Despite the challenges from the COVID-19 crisis, the country’s financial system remained sound and stable, with more-than-ample liquidity, sufficient capitalization, and satisfactory loan and asset quality. Three years of close supervision, sustained reforms, and timely pre-emptive measures by the Bangko Sentral ng Pilipinas (BSP) spelled resilience and robustness for the banking sector and the entire financial system.
Sustained safety and soundness of the banking system
At the core of this resilience is prudent regulations. During the crisis, the banking industry served as a pillar of strength for the economy, guided by the BSP’s forward-looking and risk-based supervision. The Philippine banking system (PBS) sustained its solid footing, as shown by the continued growth in assets, deposits, healthy profits, stable capital and liquidity buffers, and ample loan-loss reserves.
Total assets of the banking system reached ₱20.70 trillion as of April 2022, up by 6.7 percent year-on-year. Similarly, total deposits of 16.13 billion as of the same period also reflected the sustained confidence of depositors amid the pandemic with a 7.2 percent year-on-year growth.
Alongside improving economic conditions and credit activity, loan quality remained manageable. The PBS’ gross non-performing loan (NPL) ratio stood at 3.9 percent as of end-April 2022, a solid rebound from the pandemic-record of 4.5 percent in July 2021.
The latest total loan portfolio (TLP) figures as of April 2022 also marked an expansion of 7.0 percent year-on-year with ₱11.4 billion against the recorded ₱10.65 billion in 2021.
The enactment of the Financial Institutions Strategic Transfer or FIST Act has further supported resilience of banks to the crisis. The law allowed banks to sell non-performing assets to asset management companies, so called FIST corporations, to keep their exposure to bad assets manageable.
Sustained profitability has also been evident in the banking industry as net profit went up by 26.3 percent year-on-year to ₱66.3 billion as of end-March 2022. This growth reflected a reversal from the recorded 5.7 year-on-year decline in net profit during the same period in 2021.
The BSP also ensured ample capitalization that helped banks absorb pandemic-induced shocks. The capital adequacy ratio stood at 16.2 on solo basis as of March 2022, which is well above the 10 percent and 8 percent thresholds of the BSP and the Bank of International Settlements, respectively. This means banks have adequate capital for their risk-taking activities at the time of the crisis.
In addition, the liquidity coverage ratio of 200.3 percent on solo basis at end-February 2022 indicated strong liquidity position to support short-term funding requirements.
Continued financial services amid the pandemic
The BSP ensured that the banking industry and other BSP-supervised financial institutions remained supportive of the country and the Filipinos’ financial needs, especially amid challenging times.
Regulatory relief packages were initiated to help ease the financial burden of households and businesses amid weaker economic activity during the pandemic. Such measures included forbearance on loan payments without incurring further interest on interest, fees, penalties, and other related charges. At the same time, the BSP also imposed a ceiling on interest or finance charges for credit card receivables to induce consumption and promote responsible credit card lending in the country.
The BSP extended the effectivity of these prudential and operational relief measures until end-December 2022 to ensure continued provision of credit and access to financial products and services for all.
Institutionalized Islamic banking
The pandemic did not stop the BSP from advancing the domestic Islamic finance industry. The BSP created the Islamic Banking Supervision Group (IBSG) on 18 June 2021. IBSG is the focal for the BSP’s strategic initiatives and prudential policy reforms meant to implement the Islamic Banking Law and promote Islamic banking.
Likewise, the BSP inked a memorandum of understanding (MOU) with the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) as part of the BSP’s initiatives to develop Islamic banking and finance in the country.
This pioneering work of the BSP continues to fortify a whole-of-government approach toward greater inclusivity and broadened access in the financial system.
Introduced rural bank reforms
A fundamental root cause of many rural banks (RBs)’ weaknesses is inadequate capital which limits their ability to cover operational costs and constrains the viability of their operations, management, and governance. These constraints restrict opportunities to expand operations and enhance income potential. The BSP’s Rural Bank Strengthening Program (RBSP) aims to address these concerns.
The RBSP is anchored on the principle that a safe and sound bank is well-capitalized. Its design draws from various reviews and empirical analyses to develop a program responsive to the challenges faced by RBs. It has four key elements: (i) a stronger capital base for RBs; (ii) a holistic menu of five time-bound tracks for RBs; (iii) incentives and capacity building interventions; and (iv) enhancements of regulations to ensure consistency in policy approach and direction.
Strengthened systemic risk management
The BSP promoted financial stability (FS) and maintained sharp-eyed vigilance over vulnerabilities in the financial system, particularly during the height of the COVID-19 crisis.
A milestone of BSP’s FS initiatives is the publication of the Macroprudential Policy Strategy Framework. The framework reflects how financial authorities define systemic risks, how they monitor changes in risk behaviors, and how they move forward in managing this policy concern. As a crucial part of the framework, the BSP conducted the first-ever Macroprudential Stress Test. The completed initial phase assessed the resilience of non-financial corporations (NFCs) to severe yet plausible income shocks. The assessment used a whole-of-market approach and potential second-round effects of decreased supply and demand arising from stressed revenues.
Another landmark document is the Systemic Risk Crisis Management (SRCM) framework. The SRCM framework was developed to identify key actions required to assess, categorize, manage, and communicate systemic risks.
All these bright spots signified the soundness and resilience of the country’s financial system despite the pandemic-driven headwinds. More importantly, these instituted financial reform contours have paved the way for a stronger-than-ever Philippine financial system that is up to the challenges of the times.