Bank profitability better this year, says Tetangco

MANILA, Philippines – Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said bank profitability would be better this year, remarking on the resilience of bank lending amid declining interest rates and stabilizing economic activities.

Tetangco originally expected bank profitability to drop slightly this year due to the expected impact of the global recession. But he said the industry’s prospects have significantly improved as developed economies showed signs of stabilizing.

“The banking industry’s profitability has actually gone up in the first quarter so we believe they will have a better profit picture this year compared with last year,” Tetangco said. “That would come from the increase in loans, the increase in fee-based income and the reduction in interest rates which could also improve the value of securities in their portfolios.”

Tetangco pointed out that even if bank profits were not as strong as in previous years, he said this would be due to the shift in the behavior of corporate borrowers.

“Corporates are no longer just dependent on bank lending, they also get funding from the capital market by issuing bonds,” Tetangco said. “From that, banks get fee-based income so they still benefit but not as much as they would if they were lending directly.”

Tetangco’s projections were supported by private analysts who said the Philippine banks would see earnings growth driven by interest income this year, particularly if the volume cycle would take hold.

JP Morgan banks analyst Harsh Wardhan Modi said the stabilization in the broad economy was also positive for the industry’s asset quality which had been a point of concern due to cyclical positioning.

Modi said the increase in bank lending as of April reflected increases in lending to the manufacturing sector which had seen what he categorized as an “almost consistent decline in credit demand” in the last two years.

“If sustained, return of growth in this sector bodes well for economic activity and loan demand for the rest of the year,” Modi said. “This is especially true as manufacturing loans are the biggest credit category, comprising 19 percent of the total.”

According to ATR Kim Eng Securities analyst Ricardo Puig, credit growth has so far exceeded expectations despite the shock of the 0.4-percent growth in gross domestic product (GDP).

“Loan growth could start to decelerate mainly on base effects starting June this year but nonetheless looks set to exceed our five-10 percent forecast for Philippine banks,” Puig said in a report.

Puig said there were signs of greater activity across many sectors, with loans to manufacturing increasing by 3.4 percent in April after falling by 7.5 percent February and 1.6 percent in March.

The decline in loans to wholesalers and retailers have also started to decelerate while lending to transportation, storage and communications surged by 68.2 percent in April compared with 30.7 percent in March.