March 31, 2014

Impact of RRR increase on banks’s earnings

In a banking note we published last Friday (see Industry Update, BSP keeps policy rate steady, raises reserve requirement), we ran a quick computation on the possible impact of the 1% hike in reserve requirement ratio (RRR) on the pre-tax earnings (NIBT) of banks.

This may come in the form of foregone interest income since reserves parked with the BSP do not anymore earn interest. This simulation is based on the asset yields and deposit bases of local banks. Note that these are not actual losses but are potential opportunity costs in terms of interest earnings that the banks would have otherwise earned if not for the RRR increase.

Our take: Based on this simulation, it appears that the opportunity costs are manageable, ranging from 1.0% to 3.3% of NIBT, depending on the banks’ asset yields and amount of pre-tax earnings. Banks can always adjust their positions to focus more on earning assets in order to compensate for opportunity costs brought about by the RRR increase.

We expect that an increase in policy rates would have a bigger impact on banks. On the one hand, an increase in policy rates would precipitate rising yields for bonds and may lead to muted trading gains or even mark-to-market losses in the investment portfolios of certain banks.

On the other hand, higher policy rates may translate to higher loan rates that can expand margins for most banks. It remains to be seen how banks will adjust their balance sheet structures to adapt to imminent changes in the interest rate environment. – WealthSec