Banks feel bite of low interest rates

MANILA, Philippines - Banks are feeling the bite of low interest environment, but they will not resort to unsound practices just so they can improve their profits, an organization of bank treasurers said yesterday.

“I do not think they will do that,” said Raul Victor Tan, president of the Money Market Association of the Philippines (MART), in a lunch with reporters.

Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr., in a speech delivered on Tuesday by Deputy Governor Nestor Espenilla Jr., renewed its warning to banks that it “will not tolerate asset bubble formation and pricing mismatches” in a low interest environment.

That was the third kind of comment on asset bubbles – a situation when asset prices spike that they do not reflect real market prices – stated by the BSP for the past three weeks, but Tan said such should not be a cause of worry.

“The BSP has been proactive on this kind of problems that even before it develops, it already wants to make sure there will be no chance for such,” Tan explained.

He, however, admitted that the present low interest regime has been “challenging” for banks as far as profits are concerned and such is not expected to ease even by next year.

BSP brought key rates to new record lows of 3.5 percent for overnight borrowing and 5.5 percent for overnight lending this year after cutting them by a total of 100 basis points to support growth.

Central bank rates serve as benchmark for bank loan interest rates. Thus, the fear now is that with easier money, banks may resort to a “lending spree” without minding credit standards.

But for Manuel Andres Goseco, chairman of MART money market committee, lending could actually slow down “a little bit” in the coming months as banks surge for better yields elsewhere, one of which is in special deposit accounts (SDA).

Banks, Goseco said, have been lured to the 3.5 percent interest paid to SDA deposits, which are much higher compared to the 0.15 percent offered by the 91-day Treasury bill (T-bill) as of its last auction. 91-day T-bill rate serves as benchmark for banks’ short-term loans. 

Goseco, however, was quick to add: “Banks have remained very competitive. If you look at our rates in housing, credit card, the rates are already very low.”

Tan also said banks have cut fees and charges because of competition which is expected to drive lending. “They are also looking into more efficient and innovative cash management products which do not include risky ones,” he added.

Meanwhile, while interest rates in the Philippines are in record-lows, they remain relatively higher than those near-zero rates in crisis-stricken developed markets. As such, Tan said the Philippines should expect more foreign portfolio investments in the future.

 “Investors are placing first ‘hot money’ as a test. When they see there is really momentum for your infrastructure spending or stable growth, for instance, that is the time they will put fixed capital here,” he explained.

 “It will happen slowly, especially when they see we have stable, long term growth. Of course, if you are going to put in capital, you want to make sure that it is in safe hands.”

Portfolio investments— also called hot money for the ease they enter and exit economies—posted a net inflow of $2.575 billion as of Oct. 19, already more than half of the BSP’s official forecast of $4.5 billion this year.