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Second Semester 2002 Status Report on the Philippine Financial System

05.12.2003

The Bangko Sentral ng Pilipinas recently submitted to the President and the Congress the semestral Status Report on the Philippine Financial System as of end-December 2002, in compliance with Section 39 (c), Article V of the New Central Bank Act (R.A. No. 7653). The report also includes an article on the Special Purpose Vehicle (SPV) Act of 2002.

Overall Assessment

The Philippine Financial System continued to perform steadily in 2002 amid a prolonged tough and uncertain environment. The banking system in particular kept its focus on strengthening basic financial soundness. All indicators point to recovery taking hold: steady growth of deposits, increasing capitalization, and resumption of lending. However, the momentum of these improvements will need to be carefully nurtured.

The rapid growth of microfinance was noteworthy. In the last couple of years, microfinance has made progress towards the mainstream. Through various joint initiatives, mechanisms have been created to bridge banks, NGOs and cooperatives in credit delivery. Since 2000, there were 49 additional banks that have joined the 71 participating banks in microfinance. This brings the number to 120 banks participating in microfinance. The total microfinance loan portfolio amounted to P2.1 billion reaching 386,431 borrowers as of end-year 2002.

As the BSP remains committed to its legal mandate of taming inflation, the past year’s inflation rate has plummeted further to a benign 3.1 percent at end-2002, thus fostering a low-interest rate regime. On balance, this should be conducive to a lower risk financial environment and the further implementation of structural reforms.

Banking System Developments

The number of industry participants by end-year 2002 tallied to 912 (vs. 929 at end-year 2001) with 6,542 (vs. 6,656 at end-year 2001) branches/other offices. The operating banks consisted of 42 commercial banks, 94 thrift banks, and 776 rural and cooperative banks.

For end-year 2002, the Philippine banking system recorded healthy growth on key financial indicators: 2.5 percent loan growth amounting to P45.4 billion, 7.0 percent increase in deposits equivalent to P153.5 billion, 4.6 percent additional capital amounting to P20.4 billion, and 98.1 percent improvement in net income after taxes (NIAT) equivalent to P13.9 billion.

The improvements are especially notable considering that not only did these occur under tough and uncertain domestic and global conditions, but such progress proceeded in spite of steady consolidation in the number of banking institutions.

For end-year 2002, the market share of the banking system’s resources were as follows:

  1. private domestic universal banks - 58.3 percent (vs. 56.3 percent end-year2001);
  2. private domestic commercial banks - 6.6 percent (vs. 7.9 percent end-year 2001);
  3. government banks - 11.6 percent (vs. 11.2 percent end-year 2001);
  4. foreign branches/subsidiaries - 14.0 percent (vs.15.3 percent end-year 2001);
  5. domestic thrift banks -7.2 percent (vs. 7.1 percentend-year 2001); and
  6. rural/cooperative banks - 2.3 percent (vs. 2.2 percent end-year 2001).

The total loan portfolio (TLP) of the banking system came to P1,857.5 billion, up by P45.3 billion or 2.5 percent from end-year 2001. Excluding Interbank Loans (IBL), total loan growth was 2.2 percent amounting to P34.8 billion, recovering from last year’s contraction by 1.0 percent or P16.2 billion.

NPL ratio of the banking system by end-year 2002 was 15.4 percent, an improvement of 1.5 percentage points from end-year 2001 ratio of 16.9 percent. Net of IBL, NPL ratio also posted a 1.5 percentage point decline to 17.5 percent.  NPL level was down by 6.3 percent or P19.2 billion to P286.6 billion from P305.8 billion a year ago.

With the restructuring and foreclosure proceedings, Restructured Loans (RLs) increased by 12.4 percent or P14.6 billion to P132.5 billion from P117.9 billion a year ago, whereas Real and Other Properties Owned or Acquired (ROPOA) grew by 13.7 percent or P26.1 billion to P217.5 billion from P191.4 billion last year. Consequently, the level of non-performing assets (NPA) still climbed by 1.4 percent or P7.0 billion from P497.2 billion last year. The large holdings of foreclosed properties and restructured loans continue to undermine the banking system’s apparent contraction in NPL.

Given the continued domestic and global economic slowdown, the banking system’s bottom line figures were buoyed by investments in government securities readily supplied by government’s appetite for borrowings to finance the country’s large fiscal deficit. The buying and selling of risk-free government securities were brisk such that trading gains accounted for the substantial growth in non-interest income especially in commercial banks.

For the year 2002, the banking industry achieved record high profits for the last five years. NIAT amounted to P28.1 billion, a remarkable 98.1 percent growth compared to the 23.6 percent growth for the year 2001. All industry categories posted profits. Commercial banks and rural/cooperative banks grew by 97.9 percent to P26.2 billion and 16.4 percent to P1.2 billion, respectively. Thrift banks’ profitability made a turnaround after two years of operating losses (P1.0 billion in 2000 and P0.1 billion in 2001) to NIAT of P0.7 billion in year 2002.

Cost-to-income ratio was favorably lower at 70.6 percent in year 2002 from 80.7 percent in year 2001. Comparatively, domestic thrift banks posted the lowest cost-to-income ratio at 51.7 percent in year 2002. Across bank industry, foreign bank branches/subsidiaries, government banks and domestic thrift banks were consistently the most cost-efficient while the rural/cooperative industry was consistently the least cost- efficient.

The return on assets (ROA) of 0.8 percent and on equity (ROE) of 6.2 percent during year 2002 had remarkably improved from 0.4 percent and 3.2 percent during year 2001, respectively.

Policy initiatives

In consonance with monetary policy, the future thrusts of the banking sector policy seek to provide a strengthened financial environment to support economic growth with financial stability. Specifically these include, among others, the amendments to the BSP Charter as well as the PDIC Charter; support for legislative initiatives such as the proposed Asset Securitization Law and the proposed Corporate Recovery and Insolvency Law to help banks manage their balance sheets; support for the continuing restructuring of the banking industry; implementation of the consolidated supervision of financial enterprises; and continued implementation of other reforms to further strengthen the banking system such as better corporate governance.

Moreover, the BSP accords particular importance to the expediency and dispatch in disposition of the NPAs of the banking system. The overhang of large NPAs on the books have been keeping banks in a bind, hampering more vigorous progress in lending activity. The BSP has been at the forefront of the joint government-private sector effort to secure the passage of the appropriate enabling legislation, which will encourage/facilitate private investment in the NPAs of Philippine banks through the creation of privately owned asset management companies (AMCs). The AMC bill has been approved by the Bicameral Conference Committee of Congress and has been signed into law by the President on 10 January 2003. Improvement is expected in year 2003 with the issuance of guidelines to implement the SPV Act.

Attachment:  Philippine Banking System: Selected Performance Indicators (pdf)

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