In understanding an industry, one must take note of the following important details:
- How the industry generate revenues?
- What are the regulatory risk surrounding the industry?
How does the banking industry generate revenues?
It is common knowledge that the banking industry profits by extending the cash deposited by the depositors to willing borrowers. To illustrate:
However, it was least known that bank profits more through rediscounting loans extended to borrowers. It is in this picture that the Bangko Sentral ng Pilipinas (BSP) plays a major role in a bank’s profit. Rediscounting loans is like borrowing money from the BSP with the loans receivable from the borrower as collateral. To illustrate:
What are the regulatory risk surrounding the industry?
The regulatory body that greatly affects the banking industry is the Bangko Sentral ng Pilipinas (BSP). Every time news comes out like BSP maintains key interest at record lows, what was referred as “key interest rates” are overnight borrowing and lending rates. Overnight borrowing rates or reverse repurchase rates (RRP) are the rates used in rediscounting loans.
Changes in overnight borrowing rates should be followed by bank investors since change on the rates will affect bank profits.
Is there a way to anticipate interest rate changes?
Definitely! Interest rate changes can be anticipated by watching the inflation rates. The BSP adopts the inflation targeting framework since 2002. In other words, should inflation go beyond their target, the BSP will certainly increase the interest rates. For 2014, the BSP targets inflation rates of 4 ± 1 percentage points. Therefore, should inflation go beyond 5%, expect the BSP to increase interest rates.
Obtain the inflation rate information from the BSP through here.
- Lending rates, http://www.bsp.gov.ph/loans/loans_lending.asp
- Inflation Targeting: The BSP’s Approach to Monetary Policy, http://www.bsp.gov.ph/monetary/targeting.asp
Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.