ANZ: RRR cut won’t automatically boost lending

THE UPCOMING CUT in Philippine banks’ reserve requirement ratios (RRR) will not necessarily lead to faster lending growth, ANZ Research said on Tuesday.

“Banks do have the flexibility to lend out the liquidity arising from the RRR reduction. However, this does not imply that bank lending will necessarily increase by an equivalent amount,” it said in a report.

The Bangko Sentral ng Pilipinas (BSP) last month announced that it would reduce the RRR for universal and commercial banks and nonbank financial institutions with quasi-banking functions by 250 basis points (bps) to 7% from 9.5% effective on Oct. 25.

It will also cut the RRR for digital banks by 200 bps to 4%, while the ratio for thrift lenders will be reduced by 100 bps to 1%. Rural and cooperative banks’ RRR will likewise go down by 100 bps to 0%.

The RRR is the portion of reserves that banks must hold onto rather than lending out.

Based on historical data, ANZ Research said there is no “durably positive relationship between RRR cuts and bank lending.”

“The Philippine credit cycle has been quite independent of RRR cuts, even if the pandemic years of 2020 and 2021 are excluded,” it said. “On balance, we do not anticipate a boost to credit arising from the RRR cuts until nonfinancial constraints on the Philippines’ business cycle eases.”

“Overall, the decision to lower the RRR is a positive development; though, in the short term, credit growth is unlikely to materially accelerate. The demand for credit remains moderate at an overall level and is narrowly focused on some segments of household lending.”

Latest data from the BSP showed bank lending rose by 10.7% to P12.25 trillion in August, the fastest increase in 20 months or since the 13.7% in December 2022.

ANZ expects around P300 billion in liquidity, equivalent to about 1.1% of gross domestic product (GDP), to be released into the financial system following the RRR cut.

“A surprisingly commonly held view is that this additional liquidity will be directed towards bank lending. This is unlikely to be the case, even though banks will have the flexibility to do so,” it said.

It added that current conditions do not show a “strong borrower appetite for funds.”

“Transitioning to market-based liquidity management has been a long-standing objective of the central bank. As the RRR is not market determined, it does not accurately reflect prevailing liquidity conditions.”

“We think most of this additional liquidity will be absorbed via the BSP’s market-based tools of liquidity management,” it added.

ANZ said the Philippines’ RRR level is “unusually high.”

“It was kept at an elevated level to avoid a repeat of bank failures that occurred in the 1980s. However, with other measures of financial stability evolving, the BSP has scope to lower the RRR and has been doing so since 2018,” it said.

BSP Governor Eli M. Remolona, Jr. has also said that the country’s reserve requirements are higher than those of its neighbors.

The central bank has brought down the RRR for universal and commercial banks to a single-digit level from a high of 20% in 2018.

Mr. Remolona this month said they may bring down big banks’ RRR to zero by the end of his term in 2029.

ANZ said that RRR reductions are also unlikely to lead to increased interest earnings for banks.

“Unlike other liquidity management tools, the RRR does not earn interest, so it raises intermediation costs for banks and impedes monetary policy transmission,” it said. “A reduction will therefore bolster bank profitability and reduce intermediation costs. It should also, over time, improve policy transmission.”

It added that as RRR balances do not earn interest, this may “suppress banks’ net interest margins (NIM).”

“A reduction in the RRR should improve NIMs as has been the case with previous reductions. As such, NIMs of banks have trended up in the tightening cycle as lending rates have risen by more than deposit rates. This increase is likely to reverse with monetary policy easing particularly as the share of time deposits in overall deposits has risen and will take time to mature.” — Luisa Maria Jacinta C. Jocson