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The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) last week decided to increase the benchmark interest rate (BSP Overnight Reverse Repurchase rate) by 0.50%, bringing it to 6.00%.
The 50-bps (0.50%) increase was well anticipated by 13 of the 25 economists surveyed by Bloomberg. The higher-than-expected January inflation rate of 8.7% warranted the more aggressive stance by the BSP to prevent the prices of consumer good and services from overshooting further the central bank’s ideal range of 2%-4%.
We see the outperformance of banks, particularly the Big 3 banks BDO, BPI, and MBT, to continue, as these three banks still offer an average upside of around 14% to their consensus fair value targets. We suggest adding these stocks to one’s portfolio on price weakness.
Analysis and Recommendation
Good for the Philippine Peso
It was good to see the BSP’s proactiveness and commitment to taming domestic inflation, showing its willingness to let go of their initial strategy of just maintaining a 1% spread over the U.S. Fed funds rate. This should prevent speculation against the Philippine Peso and allow the central bank to achieve their goal of bringing inflation closer to their 2%-4% target.
The move, albeit within expectations, should give investors’ confidence that the central bank is trying to do its job of maintaining price stability and its willingness to deviate from its initial plan of just maintaining a 1% spread over the U.S. Fed funds rate.
The central bank’s guidance of being data-dependent for their future interest rate actions bumped up the street’s expectations to between 6.25%-6.75. Several economists expect for this terminal rate to be achieved during the first half of 2023, after which the BSP is expected to stay put throughout the rest of the year.
Good for Philippine banks
Notably, the Big 3 banks (BDO, BPI and MBT) have been outperforming the PSEi since the BSP started raising interest rates last May 2022. Since that first rate hike, all three banks have delivered an average gain of 8.3% and an average outperformance of ~10.15%.
We think these banks will continue to outperform the market as they enjoy higher margins on their loan portfolios. While we remain concerned on consumers’ appetite to spend, the manageable loan-to-GDP ratio of just ~72% will allow these banks to lend to credit-worthy businesses and individuals.
We see this outperformance to continue, as these three banks still offer an average upside of around 14% to their consensus fair value targets. We suggest adding these stocks to one’s portfolio on price weakness.
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