Banks’ trading losses may have worsened in Q2

MANILA, Philippines - Bnak profits were expected to continue to get hit by poor treasury operations in the second quarter, Deutsche Bank said, but their lending business should have buoyed their operations during that period. In a report titled "Philippine Banks 2Q 08 Preview — Another Rough Patch," Deutsche Bank said local banks’ mark-to-market losses were expected to pile up given the turbulent conditions in the global and domestic financial markets. It noted that domestic interest rates moved up by over 100 basis points (bps) in the second quarter compared to about 40 bps in the first quarter because of soaring consumer prices. Consequently, prices of government debt papers, particularly dollar-denominated Philippine bonds, fell during the second quarter, Deutsche Bank said. "Trading in [the second quarter] may not look much better, and be even worse quarter-on-quarter," the bank said. "Larger mark-to-market losses should appear either on the profit and loss or capital accounts." "Mark-to-market" refers to giving a value to a financial instrument based on current market prices. Interest rates and bond prices have an inverse relationship. As interest rates rise, bond prices go down, and vice versa. Rising interest rates, as a result of higher inflation, dragged banks’ treasury operations in the first quarter, reversing spectacular securities gains last year when interest rates were very low. Traders are now avoiding the long-term debt papers in favor of short-term securities, with inflation expected to rise higher this quarter from 11.4% in June. On the other hand, Deutsche Bank said banks’ lending business likely continued growing in the second quarter. And even if banks were wary of the negative impact of inflation on consumers and on corporate margins, bad loan ratios remained under control, it said. The Bangko Sentral ng Pilipinas does not have lending or bad loans data for the second quarter, however. Data as of March indicated that banks’ credit activities grew by 15.7% in the first quarter while bad loans as ratio of total loans were trimmed to 4.54%, approximating the pre-Asian financial crisis level of 4%. Despite saying that rising interest rates would impact credit growth, the central bank maintained its lending growth forecast of 10% for this year, hopeful that consumer loans would continue to grow. Listed Philippine Savings Bank, the thrift bank arm of the Metropolitan Bank and Trust Co. (Metrobank), reported last week its net income in the first half amounted to just P501 million, 18% less than the P608 million it posted during the same period last year. Its revenues summed up to just P2.4 billion from P2.7 billion the previous year due to an 81% decline in trading gains. However, it raked in P2.3 billion in interest income from loans, a 16% jump from the P1.9 billion posted in the first half of 2007. Other banks listed in the stock exchange are yet to disclose how they performed in the first half. A bank official, meanwhile, said the turmoil in financial markets abroad have affected the appetite by financial firms for Philippine securities, dragging securities prices down. "It’s hard times for banks right now," the official said. — Gerard S. dela Peña, BusinessWorld