The Bangko Sentral ng Pilipinas (BSP) recently released the Status Report on the Philippine Financial System for the second semester of 2011. 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 trust entities under BSP supervision. Also included in the report are box articles on BSP’s various policy initiatives to enhance existing capital rules, further promote financial inclusion and implement the revised rules and regulations on mandatory agri-agra credit under Republic Act No. 10000.
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), Section 29 of the Rural Banks Act of 1992 (Republic Act No. 7353) and Section 26 of the Revised Non-Stock Savings and Loan Association Act of 1997 (Republic Act No. 8367).
Following are the highlights of the report.
The Philippine financial system managed to secure a good spot as an audience to the dramatic unfolding of financial catastrophe now plaguing Europe from the Greek debt overhang which has been an offshoot of the US subprime crisis in 2008. The International Monetary Fund (IMF) in its latest Global Financial Stability Report Market Update1 estimated that more than two-thirds of the €6.9 trillion European sovereign debt at end-2011 had credit default swap (CDS)2 spreads past 200 basis points with Greece, Portugal and Italy leading the cast having CDS spreads of more than 400 basis points. In contrast, the latest CDS spreads of ASEAN-53 were all below 200 basis points with the Philippines at 155 basis points. These, in turn, provided an ideal vantage point for some introspection by allowing the System to look inward for growth and stability even as the specter of financial fragilities remains prevalent elsewhere.
Amid the global economic slowdown and devastation of Sendong at the close of 2011, the economy managed to post a modest growth of 3.7 percent on account of strong consumer base and growing investments. This supported a positive GDP growth trend for 52 consecutive quarters since 1999. The country’s external position remained strong as the country’s gross international reserves (GIR) peaked at $75.3 million in 2011 which was ample enough to cover 11.1 months of imports of goods and payments of services. The current level of foreign exchange reserves more than covers the country’s total external debt of $62.4 billion as of end-September 2011. Moreover, this allowed the Philippines to solidify its position as net external creditor after its $125 million contribution to the Financial Transactions Plan (FTP)4 of the IMF in 2011. The inflow of remittances from migrant Filipino workers remained steady with an annual growth of 7.2 percent in 2011 as the level coursed through the banking system reached more than $20 billion which was thrice from the level recorded in 2001. The conduct of credible and effective monetary policy of the BSP also led to a low inflation and interest rate environment which supported domestic activity.
While indeed long overdue, these result to growing third party recognition of significant inroads achieved since the 1997 Asian Financial Crisis in terms of addressing the vulnerabilities confronting the financial system and its macroeconomic environment. In 2011, the country received a series of credit rating upgrades from Fitch, JCRA, Moody’s and Standard & Poor’s. The country likewise moved up 10 places in the latest World Economic Forum (WEF) competitiveness rankings with financial market development similarly moving by four notches. The Economist Intelligence Unit (EIU) again awarded the Philippines its top rank for best regulatory environment in microfinance for the third time in a row.
Central to the Philippine story of fortitude and less internationally recognized resilience is a banking system that delivers consistent performance amidst any market conditions and more so, beyond expectations. For the last 15 years, for instance, total resources posted a compound annual growth rate (CAGR) of 7.1 percent. Asset quality ratios were at historic lows and have eased even from their pre-1997 Asian Financial crisis level of around four percent. Solvency ratios were well-above regulatory and international standards, which provided local lenders ample headroom to adjust to higher capital rules under Basel III by 2014. Net profits almost tripled during the same period. The saga continued in 2011 as it is a subplot that supports the overall remarkable performance. Key indicators showed further strengthening of banks’ balance sheets with positive growths in assets, loans, deposits and capital. Asset quality and solvency ratios have significantly improved and fared better than the ASEAN-5 average. Meanwhile, banks remained profitable and provided positive returns to shareholders on account of cost-efficient operations.
To sustain such commendable performance in the long run, some concrete actions have to be undertaken in order to harness these inherent strengths into future gains and at the same time, provide the System sufficient vantage points to withstand any potential spillover effects of the Euro crisis and global economic slowdown.
