will contract. Then again, that’s a cycle.”
As for risks, he echoed Dee’s concerns about geopolitical risks, particularly in Europe and the Middle East.
“I think the risks are mostly about global political risks. Obviously, there’s a lot of tension in eastern Europe. Conflict in the Middle East. The issues over the Suez canal. That might cause some trade costs to rise, but really its political and there’s nothing we can do. We just sit and watch,” said Limcaoco.
The BSP chief, Remolona, has committed to bringing down high inflation to within the target range of two percent to four percent this year. At the end of 2023, the average inflation rate was at six percent, mainly due to supply-side pressures.
Remolona said last Jan. 26 that the central bank’s hawkish actions in 2023 will continue. After raising the target reverse repurchase (RRP) rate by a combined 350 basis points (bps) in 2022, the Monetary Board again increased the policy rate by 100 bps in 2023 to bring the key rate to 6.5 percent. This is because upside risks to prices have continued to dominate the inflation outlook.
Keeping a policy rate this high enables the central bank to “prevent sustained price pressures from becoming entrenched and causing inflation expectations to drift further away” from the two percent to four percent inflation target. A high interest rate environment also curbs pressures for second-round effects on wages, transportation fares, and other production costs.
For now, the balance of risks to the inflation outlook is still on the upside.
The upside risks are higher transport charges; increased electricity rates; higher oil and domestic food prices due to continued constraints on food supply; and the additional impact of a strong El Niño episode persisting until the second quarter 2024 on domestic and imported food prices as well as power rates.