Lower trading gains likely to dampen banks' earnings - Fitch

MANILA, Philippines - London-based Fitch Ratings said Philippine banks are not likely to sustain historic profitability over the past two years due to lower trading gains this year.

In a report entitled “2012 Outlook: Asia Pacific Banks,” Fitch director Alfred Chan pointed out that the record profitability of banks operating in the Philippines could ease this year.

“Fitch expects trading income – which drove banks’ profitability to historical highs in 2010-nine months of 2011 – will be difficult to sustain in 2012,” Chan stressed.

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed that earnings of universal and commercial banks posted a double-digit growth of 12.2 percent in earnings to P69.63 billion in the first nine months of last year from P62.03 billion in the same period in 2010.

The industry posted a higher return on equity of 12.44 percent from 12.24 percent as well as a return on asset of 1.52 percent from 1.44 percent.

Likewise, total assets of banks operating in the Philippines grew 9.6 percent to P7.4 trillion as of end-September last year from P6.75 trillion as of end September 2010 amid economic uncertainties in advanced economies led by the US as well as the sovereign debt crisis in Europe.

Universal and commercial banks accounted for the bulk or almost 90 percent of the total resources of the banking system while thrift, savings, and rural banks cornered the remaining 10 percent.

Chan pointed out that banks operating in the Philippines may opt to book one-time unrealized paper gains on their held-to-maturity bonds solely by adopting Philippine Financial Reporting Standards 9 on Financial Instruments earlier than the effective date of January 2013.

He added that treasury gains could also result from any decline in interest rates but could be offset by tighter margins and rising credit costs.

According to him, Fitch expects the structural balance sheet issues of many rated Philippine banks to be a main source of impairment, especially if the rising global uncertainties were to significantly affect domestic operating conditions.

“However, the agency believes most major local banks can cope with a fresh downturn, thereby preserving their liquidity and capitalization,” he added.

The Fitch official added that most rated Philippine banks are expected to maintain sound core capital that is vital in mitigating risks from their balance sheets and the operating environment.

The BSP decided to impose tighter capitalization requirement ahead of schedule starting January 2014 compared to international standards under the Basel III of January 2018.

The Basel Committee on Banking Supervision outlined a staggered implementation of Basel III stretching through the end of 2018 to allow internationally-active banks time to raise capital organically.

The capital adequacy ratio (CAR) is a ratio of a bank’s capital to its risk and the central bank tracks this indicator to ensure that banks have the capability to absorb a reasonable amount of loss and that they are complying with their statutory capital requirements.

“Local capital rules under Basel III - effective Jan. 1, 2014 - are unlikely to be onerous for the banks,” Chan said.

He said most major banks in the country have liquid balance sheets and deposits as their main funding source due to ample domestic liquidity.

“With the system-wide loan/deposit ratio of 60 percent, Basel III’s liquidity standards may be less burdensome for the Philippine banks,” he added.