Trading remains biggest revenue source for banks

By Jerry Maglunog

While local banks are required to engage in lending to needy sectors, as it is the essence of banking, trading remains the biggest revenue source for most.

The lending mandate on banks is heavily imposed by the Bangko Sentral ng Pilipinas (BSP), which immediately puts a red flag on a bank when its lending portfolio becomes lower than its assets due to weak lending activity.

“Lending is the essence of banking,” said BSP Deputy Governor for the Supervision and Examination Sector Nestor Espenila Jr.

A top banker at the Rizal Commercial and Banking Corp. (RCBC), however, has supported Espenilla’s statement that no other bank offer/service can give better margins than lending.

Lourdes Jocelyn-Pineda, senior vice president of RCBC, said banks’ second biggest source of revenue is through proprietary trading.

After trading, other top revenues source among banks are foreign exchange (forex), fees, credit card and investment.

“The biggest source of revenues really comes from lending operations,” Pineda said.

“Revenues from trading and forex aren’t really as big. Credit card does have big revenues, but default rates could also be big, thus loan loss provisions could into revenues,” she added.

After lending, banks’ next biggest source of revenue is proprietary trading, mostly of government securities, among banks.

The BSP said although proprietary lending is considered the second source of revenues for banks, this offer is very risky, thus endangering the bank to have high risk assets that can hugely affect their capital adequacy ratio.

Proprietary trading occurs when a bank or trader trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments with the firm’s own money, as opposed to depositors’ money, so as to make a profit for itself.

Trading, unlike lending, allows banks to use own money rather than the depositors’ money. In event that huge margins are made by a bank in trading, it is not required to put interest on deposits.

However, the BSP reminds banks that under the organic law around the world all banks are required to lend to give access to credit among businesses needing capital either for operations or expansion.

Espenilla said although every bank has its own strategy that it follows in order to grow bigger and be ahead of competition in banking business, these institutions should not forget that they were established to be an avenue for credit.

Under normal condition, he said, banks can accept private bonds with interest of more than four times than government securities (GS), especially if the bond has no guarantee and issued by a non-triple A rated firm.

“We’re not discouraging banks from investing in bonds. It’s a business decision,” Espenilla said. A source at the banking community said most banks rake in profits when they accept private bonds because of very high interest.

“The logic is simple: high interest but also high risk; low risk low interest. Banks’ credit underwriting is key to accepting private bonds,” the source, who is one of the top investment bankers in the country, explained.

Since private bonds have risk weight, the deputy governor said banks must be careful when accepting such bonds. On the other hand, GS has low interest but the risk weight is zero.Another bank activity that has high risk weight is real and other properties acquired (Ropa). The BSP official said Ropa has high risk weight to prevent banks from prolonged holding of this kind of properties.

Espenilla believes that being prudent remains as the key in order for a bank not to fall on prey when accepting bonds, either private or government-issued.

“We want banks to lend but lend prudently. Deposit-taking and lending are the essence of banking,” the official said.