The Bangko Sentral ng Pilipinas (BSP) recently released the Status Report on the Philippine Financial System for the second semester of 2009. The report provides an account of the performance of the banking system and other financial institutions such as non-banks with quasi-banking functions, offshore banks, and trust entities under BSP supervision. Also included in the report are box articles on BSP’s revised rules and regulations on accreditation of external auditors and/or auditing firms, derivatives regulations for quasi-banks and the expansion of microfinance through loan collection and disbursement points (LCDP).
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), Section 13 of the Foreign Banks Law of 1994 (Republic Act No. 7721), Section 27 of the Thrift Banks Act of 1995 (Republic Act No. 7906) and Section 29 of the Rural Banks Act of 1992 (Republic Act No. 7353).
Following are the highlights of the report.
The Philippine financial system remained on board of its travel altitude despite the incessant turbulence in the global financial aerospace when the news on the fiscal woes of Greece percolated and came to the fore in the last quarter of 2009.
During the period in review, the System worked to strategically position itself to gradually get rid of all the excess baggage and kept a watchful eye on key risk barometers to address potential hazards coming from the external and internal environment.
Fortunately, key performance indicators for the year continued to showcase the inherent strength of banks’ core balance sheet accounts: steady asset expansion, sustained credit growth, growing deposit base, ample liquidity, continuing improvement in overall asset quality and above standard solvency ratios. Banks likewise managed to register a positive bottom line on account of substantial realized gains primarily from foreign exchange transactions and to a certain extent, from securities trading.
Other Bangko Sentral ng Pilipinas (BSP) supervised financial institutions similarly exhibited sustained resilience against the prevailing difficult operating environment.
En route towards sustained growth, the system could still benefit from remaining stop-gap measures to achieve further mileage:
First, there is enough room for further industry consolidation to develop stronger and economically viable financial institutions in the Philippine banking system. As of end-December 2009, the Herfindahl-Hirschman Index (HHI) of Top 5 banks of the system stood at 613.2, which was still way below the 1,000 benchmark for competitive marketplace. While mostly products of merger and consolidation activities since 1999, these systemically important banks remain competitive players in the banking system. Moreover, the current HHI figure broadly indicates that there is more room for industry consolidation in the Philippines.
Toward this end, the inter-agency coordinating body of financial regulators in the Philippines known as Financial Sector Forum (FSF) spearheaded the signing of a memorandum of agreement (MOA) between the BSP and the Philippine Deposit Insurance Corporation (PDIC) on the evaluation process for bank mergers and consolidation last 12 August 2009. The move was geared towards further accelerating merger and consolidation activities among interested market participants.
Second, banks need to continue to ascribe to the highest ideals of corporate governance as their boarding pass to sustained growth. For its part, the BSP has been diligently building on its corporate governance regulatory framework to foster a deeper culture of corporate governance among its supervised financial institutions. During the review period, the BSP revised its rules and regulations governing the selection and delisting of external auditor and/or auditing firms of covered entities (Circular No. 660 dated 25 August 2009). It will also set an annual bank corporate governance survey to institutionalize a scorecard system to gauge the state of corporate governance practices among BSP supervised institutions. The first survey confirmed that domestic banks were really high flyers with an average industry score of 84 percent over listed financial firm’s 72 percent and government corporation’s 57 percent.
Third, a deep and fully developed financial market means diverse market participants. Cognizant of this thrust, the BSP allowed non-bank financial institutions and their clients to pursue expanded opportunities for financial risk management and investment diversification through the prudent use of derivatives (Circular No. 668 dated 02 October 2009).
Lastly, the lack of access to financial services in some remote areas of the archipelago raises the demand for a more inclusive financial system. During the semester in review, 13 out of 17 regions continued to have density ratios lower than the system average of five banking offices per city/municipality.
To provide greater access to financial services for the marginalized sectors of the economy particularly the farmers and fisher folks in the rural areas, the BSP has actively pursued microfinancing, agent banking (e.g., sari-sari or variety stores under Circular No. 649 dated 09 March 2009), e-banking platforms such as SMS-based mobile banking, branchless banking and the promotion of broad-based financial literacy and consumer protection. As of end-December 2009, there were 212 banks engaged in microfinance with a loan portfolio of P6.6 billion and serving 882,692 microborrowers.
Parallel to this, it has improved the delivery channel for microfinance with the issuance of guidelines on loan collection and disbursement points (LCDP) of microfinance-oriented banks and microfinance/Barangay Microbusiness Enterprise (BMBE)-oriented branches of banks (Circular No. 669 dated 22 October 2009).
Summing up, the Philippine financial system managed to pass behind the dark clouds of the 2008 subprime crisis and came out in one piece. While the flight towards greater financial stability may be long and bumpy after a turbulent storm, sustained commitment to reforms and best practices will navigate the System to its rightful destination on time.
Banking System Developments
The Philippine banking system stayed in its growth horizon in 2009 as expected. Key balance sheet and income indicators showed sustained resilience of the banking system:
- High bank earnings. Core earnings remained strong on account of substantial trading gains particularly from realized gains in foreign exchange related transactions during the review period. Net profit stood P69.5 billion, 67.7 percent higher than the figure reported last year. This is a remarkable recovery from the negative 34.2 percent posted last year.
- Steady asset growth. Asset expansion continued at 9.1 percent on the back of sustained growths in loans (4.5 percent) and financial assets other than loans (15.7 percent). Meanwhile, deposit liabilities (75.4 percent), capital accounts (11.1 percent) and other liabilities (5.7 percent) were still the three main sources of bank funding for its operations.
- Sustained credit growth. Core lending continued to grow, albeit decelerated, at 4.5 percent on account of moderate economic expansion, prevailing market risk aversion and increased corporate bond issuances on the back of related developments in the domestic capital markets.
- Improving loan and asset quality. During the review period, asset and loan quality have remarkably improved much closer to their pre-crisis levels of around four percent.
- Growing deposit base. Deposit liabilities posted a strong growth of 11.4 percent to P4,671.6 billion from last year’s P4,195.1 billion, which was indicative of sustained depositor confidence in the banking system.
- Ample liquidity. Liquid assets-to-deposit ratio remained strong at 68.1 percent from last year’s 69.7 percent.
- Risk-based and strong capitalization. Banks remained solvent during the semester in review as capital adequacy ratio (CAR) was above regulatory and international standards at 15.8 percent. Banks’ compliance ratio with minimum capital, further strengthened to 82.6 percent from last year’s 81.7 percent.
Finally, the emerging financial landscape of the banking system was a byproduct of BSP’s continuing reform agenda and strong partnership with its supervised institutions and optimal maximization of technological advancements to cater to the changing needs of urban lifestyle and promote greater financial inclusion in the countryside. As of end-December 2009, there were 785 banks with 7,835 branches operating in the Philippines.