Trading gains boost banks’ earnings

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    Lending income and trading gains boosted banks earnings in the third quarter, online brokerage firm Colfinancial.com said.

    Colfinancial said the sector posted trading gains of P14.3 billion for the period, up from P344 million a year ago.

    “More importantly, core operations also posted robust results with net interest income and fees increasing 17.8 percent and 13.4 percent, respectively,” it said.

    Colfinancial said six out of the eight banks it covers reported above expectations results.

    “In particular, Bank of the Philippine Islands (BPI), EastWest Banking Corp., Metropolitan Bank and Trust Co. (Metrobank), Security Bank Corp., and Union Bank of the Philippines outperformed on the back of stronger than expected trading gains. Aside from strong trading gains, EastWest, Security Bank and Union Bank booked higher than expected net interest income. Security Bank also posted higher than expected fees,” it said.

    BDO Unibank Inc. reported slightly higher than expected net interest income as well as lower than expected provisions and operating expenses. On the other hand, China Banking Corp. (ChinaBank) and Philippine National Bank (PNB) ended in line with estimates, Colfinancial said.

    It added ChinaBank’s third quarter results met expectations as the stronger than expected fees and trading gains were offset the slightly weaker than expected net interest income and higher than expected operating expenses.

    “Meanwhile, PNB’s earnings were in line as the stronger than expected net interest income and fees were offset by higher than expected operating expenses and lower than expected gains on real and other properties acquired (ROPA) sale,” it said.

    Colfinancial noted all banks’ posted double digit net interest income growth for the period.

    “Note that the sector’s net interest income expanded by 17.8 percent during the quarter, driven by both higher interest earning assets and net interest margin. Compared to our estimates, BDO, EastWest, PNB, Security Bank, UBP outperformed, while Metrobank ended in line with estimates. On the other hand, BPI and ChinaBank underperformed our forecast,” it said.

    All banks reported growth in their loan portfolio during the third quarter, though BDO, BPI, ChinaBank, EastWest, and Security Bank posting slower growth compared to the previous quarter.

    “Nevertheless, we believe loan growth should start recovering as we expect some normalization in demand as loan yields should gradually decline following the cumulative 75 bps (basis points) cut in policy rate this year. In terms of margins, we estimate that the sector’s median net interest margin (NIM) improved year on year and on a sequential basis, increasing 19 bps year on year and 33 bps quarter on quarter,” it said.

    “Note that all banks reported better margins quarter on quarter. Overall, the improvement was led by the continued normalization in funding cost on the back of the multiple cuts in reserve requirement ratio as well as decline in bond rates,” it added.

    This supports the view that funding cost for the banks have already peaked in the first quarter of the year, Colfinancial said.

    “Going forward, we expect further improvement to come from further cuts in the reserve requirement ratio next year which will ease the tightness in liquidity and lower the banks’ funding costs. However, this will be tempered by pressure on loan yields to decline from further cuts in policy rate,” Colfinancial added.

    Banks continued to book strong trading gains in the third quarter. The sector’s trading gains surged to P14.3 billion, up from P344 million last year.

    “We believe most banks took advantage of the decline in bond rates during the period and sold a portion of their investment securities. Note that the 10-year bond rate declined from 5.1 percent as of end-June 2019 to 4.8 percent as of end-September 2019,” Colfinancial said.

    “While trading gains in the fourth quarter could remain strong, we believe this may not be in the same magnitude seen in the previous quarters. Going forward, we expect trading gains to gradually normalize as bond rates stabilize. Consensus is currently forecasting the 10-year bond rate to settle at 4.5 percent and 4.6 percent by the end of 2019 and 2020, respectively,” it added.