2006 ANNUAL REPORT ON THE IMPLEMENTATION OF REPUBLIC ACT NO. 7721
(An Act Liberalizing the Entry and Scope of Operations of Foreign Banks in the Philippines and for Other Purposes)
The Bangko Sentral ng Pilipinas (BSP) recently released the thirteenth Annual Report on the Implementation of Republic Act (R.A.) No. 7721 (An Act Liberalizing the Entry and Scope of Operations of Foreign Banks in the Philippines and for Other Purposes). The report highlights that the total resources or assets of the Philippine banking system remain under the effective control of Filipino-owned domestic banks. As of end-2006, the share of foreign banks in the total assets of the Philippine banking system barely changed to 13.3 percent from 13.4 percent at end-2005.
The report is submitted to Congress and its respective Bank Committees, in compliance with Section 13 of R.A. No. 7721.
Overall Financial Performance
Foreign banks (composed of four foreign bank branches existing prior to R.A. No. 7721, ten new foreign bank branches and eight foreign bank subsidiaries) sustained profitable operations in 2006. Improved operational efficiencies resulted to better earnings as the industry’s net income after tax (NIAT) for the year 2006 reached a record high of P12.0 billion, 37.7 percent higher from last year’s NIAT of P8.7 billion. Returns on banks’ assets/shareholders were also better with ratios for return on assets (ROA) and return on equity (ROE) at 2.0 percent (from 1.5 percent in 2005) and 13.2 percent (from 10.0 percent), respectively. (Table 1)
Strong trading gains and the resumption of lending activities allowed foreign banks to rake in higher profits for the year. The general declining trend in interest rates on debt securities and substantial foreign exchange transactions translated to huge trading income which soared by 180.6 percent (or P5.0 billion) and propelled the 48.3 percent rise in non-interest income. Fee-based income, which grew by 12.2 percent, contributed P0.9 billion to the growth in non-interest income. Meanwhile, interest income rose by 8.5 percent (or P3.9 billion) with the upbeat lending activities. However, the accelerated drop in investments together with bigger interest expenses brought on by rising deposit liabilities factored into the single-digit growth of 5.9 percent (or P1.6 billion) in net interest income.
Meantime, higher provisioning for probable losses led to the 37.2 percent (or P1.6 billion) expansion in provisions for probable losses. This along with the 14.4 percent (or P3.3 billion) increment in other operating expenses, padded operating expenses by 18.0 percent (or P4.9 billion).
Across foreign banking groups, new foreign bank branches were consistently the most efficient in their operations, as they registered the lowest cost-to-income (CTI) ratio at 45.8 percent (down from 46.0 percent in 2005). The four original foreign bank branches came second with a CTI ratio of 53.2 percent (down from 56.7 percent) while foreign bank subsidiaries posted the highest CTI ratio of 96.3 percent (up from 89.9 percent). Compared with domestic banks’ CTI ratio of 68.7 percent, foreign bank branches and subsidiaries exhibited greater operational efficiency. (Chart 1)
The industry’s total resources reached an all-time high of P647.5 billion and the 11.5 percent growth rate was also the highest asset expansion in the last six years. These resources were principally funded by deposit liabilities and channeled primarily to loans and cash and due from banks. Loans, gross robustly grew by 25.1 percent and funds parked in cash and due from banks expanded by 41.1 percent. Accordingly, loans-to-deposits ratio and cash and due from banks-to-deposit ratio increased to 82.3 percent (from 81.2 percent in 2005) and 30.4 percent (from 26.6 percent), respectively. Foreign banks, with liquid assets-to-deposits ratio of 63.1 percent, were more liquid than domestic banks with a ratio of 50.4 percent. This was brought on by the substantial 41.1 percent rise in cash and due from banks, notwithstanding the 23.9 percent decline in investments, net. By industry subgroup, the four original foreign bank branches still held the lion’s share of the industry’s total resources at 62.3 percent (down from 65.9 percent in 2005).
The double-digit loan growth was supported by expansion in the industry’s credit exposures to all economic activities except the manufacturing sector and electricity, gas and water sector. The financial Intermediation sector (inclusive of interbank loans) was still the main beneficiary of foreign banks’ loans at 44.7 percent share or P155.8 billion (up from 30.7 percent in 2005). The community, social and personal services sector came in second at 15.6 percent share (down from 16.7 percent), overtaking the manufacturing sector, which fell to third place, at 13.8 percent share (from 26.8 percent). Combined, these sectors comprised 74.1 percent of the industry’s total loans (gross). (Chart 2)
Improved credit risk management and continuous asset cleanup further reduced the industry’s non-performing loans (NPLs) to P4.6 billion. This was lower by 28.3 percent than last year’s P6.4 billion. Consequently, the NPL ratio further improved to 1.4 percent (from 2.3 percent). Among peers, foreign bank branches (four original and ten new branches) posted the lowest NPL ratio at 0.8 percent. On the other hand, the NPL ratio of subsidiaries of foreign banks, at 6.1 percent (down from 6.4 percent), still bested domestic banks’ NPL ratio of 6.9 percent.
The industry’s improved loan quality as evidenced by the declining NPLs allowed foreign banks to reduce loan loss reserves (LLR). LLRs contracted by 13.5 percent (or P1.6 billion) to P10.1 billion. Nonetheless, the NPL coverage ratio (LLRs to NPLs) strengthened further to 219.9 percent from 182.4 percent with the sharp decline in NPLs.
Real and other properties acquired (ROPA), (exclusive of performing sales contracts) fell from last year by 14.0 percent (or P0.2 billion). This, together with the decline in NPLs, pared non-performing assets (NPA) by 26.0 percent (or P2.0 billion) to P5.7 billion. As an outcome, the NPA ratio further improved to 0.9 percent from 1.3 percent in 2005. Lower NPAs also afforded foreign banks to allot less allowance for probable losses on NPAs. NPA reserves were cut by 13.4 percent (or P1.6 billion). Notwithstanding, the NPA coverage ratio widened to 180.4 percent (from 154.2 percent) with a faster pace of decrease in NPAs.
Deposit liabilities, funded 66.4 percent of total resources, up from 60.0 percent last year. With more aggressive marketing activities, deposit liabilities climbed by 23.5 percent, a complete turnaround from the 2.5 percent decline in 2005. All types of deposit liabilities posted the following year-on-year increments: peso demand at 45.5 percent, peso time at 42.5 percent, peso savings at 26.8 percent and foreign currency at 10.6 percent.
Capital accounts were the second biggest source of funds at 14.4 percent (down from 15.0 percent last year) of the industry’s total resources. Capital accounts grew by 7.1 percent (or P6.2 billion) to P93.6 billion. The increase came from additional assigned capital and funds from head offices-abroad of foreign bank branches.
Foreign banks remained solvent and compliant with the prescribed capital requirements (both in terms of the minimum amount and the capital adequacy ratio). At end-June 2006, the overall capital adequacy ratio of foreign banks on a solo basis stood at 27.5 percent (down from 29.2 percent ratio at end-2005), way above the minimum benchmark of 10 percent.