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Second Semester 2003 Status Report on the Philippine Financial System

04.30.2004

The Bangko Sentral ng Pilipinas (BSP) recently submitted to the President and the Congress the semestral Status Report on the Philippine Financial System as of end-December 2003, in compliance with Section 39 (c), Article V of the New Central Bank Act (R.A. No. 7653).  Also included in the report are the directory of head offices of the country’s banks, non-banks with quasi-banking functions, and offshore banks and an article on credit rating agencies. 

Overall Assessment 

The Philippine financial system’s underlying fundamentals posted steady progress in the second half of 2003.  Key financial performance indicators showed progressively more favorable trends on loans, investments, deposits, capital and earnings as a result of resolute operational and financial restructuring.  More than just racking up new business and revenues, both banks and non-banks struggled towards profitability by keeping expenses in check, consolidating operations, shifting to more cost-efficient methods, business process outsourcing, system rationalization and a host of other operational improvements.  Balance sheet strengthening was also advanced through painstaking resolution of non-performing assets and through recapitalization especially with Tier 2 Capital Notes by major players. 

Contributing significantly to business opportunities for rural banks was the rapid commercialization of microfinance based on sound credit principles.  For the record, close to half a million borrowers have been granted loans by the banking sector.  As of 30 October 2003, a total of 123 banks engaged in microfinance activity.  So far, these banks which consist of 2 microfinance-oriented thrift banks, 4 microfinance-oriented rural banks and 117 rural and cooperative banks with some level of microfinance operations were able to give out microfinance loans amounting to P2.5 billion to 432,475 borrowers. 

Another positive development in the financial system was the easing of ratios on non-performing assets (NPAs) and non-performing loans (NPLs).  Banks and non-banks appear to have found ways to gradually dispose of their NPAs.  However, improvement remains limited.  The Special Purpose Vehicle (SPV) law was enacted in January 2003 and became operational with the promulgation of its implementing rules and regulations in April 2003, but transactions big enough to start a real turnaround in balance sheet quality have yet to materialize.

 The greatest obstacle to wholesale disposal of NPAs under the SPV law continues to be the gap between bank’s target prices and bid prices of NPAs.  The BSP has tried to play the role of a catalyst by providing measured regulatory relief but market forces need to be the main driver of these transactions.

The second half of 2003 also saw the promulgation of measures to further strengthen corporate governance including a clearer definition of an independent director and the tightening of performance standards for external auditors of banks.  The latter is being done to uphold high ethical and professional standards in accounting and promote greater transparency through enhanced coordination and sharing of information between external auditors and regulatory authorities.  The new guidelines governing the accreditation of external auditors are embodied in BSP Circular No. 410 dated 29 October 2003. 

 To some extent, the improved management of financial institutions in 2003 may already be reflecting better implementation of sound corporate governance practices especially in banks.  The mandatory orientation program for incumbent bank directors has just been recently concluded.  Overall, the industry has been quite supportive of this undertaking. 

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