Strength in capitalization and liquidity, diligent and strong monitoring by government regulators, limited linkages to global markets, and modest growth in private-sector debt and real estate prices.
These are the features of the Philippine banking sector at present that make it one of the most stable in the world, even as it faces potential headwinds in the form of issues surrounding the new administration of President Rodrigo Duterte and somewhat unpredictable policy-making compared to his predecessor’s term.
Standard and Poor’s Global Ratings, better known as S&P, made these observations recently as it praised the “strengthened oversight” of the Bangko Sentral ng Pilipinas (BSP) on banks in the country.
The international credit watcher recently kept its “BBB” credit-rating assessment for the Philippines with a “stable” outlook, thanks to the country’s strong external position, rising foreign-exchange reserves and declining external debt.
S&P also rated the PH banking sector a 7 on a scale of 10 (1 having the highest risk, 10 the lowest) in its bank industry credit risk assessment. The ratings agency felt positively about local banks’ high liquidity and stable numbers, which offset the country’s low income level and limited legal protection to BSP as the regulator.
The BSP’s “ability to support sustainable economic growth while muting the negative impact of recent economic or financial shocks” reflected the central bank’s “sound record in keeping inflation low and its history of independence,” S&P said.
“We believe the BSP’s new monetary policy measures, such as the new interest-rate corridor, supported by implementing term deposit auctions, reforms to the reverse repo auction mechanism, and the issuance of central bank bills will improve the effectiveness of monetary policy transmission,” the agency added.
At the end of June 2016, BSP data showed the PH banking system had a total of P12.54 trillion in assets, growing 12.22 percent from the year before. The BSP also posted P10.95 billion in net income through July 2016, a huge turnaround from the previous year’s net loss of P3.55 billion.
Deposits lead the charge
Total deposits in PH banks also rose 12.5 percent year-on-year, reaching P7.6 billion as of end-August, giving the industry a buffer against the impact of negative developments outside the country.
“Savings and demand deposits remained the primary sources of funds for the banking system,” the BSP’s Inflation Report for the third quarter of 2016 said.
Thanks to these deposits, “the Philippine banking system continues to be resilient in supporting the economy’s long-term growth,” the report added. “This strength was evident in banks’ balance sheets that are marked by steady growth in assets and deposits.”
With savings deposits rising 14.8 percent, demand deposits by 16.8 percent, and time deposits by 3.5 percent, the local banking industry’s total resources in the first half of 2016 reached P12.9 trillion, jumping 11.8 percent from the P11.5 trillion posted by end-June 2015.
The capital adequacy ratio (CAR) of domestic financial institutions, which gauges banks financial health, and of universal and commercial banks (U/KBs) in particular is still above the international minimum requirement of 8 percent and the BSP requirement of 10 percent. The end-March 2016 mark actually stood at 15.8 percent on a consolidated basis, the regulator said.
Lending growth is steady too
Lending has also buoyed local banks as they have responded to the strong demand from corporate and retail borrowers, the BSP said. As of end-August this year, outstanding loans of commercial banks increased 17.3 percent to P5.48 trillion compared to the P4.67 trillion posted at the same time in 2015.
Loans for production activities made up 89.2 percent of local banks’ total loan portfolio as of end-June, with an increase of 17.3 percent to P4.88 trillion from P4.16 trillion. Loans to real estate also rose by 19.5 percent to P967.92 billion, and loans to the manufacturing sector posted a 7.7 percent increase to P766.86 billion.
Wholesale and retail trade loans, including repair of motor vehicles and motorcycles rose 15.9 percent to P757.57 billion, and lending to electricity, gas, steam and airconditioning supply surged 30.9 percent to P634.28.
Loans for household consumption went up 20.3 percent to P436.23 billion in end-August, motor vehicle loans zoomed 34.9 percent to P184.73 billion, and credit card loans went up 8.7 percent to P180.61 billion, the BSP added. Salary-based general consumption loans likewise soared 63.1 percent to P58.34 billion.
BSP Governor Amando Tetangco said that going forward the central bank will continue to ensure “that domestic credit and liquidity conditions will keep pace with overall economic growth while remaining consistent with its price and financial stability objectives.”
Tighter loan standards for housing and real estate
Loan volumes increased even as the banks tightened standards for commercial real estate and housing loans amid a sharp rise in prices, the BSP reported after revealing the results of its 3rd Quarter 2016 Senior Loan Officers Survey.
The stricter overall credit standards for commercial real estate loans “reflected respondent banks’ wider loan margins, reduced credit line sizes, stricter collateral requirements and loan covenants, shorter loan maturity, and increased use of interest rate floors,” the central bank said.
Although both the standards and demand for commercial real estate loans went largely unchanged, several banks indicated heightened demand on the back of larger working capital and inventory financing needs of borrowers and their clients’ improved economic outlook.
Meanwhile, bank officers responding to the survey attributed the net tightening of credit standards largely to “perceived stricter financial system regulations and as well as clients’ less favorable economic outlook,” the BSP said.
Housing prices nationwide rose faster after the Residential Real Estate Price Index (RREPI) climbed 11.3 percent to 122.8 in the second quarter owing to strong demand in areas outside the National Capital Region (NCR).
Data from the survey showed that prices of single-detached housing units grew the most at 18.6 percent, followed by townhouses at 14.7 percent and duplex units at 0.6 percent. Condominium units prices went almost unchanged.
The growth of residential prices in the second quarter is not “bubbly” as there is “real demand,” BSP Deputy Governor Diwa Guinigundo said, noting that residential construction activities have expanded with the development of new projects outside Metro Manila.
Consolidation leads to fewer banks, more branches
Finally, the continued consolidation of banks and the exit of “weaker” rural banks led to a drop in the number of banks operating in the country to 618 as of end-June, the BSP reported.
The Philippines now has 41 “big banks” or universal and commercial banks, up from the 36 as of end-June 2015, as new foreign banks entered the fray.
Of the 21 operating universal banks, 12 are private domestic banks, three are government-run and six are foreign bank branches. The 20 commercial banks are made up of 13 foreign bank branches, five private domestic banks, and two foreign bank subsidiaries.
The decrease came at the level of rural and cooperative banks, which are now just 513, 19 less than 2015’s midyear total. Five thrift banks also shuttered their businesses, leaving the present total at 64.
In July last year, then-President Benigno Aquino III allowed more foreign banks to come into the country by signing Republic Act 10641, amending the existing law (RA 7721) by removing the limit of foreign banks in the country, earlier set at just 10.
The BSP has so far allowed eight foreign banks to operate in the Philippines. Three are from Korea – Shinhan Bank of South Korea, the Industrial Bank of Korea, and Seoul-based Woori Bank. Taiwan also has three (Yuanta Bank, Cathay United Bank of Taiwan and First Commercial Bank of Taiwan) alongside Sumitomo Mitsui of Japan and the United Overseas Bank Ltd. of Singapore.
With more global players expected to enter the consolidated Southeast Asian market through the Philippines, the strength of the local banking system will be truly tested. But with S&P’s confidence in the country and the BSP’s guidance, the industry should remain a bastion of strength of the economy for years on end.
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