• High rates may limit PH banks’ profits – S&P

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    Debt watcher Standard & Poor’s Ratings Services said rising interest rates may limit Philippine banks’ profitability as trading gains are likely to remain muted this year until 2016.

    In a report, S&P said policy rates in the Philippines are expected to continue to increase to 4.25 percent in 2015 and to 5 percent in 2016, from 4 percent in 2014.

    “Rising interest rates will continue to lower banks’ gains from fixed-income investments, which account for over a quarter of their total assets,” it said.

    The ratings agency noted that Philippine banks have large holdings of government bonds, and rising interest rates have caused valuation declines on these investments.

    In addition, the stable outlook on the Philippine government will limit further mark-to-market gains from rating upgrades, it said.

    “We believe that the days of windfall profits for Philippine banks are over and that trading gains will remain muted this year and into 2016,” it added.

    S&P continued that the dissipation of trading gains marks the shift to more recurring sources of income, with banks re-focusing their strategic direction on their core lending and related fee income business.

    “Large banks with sizable distribution networks have focused on growing their higher-yielding consumer loan books to help arrest the profit slump, but we believe it might be a while before they feel the full effects,” it said.

    The ratings firm noted that the underpenetrated consumer segment is coming off a low base, and accounts for less than 20 percent of total loans.

    With this, consumer lending will take some time to pick up because Philippine banks have traditionally focused on large corporate entities, it said.

    “The lack of a comprehensive consumer credit bureau will also pose underwriting challenges,” it added.

    As a result, S&P said the overall profitability upside for Philippines banks should be limited in 2015.

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