Bank profits to remain healthy

Philippine banks will likely see their trading gains decline this year due to higher interest rates, but profits from corporate loans could compensate for this, credit rater Fitch Ratings said Monday. “The higher profits booked last year from trading gains, because of low interest rates, would moderate this year because an increase in the Philippines’ interest rates is expected to happen," Ambreesh Srivastava, Fitch Ratings analyst for South and Southeast Asia, said in a teleconference Monday. “The lower trading gains this year would, however, be offset by the high demand for corporate loans," he added. Profit-wise, Philippine banks are still expected to do well, he said further. Yesterday’s teleconference coincided with the release of a Fitch report, “2011 Outlook: Asia-Pacific Banks." Fitch gave a “stable outlook" to Philippine banks, citing that the banks’ “credit fundamentals will remain intact amid generally sound domestic economic conditions." The economy expanded by 7.3% last year, breaching the government’s 5%-6% growth target for 2010. The government hopes to record another 7% growth this year. Fitch also said that banks’ earnings and capital will protect depositors from “spill-over effects" from still-weak western economies. It said banks should see demand for corporate loans rise amid a property boom fueled by demand for housing by overseas Filipino workers and for space for outsourcing centers by multinational companies. However, inflationary pressures due to higher commodity prices could prod the central bank to tighten its rates, which have been untouched since July 2009. The rates presently stand at 4% for overnight borrowing and 6% for overnight lending. Low and stable inflation last year, which allowed the central bank to maintain its key rates, resulted in a bond rally. Banks booked huge gains from securities trading, but also saw their interest income rise amid a demand for corporate and consumer loans. “Barring any severe negative economic shocks, the deposit-funded and reasonably capitalized banks are well-positioned to support loan growth," Fitch said. “Fitch expects gradually rising interest rates to support net interest margins since loans typically reprice faster than deposits in the Philippines," it added. The downside is, trading gains could fall due to higher interest rates, it reiterated. There will also be keener competition among banks. Fitch warned that Philippine banks could see an increase in their nonperforming loans (NPL) due to “credit mishaps" among the big firms. It pointed out that banks’ loan books remained heavily in favor of corporate borrowers even if they have started giving more attention to the consumer segment. Universal and commercial banks’ NPL ratio, or the ratio of their bad loans to total loans, slipped to 3.07% in November from 3.20% a month earlier. “On a more optimistic note, Fitch estimates that banks’ core Tier-1 capital ratio would remain at a satisfactory level of 9% on average assuming some hypothetical write-downs on foreclosed properties...," it said. Central bank data showed Tier-1 capital of Philippine banks at 12.79% on solo basis and 12.90% on consolidated basis as of end-June. Capitalization among banks, Fitch said, would remain satisfactory due to “banks’ capital raising activities and earnings retention." Fitch also said Philippine banks are unlikely to face any near-term funding pressure. “The loan-to-deposit ratio has not exceeded 65% over the last five years. Deposits showed remarkable stability despite the global crisis," Fitch said. As for mergers among domestic banks, Mr. Srivastava said he did not see mergers among Philippine banks this year due to “ownership issues because the big Philippine banks are owned by families." -- ARRG, BusinessWorld