The Bangko Sentral ng Pilipinas (BSP) recently released the Status Report on the Philippine Financial System for the first semester of 2012. The report provides an account of the performance of the banking system and other financial institutions under BSP supervision such as non-banks with quasi-banking functions, trust entities, and non-stock savings and loan associations. Also included in the report are box articles on BSP’s various policy initiatives and regulatory issuances on capital standards under Basel III, on corporate governance, and on consumer education through the implementation of the Truth in Lending Act or Republic Act No. 3765.
The report is submitted to the President and the Congress, in compliance with Section 39 (c), Article V of the New Central Bank Act (Republic Act No. 7653).
Following are the highlights of the report.
Despite the lingering fragilities in the international financial system and uncertainty of the global economy, the Philippine financial system continued to grow on the back of sound macroeconomic fundamentals and sustained implementation of deep-ranging reforms. The potential burden of weak Euro-area banking system loomed large on most sovereigns following the larger-than-expected size of recapitalization for Bankia and the threat of the Greek exit from the European Union exacerbated in the first half of 2012. Across the Atlantic, strains on global financial stability further intensified with the US fiscal lockdown. Slower export prospects and volatile capital flows from these advanced economies also complicated policymaking and policy execution in emerging economies including the Philippines.
On the domestic front, the Philippine economy expanded by 6.1 percent the first semester of 2012 from year ago’s 4.2 percent despite the global economic slowdown. It was driven by strong public infrastructure-related spending and domestic demand for consumer goods and real estate properties. Moreover, the country’s solid external position, manageable inflation, stable domestic currency and low interest environment supported market confidence.
The robust domestic economy provided the banking system—as the core of the Philippine financial system—a sufficient range to aim and deliver on its targets. Accordingly, assets, loans, deposit liabilities and capital accounts continued to grow; asset quality and solvency indicators improved further; banks system’s net profit posted double-digit growth; BSP-supervised financial institutions recorded commendable performance during the first semester of 2012.
Furthermore, the favorable developments in the Philippine economy enabled the BSP to undertake measures to further strengthen the banking system. The BSP deemed it timely to adopt stricter risk-based capital requirements under Basel III while domestic banks have sufficient liquidity to accommodate such measures. For instance, the BSP required universal and commercial banks (including their subsidiary banks and quasi-banks) in early 2012 to adhere to Basel III capital standards beginning 1 January 2014, four years ahead of the Basel Committee on Banking Supervision’ (BCBS) full timeline. This placed the Philippines alongside such jurisdictions as China, Australia, Hong Kong SAR and Singapore that have announced similar Basel III implementation plans.
In addition, existing corporate governance frameworks of BSP-supervised financial institutions were also strengthened to align them more closely with international best practices such as the “Principles for Enhancing Corporate Governance” issued by the BCBS. The new corporate governance rules called for higher representation of independent directors, increased responsibility and accountability of the Board of Directors as corporate decision-makers and clearer risk management framework. Relative to this, the BSP invigorated the compliance framework of banks through the appointment of a full-time Chief Compliance Officer (CCO) to oversee the implementation of banks’ compliance function and better administration of risk mitigation of evolving business risks (Circular No. 747 dated 06 February 2012).
To enhance the monitoring of financial conglomerate transactions in the Philippines and their attendant risks to the financial system, the BSP sought to improve the existing information sharing arrangements among the member agencies of the Financial Sector Forum (FSF) for the efficient conduct of coordinated regulation and supervision of financial conglomerates. As of end-June 2012, financial conglomerates represented a moderate supervisory concern as five banks that belong to conglomerated family groups in the Top 10 had a combined market share of 47.5 percent. The HHI of all listed banks of conglomerated family groups stood at 946 during the same period.
To expand financial access in under-banked and unbanked areas in the country, the BSP supported the development of various e-banking technologies. The BSP also encouraged further industry consolidation, particularly in lower tier banks with the Strengthening Program for Rural Banks Plus (“SPRB Plus”) and the Strengthening Program for Cooperative Banks (“SPCB”), which both aimed to provide a more definitive merger and consolidation mechanisms for applicant banks and their strategic third party investors (STPIs).
Moving forward, the BSP will remain equipped with keen foresight in dealing with potential barriers, unyielding market discipline and watchful eye for supervisory precision and timely implementation of reforms to help preserve the stability of the Philippine financial system.
Banking System Developments
Notwithstanding the challenging external environment, the Philippine banking system continued to deliver a remarkable performance in the first semester of 2012. Key balance sheet and income indicators showed sustained resilience and soundness:
- Strong core earnings. Banks remained profitable as interest and non-interest based revenue streams recorded robust expansion. Net profit stood at P60.8 billion, 17.1 percent higher than last year’s P51.9 billion.
- Steady asset growth. Total resources grew by 5.6 percent to P7,410.1 billion from P7,018.2 billion a year ago, which were channeled mostly to loans and portfolio investments. Meanwhile, funding was mainly sourced from deposit liabilities and owner’s capital.
- Sustained credit growth. Core lending posted a double-digit growth of 15.1 percent on sound macroeconomic environment and seasonal loan demand in time for the June 2012 school opening. The ratio of domestic credit to gross domestic product (GDP) similarly rose to 40.6 percent from 38.6 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 reached their record lows since the 1997 Asian financial crisis.
- Ample liquidity. Liquid assets-to-deposit ratio remained strong at 54.7 percent from year ago’s 57.1 percent.
- Strong capitalization. Banks remained solvent during the semester in review as capital adequacy ratio (CAR) was above regulatory and international standards at 17.6 percent on a consolidated basis and 16.7 percent on a solo basis. Net Tier 1 ratio likewise remained strong at 14.4 percent.
Finally, the banking system became more streamlined, technologically-driven and inclusive to cater to the diverse service delivery needs of modern Filipino banking clients. As of end-June 2012, there were 712 banks with 8,495 branches operating in the Philippines.
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