The Bangko Sentral ng Pilipinas (BSP) recently released the Status Report on the Philippine Financial System for the second semester 2008. The report provides an account of the performance of the banking system and other financial institutions such as non-banks with quasi-banking functions and non-stock savings and loan associations. Also included in the report are articles on: (1) Guidelines on Reclassification of Financial Assets and (2) The State of the Rural Banking Industry: Post Legacy Group and Other Rural Bank Closures.
The report is submitted to the President and the Congress, in compliance with Section 39 (c), Article V of the New Central Bank Act (R.A. No. 7653).
Following are the highlights of the report.
The Philippine financial system, banking on its strong hull of underlying fundamentals, managed to stay afloat in the midst of global financial storm brought about by the subprime crisis and subsequent recession in world’s biggest economies. While the domestic financial sector remained resilient o1n sustained implementation of key structural reforms, the local economy likewise experienced the ripple effects of the crisis through the real sector: continued volatility in commodity and consumer prices, rising interest rates, depreciation of the peso against the US dollar, contraction in exports, foreign direct investments and hot money outflows as well as bearish stock market. Consequently, the domestic economy slowed down to 4.6 percent from 7.2 percent in 2007.
Within the context of such challenging environment, survival relies not solely on intrinsic soundness of the financial system but in its sustained resilience to sail through the turbulent waters with minimum damage.
So far, banks’ key performance indicators in 2008 showed sustained core balance sheet strength: steady asset expansion, double-digit credit growth, growing deposit base, ample liquidity, continuing improvement in overall asset quality and above standard solvency ratios. Banks likewise managed to register positive net profits, albeit with notable slowdown in terms of year-on-year growth, due to lackluster treasury activities.
Other BSP supervised financial institutions (non-bank financial institutions) similarly exhibited sustained resilience against the prevailing difficult operating environment.
The depth and magnitude of the global financial crisis remain largely undetermined at this point but one thing is clear: it has already taken its toll on the global financial system following increased financial integration and globalization in recent decades. The spillover effects of the crisis are now widely being felt in major economies particularly those with high foreign participation in the local equity markets, those with large short-term foreign currency funding and those with excessive external current account deficits. The current financial storm similarly provided a vivid reminder that relaxed monetary policy (low policy rates) and easy fiscal stance (increased treasury spending) against the backdrop of loosely regulated and complex financial sector can sink even the biggest ocean liners deeper into the abyss.
Fortunately, the 1997 Asian Financial Crisis already provided some hard and painful lessons for emerging economies, Philippines included, in East Asia. Such lessons firmly anchored the key structural reforms implemented in East Asian financial systems post crisis. As a result, banks in the region have: (1) very limited exposure to subprime and other structured and securitized products, (2) relatively stronger balance sheets and still profitable, (3) improved risk and liquidity management frameworks, (4) been supervised under strengthened supervisory and regulatory systems and (5) explored other profitable business lines such as consumer lending, which arrested the strong search for yields common among financial institutions in advanced economies.
On local shores, banks and other BSP supervised financial institutions largely weathered the ongoing crisis remarkably well on account of their inherent prudence in risk taking, domestic orientation and increased compliance with continuing structural reforms in the financial sector. While such good tidings are definitely welcomed news, it also provides a timely wakeup call for both market players and regulators alike to map out the lessons to be learned in line with the scope of work that needs to be done to address the new challenges confronting the financial sector.
Banking System Developments
The Philippine banking system’s performance in 2008 was a story of sustained resilience against adversity. Banks’ balance sheet remained strong as key accounts continued to register growths beyond expectations as indicated by the double-digit asset, credit and deposit expansions. Further, asset quality, liquidity and solvency ratios were still more than ideal, if not above regulatory requirements and international standards.
Meanwhile, the system was able to sustain positive net profits despite bearish treasury operations last year amidst rising interest rates and heightened risk aversion. In hindsight, the positive performance benefited largely from earlier financial sector reforms and long bouts of sustained profitability. These, in turn, prepared local financial institutions well in advance for the potential spillover effects of the global financial storm.
The ongoing industry consolidation and continuing financial sector reforms against the backdrop of rapidly evolving global financial services post subprime crisis all helped shape the emerging structure of the banking system: more streamlined, more technologically in-tuned and more diversified in client-defined service delivery channels to cater to changing needs of urban lifestyle.
As of end-December 2008, the banking system’s physical network expanded by 104 offices to 7,848 (818 head offices and 7,030 branches and other offices) from 7,744 (847 head offices and 6,897 branches and other offices) last year.
Total assets posted a double-digit growth of 10.5 percent with sustained growths in loans (21.5 percent) and financial assets other than loans (22.3 percent). Meanwhile, deposit liabilities (73.9 percent), capital accounts (10.6 percent) and other liabilities (6.5 percent) were still the three main sources of bank funding. With deposit liabilities as the banking system’s primary funding source, there is heightened social expectation for banks to ascribe to the highest ideals of corporate governance after the subprime crisis and the Legacy controversy.
Credit growth reached an all-time high of 21.5 percent (since the 1997 Asian financial crisis) as banks were forced to re-evaluate their asset portfolios in line with the growing risk aversion at the onset of subprime credit crunch. Outside financial intermediation and the interbank market, ‘Top 3’ loan destinations were still the real estate, manufacturing and agriculture related sectors. During the review period, asset and loan quality improved much closer to their pre-crisis levels of around four percent.
Deposit liabilities posted a strong growth of 14.5 percent to P4,195.0 billion from last year’s P3,664.8 billion. This was indicative of sustained depositor confidence in the banking system. The bulk of these deposits were still in peso demand and savings accounts.
Reeling from watching the bloodbath of reds in world trading indexes post subprime, banks’ major investment accounts slowed down year-on-year.
There was also ample liquidity in the system as liquid assets-to-deposits ratio further improved to 52.2 percent from last year’s 51.9 percent.
Finally, banks remained solvent as latest capital adequacy ratio (CAR) data showed that banks’ solvency ratio on a consolidated basis was above regulatory and international standards at 15.5 percent.
On income accounts, banks were able to sustain positive earnings despite the slowdown in treasury gains as net profit stood at P41.4 billion. Consequently, there was a notable softening in major profitability ratios. Earning asset yield stood at 7.7 percent, 20 basis points lower than the 7.9 percent recorded in 2007. Other profitability ratios exhibited similar declines: interest spread at 4.5 percent (from 4.6 percent), return on assets at 0.8 percent (from 1.3 percent) and return on equity at 6.9 percent (from 10.8 percent).
View Table 1: Financial Highlights
Table 2:Growth Rates
Table 3: Selected Performance Indicators