Rise in interest rates may dent banks’ profits

MANILA, Philippines - The expected rise in interest rates may put a dent on banks’ profitability but Bangko Sentral ng Pilipinas Deputy Governor Nestor Espenilla Jr was quick to point out that the increase has no bearing on the strength of the banking industry.

“Some of them (banks) will experience lower than projected income because of the movement of interest rates (but) it has no bearing on the fundamental strength of the bank,” Nestor A. Espenilla, Jr. said.

Interest rates are seen rising on the back of the expected increase in domestic inflation and following the US Federal Reserve’s announcement of a cut in its monthly asset purchases to $75 billion.

A climb in interest rates can slash a bank’s profitability through a decrease in its trading gains although higher earnings from loans should offset this.

But Espenilla stressed that local banks are well-capitalized and they remain stable. “We always encourage banks to boost capital in good times. We’re quite comfortable with the things are. Even with the taper, they are stable,” Espenilla said.

The BSP this year implemented a hike in banks’ capital requirements in accordance with the Basel III reforms.

Basel III is a set of reform measures for strengthening regulation, supervision and risk management of banks. Part of the reforms require banks to beef up their capital, resulting in lower return on equity.

Universal and commercial banks are now required to have a minimum Tier 1 capital of 7.5 percent, a minimum common equity Tier 1 ratio of six percent, and a capital conservation buffer of 2.5 percent. The capital adequacy ratio, meanwhile, has been kept at 10 percent.