New Bangko Sentral policy on reserve requirement negative for banks – Moody's

The revised guidelines on Philippines reserve requirement is a negative development for banks, according to New York-based Moody’s Investors Service.
 
In its latest Moody’s Weekly Credit Outlook, Moody’s analyst Simon Chen said that the new policy will give investors and depositors lower interest yields.
 
“The revisions are credit negative for banks. In particular, we expect the termination of interest payments on reserves to reduce banks’ interest yields and adversely affect their net interest margins and risk-adjusted profits,” noted Chen.
 
The BSP’s Monetary Board approved the changes to the reserve requirement policy unifying the statutory and liquidity reserves and terminating the interest payment on bank reserves placed with the BSP.
 
As a buffer, the central bank reduced the reserve requirement ratio by three percentage points to 18 percent from 21 percent starting April 6 — a move seen as intended to free an estimated P100 billion worth of funds to the financial system.
 
The lower reserve requirement ratio means that banks will have to make 15 percent on their unbridled funds to compensate for the lost interest earnings to keep their net interest margins.
 
Moody’s estimates that Philippine banks are earning 7 percent to 10 percent on their loans, which will go down because of the low interest rate environment.
 
“As a result, we expect most banks will fail to recoup the forgone interest as a result of the central bank’s measures and will experience a drop in their net interest margins as a result,” Chen said.
 
The foregone interest income, Chen said, will cut the net interest margins of banks by 9 to 38 basis points.

The risks
 
Banks with small deposit bases as a percentage of total assets, led by Development Bank of the Philippines with 20 percent, will experience the least pressure on their net interest margins, Chen noted.
 
Banks with high deposits as a percentage of total assets, such as Philippine National Bank (PNB) with 74 percent, Land Bank of the Philippines with 71 percent, and United Coconut Planters Bank (UCBP) will mean a 34- to 38-basis point drop in their net interest margins.
 
Apart on its impact on interest income, the changes to the reserve requirement will also modify credit profiles once banks relax their underwriting standards and accept higher credit risks to for higher margins.
 
“This may involve increased lending to borrowers with poorer credit profiles, lending on an unsecured basis without sufficient credit mitigation, and lending at higher loan-to-collateral values,” Chen said.
 
Additional credit exposures will boost banks’ loan margins, but also increase their risk profiles and eventually hurt their risk-adjusted profits, he said.
 
 “Of the three, we see Allied Bank as the most vulnerable to any further risk-taking. Its risk-adjusted profitability is the weakest among our rated Philippine banks, with credit costs amounting to 40 percent of its pre-provision profits in 2010,” Chen noted.

The BSP made three operational adjustments in its reserve requirement policy early this month to increase its effectiveness as a policy tool, simplify its implementation, and improve the monitoring of bank compliance.
 
Thos changes unified existing statutory reserve requirement and liquidity reserve requirement into a single set of reserve requirement. The central bank also imposed non-remuneration of the unified reserve requirement, and excluded vault cash and demand deposits as eligible forms of compliance.— VS, GMA News