Source/Date: Philippine Daily Inquirer, November 17, 2010
Title: BSP sees banks sustaining profitability in 2011
Problem: Higher Interest Rates Next Year
Point of view: BSP still project that the banking sector will still be profitable in the year to come 2011 despite of the increase in interest rate next year since there is a further rise in the corporate bond issuances. For BSP, there will could less income of banks from treasury operations but it can be offset from an increase fee-based income from services extended to company that would tap the bond market. According to BSP Governor Amando Tetangco Jr., bond market remains an attractive source of liquidity for corporate entities, thus banks will still earn continuously.
Shown in Exhibit 1, there is an increase of 8.9% volume of bonds traded in the secondary market. Also, there were 207 billion worth of freshly issued bonds. Also, exhibit 2 showed the combined net profits of banks. Moreover, OFW inflows would continue to grow next year. All of these an indication that bond market was expected to more active next year according to Tetangco.
Central bank chief reacted to Fitch Ratings that commercial banks in the country would see a moderation of profit in year 2011 as consequence of higher interest rates. Ambreesh Srivastava, a senior director for Asian financial institutions group at Fitch stated that bank profits could moderate downwards in 2011 if net interest rates were to rise. He also said that banks would still enjoy profit next year but not as strong as seen so far this year.
Alternative Courses of Action: Since BSP is not so agreed on the Fitch rating that commercial banks will provide moderate profit in year 2011 due to higher interest rate compared this year, we suggest that it is better for the BSP to restudy the said statement of the Fitch group since the said rating is credible. The group would perhaps be correct. The BSP should be strong enough with their monetary policies that would affect interest rates. Also, the government should cooperate with the BSP by making appropriate fiscal policies. BSP itself does not directly influence interest rates as these are market-determined but they can do key policy rates like overnight borrowing and etc. BSP should closely watch the market. Fitch Rating and BSP statements are just projections for 2011, thus an event to be seen. The best thing to do is that BSP as well as the government should take actions wisely and most of all, both should do their jobs.
Recommendation: We recommend that BSP together with the government and citizens should cooperate to help in one way or another that would affect the entire economy. Inflation and deflation are events that occur due to many factors. Since this area of consideration was monitored by BSP, it must find ways to encourage investment to lower the rates. Since it is already projected an increase if interest rates, the BSP should double corporate issuances as much as possible, encourage savings like what they did on campus visit for awareness of the students. The government must continue to strengthen the economy and encourage OFW remittances since this could help a lot too. Also, the bank itself should manage to control risk like credit risk and also the operating cost.