First, there is a need to properly measure, monitor and mitigate possible exposures of the domestic banking system to European bank debts regardless of the size and magnitude of such exposures. Pressures on European banks have intensified on the back of the ongoing Greek debt tragedy besetting the current European financial stage. Market watchers feared that this may result to impairment of cross-border lending for trade financing activities including possible loss of parent-bank support for local lending.
Second, banks’ capital needs to be strengthened as a countercyclical buffer to any adverse shocks to the stability of the financial system. The primary concern is the quality of bank capital from private sources. Bank deleveraging in Europe, as a result of adverse feedback loop between weak economic growths and deteriorating bank balance sheets, foreshadows a specter of full blown credit crunch.
Lastly, continuing structural reforms have to be vigorously pursued to boost potential output, enhance business environment for private investment and more importantly, strengthen existing social safety nets in supporting poorer Filipino households in the face of weakened global demand.
Summing up, the Greek debt tragedy that continues to unfold at the European financial stage provided the Philippine financial system a good vantage point for some introspection to look inward for growth, address remaining vulnerabilities and continually build on its inherent strength. All these are focused on achieving financial stability that endures the test of time.
Banking System Developments
The Philippine banking system continued to deliver a remarkable performance in 2011 amid the ongoing turmoil in the European financial stage. Key balance sheet and income indicators showed sustained resilience and soundness:
- High bank earnings. Banks remain profitable on the back of improved interest-based revenues and cost-efficient operations. Net profit stood at P108.1 billion, 19.2 percent higher than last year’s P90.7 billion.
- Steady asset growth. Total resources grew by 6.2 percent to P7,337.0 billion from P6,907.9 billion last year, which were channeled mostly to loans at 47.2 percent and portfolio investments at 22.8 percent. Meanwhile, deposit liabilities at 73.3 percent, capital accounts at 12.6 percent and other liabilities at 6.7 percent were the three main sources of bank funding for its operations.
- Sustained credit growth. Core lending posted a double-digit growth of 18.9 percent on strong consumer spending. The ratio of domestic credit to gross domestic product (GDP) similarly rose to 38.7 percent from 36.6 percent last year. Top 3 loan destinations, outside the financial intermediation sector, were real estate, manufacturing and transport-related sectors.
- Improving loan and asset quality. During the review period, loan and asset quality have remarkably improved as NPL/NPA ratios of the banking system were better than their pre-crisis levels of around four percent.
- Growing deposit base. Deposit liabilities rose by 5.0 percent to P5,375.1 billion from last year’s P5,120.7 billion, which was indicative of sustained depositor confidence in the banking system.
- Ample liquidity. Liquid assets-to-deposit ratio remained strong at 56.4 percent from last year’s 59.7 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 17.3 percent on a consolidated basis and 16.3 percent on a solo basis. Banks’ compliance ratio with minimum capital, further strengthened to 84.0 percent from last year’s 81.8 percent.
Finally, the emerging financial landscape of the banking system became more streamlined, more technologically driven and inclusive to cater to the diverse service delivery needs of modern Filipino banking clients. As of end-December 2011, there were 726 banks with 8,324 branches operating in the Philippines.
1 Cf: International Monetary Fund (January, 2012). Market update: Global financial stability report. Washington, DC: International Monetary Fund (IMF) Publications.
2 Refers to a credit derivative contract where the purchaser of the swap makes payment (i.e., spread) to the seller up until the maturity of the contract in exchange for the seller agreeing to pay off a third party debt if this party defaults on the loan. It is designed to transfer the credit exposure of fixed income products between parties and considered as an insurance against non-payment (Source: Investopedia).
3 Refers to Indonesia, Malaysia, Philippines, Singapore and Thailand. CDS spreads as of 1 March 2012 (Source: Bloomberg).
4 Refers to the financial assistance program of the IMF for crisis-stricken countries. The FTP represents the cooperative efforts of the international community to mitigate the spillover effects of the European debt crisis. The country prepaid all its obligations with the IMF in 2006 due to much improved liquidity position and has contributed a total of $251.5 million to the Fund as a creditor country. More than half of these funds were disbursed by the IMF to European countries such as Greece, Ireland and Portugal to address the impact of the ongoing Euro financial crisis in these sovereigns (Source: IMF).