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Status Report on the Philippine Financial System First Semester 2010


The Status Report on the Philippine Financial System is a semestral report prepared by the Office of Supervisory Policy Development, Supervision and Examination Sector, Bangko Sentral ng Pilipinas (BSP), and is submitted by the Governor to the President and the Congress in compliance with Section 39 (c), Article V of Republic Act (R.A.) No. 7653 or The New Central Bank Act.

 The report presents a discussion on the performance of financial institutions supervised/regulated by the BSP during the period in review.  As of end-June 2010, there were 773 banks with 7,912 branches.  The report also includes articles on: (1) Basel 1.5 Framework for      Stand-alone Thrift Banks, Rural Banks and Cooperative Banks and (2) Building an Inclusive Financial System through Microfinance.

Following are highlights of the report:


The Philippine financial system emerged in reasonable shape from the worst trails of the 2007-2008 global financial crisis and remained largely unaffected as it ran on a steady pace of growth and stability.

During the semester in review, the system endeavored to strategically position itself to overcome all the potential pitfalls of the track but instead enjoyed support from improving external and internal environment.
Key performance indicators for the first half of 2010 showed the sustained strength of banks’ core balance sheet accounts: steady asset expansion, 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 cost-efficient operations and maximization of e-banking technologies.

Other BSP supervised financial institutions similarly exhibited sustained resilience on the back of prevailing favorable operating environment. 

While the domestic financial system remains largely in good shape, some strength training is still required to continuously build its stamina for the financial stability marathon:

 First, banks have to continually reassess their investment portfolio and periodically monitor their exposures as part of effective risk management practice.
Second, the recent crisis showed that over leveraged (e.g., loans-to-deposits or LTD ratio of more than 100 percent) financial institutions without sufficient capital buffers for their risk- taking activities have a higher likelihood of hitting the ground.

Fortunately, Philippine banks are coming from a strong capital position as capital adequacy ratio (CAR) as of end-March 2010 on a consolidated basis stood at 16.0 percent. The bulk of which was core capital as Tier 1-to-risk weighted assets ratio remained strong at 12.6 percent.

Third, liquidity is a key component of financial stability. Fortunately, high reserve requirement (19 percent of peso deposit liabilities and deposit substitutes effective 14 November 2008 pursuant to Circular No. 632 dated 13 November 2008) and prudent credit allocation (LTD ratio of 66.1 percent as of end-June 2010) of banks led to ample liquidity in the system.

Fourth, the existing micro prudential approach to supervision needs to be supplemented with macroprudential policies to ensure the resilience of the Philippine financial system against possible volatile capital flows, which could lead to build up of credit or asset prices.

Fifth, bank reporting and disclosure standards have to be continually improved and supplemented by industry surveys particularly for those financial institutions that are not publicly traded. In this way, market participants can get accurate and timely picture on the health of the financial system. 
Sixth, a credible crisis management framework that is anchored on the twin objectives of crisis prevention and crisis resolution became highly important post crisis. Ideally, it should provide liquidity and restore normalcy in the most expedient and transparent manner during a crisis.

Lastly, bank density remained skewed towards populous and urbanized areas of the archipelago leaving 13 out of 17 provinces either under banked or unbanked. Toward this end, the BSP pursued a sustained advocacy to promote inclusive finance in the countryside aimed at expanding the array of microfinance products. As of end- June 2010, there were 200 microfinance banks serving 869,763 micro borrowers for a total loan portfolio of P6.6 billion.

Summing up, the Philippine financial system may not be the fastest or biggest of contenders but it has one distinct advantage: it has built on its endurance throughout the years through long distance races of reforms and achieved a steady pace of growth.


The Philippine banking system managed to stay in its growth path for the first half of 2010. Key balance sheet and income indicators showed sustained resilience of the banking system:

  • High bank earnings. Respectable economic performance, improved market sentiment and cost-efficient operations of banks made up the confluence of factors that buoyed banks’ profitability. Net profit for the first semester of 2010 stood at P40.6 billion, 21.7 percent higher than the P33.3 billion posted same period in 2009. Moreover, this is already more than half (58.5 percent) of the full year 2009 net profit of P69.4 billion. Banks likewise managed to provide positive returns for their shareholders. Annualized return on assets (ROA) settled better at 1.3 percent from 0.9 percent same period last year. Likewise, the annualized return on equity (ROE) improved to 11.2 percent from 8.1 percent posted same period last year.
  • Steady asset growth. Asset expansion continued at 9.0 percent on the back of sustained growths in loans (9.1 percent) and financial assets other than loans (12.2 percent).  Meanwhile, deposit liabilities (75.5 percent), capital accounts (11.6 percent) and other liabilities (5.7 percent) were still the three main sources of bank funding for its operations. 
  • Sustained credit growth. Core lending expanded by 9.1 percent on account of faster economic expansion during the semester in review. Inclusive of IBL and RRP with BSP, the banking system’s total loan portfolio accounted for 41.2 percent of the country’s gross domestic product or GDP.
  • Growing deposit base. Deposit liabilities posted a strong growth of 10.1 percent to P4,754.1 billion from year ago’s P4,318.7 billion, which was indicative of sustained depositor confidence in the banking system.  
  • Ample liquidity. Liquid assets-to-deposit ratio remained strong at 54.9 percent from year ago’s 52.5 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 16.0 percent on a consolidated basis and 14.9 percent on a solo basis.  A larger proportion of this was Tier 1 capital at 12.6 percent.

Finally, the emerging financial landscape of the banking system was a byproduct of BSP’s continuing industry consolidation and optimal maximization of technological advancements to cater to the changing needs of urban lifestyle and promote greater financial inclusion in the countryside.

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