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First Semester 2002 Status Report on the Philippine Financial System


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-June 2002 in compliance with Section 39 (c), Article V of the New Central Act (R.A. No. 7653). The report also includes selected articles such as Corporate Governance Initiatives and Strengthening Rules on Credit Card Operations.

Overall Assessment

Measured in quantitative output terms, the financial system turned in a modestly successful performance during the first half of 2002 amid a continuing difficult global and domestic environment. A clearly positive development was the substantial rebound in overall profitability. Pockets of strength were also noted such as steady growth of deposits, increased provisioning and capitalization, robust consumer lending and rapid growth of microfinance.

These elements have shored up the banking system against a free fall and have started it towards the path of recovery. However, it is far too soon to call a victory. Broad-based lending has yet to resume. The major banks have largely stabilized earnings by accumulating low risk government securities, taking advantage of government’s massive funding needs. Although good for banks financially, this is not a healthy long-term arrangement as the banking system should not really be intermediating for the government’s needs. Its primary role is to channel savings toward the private sector.

Banking System Developments

On the overall, the period had been a defining moment for the Philippine banking system. The difficult operating environment in the first semester of 2002 brought out the real winners among industry players, banks that found redemptive significance in their adaptive capacity.

Resource growth from January to June 2002 stood at 2.3 percent or P76.2 billion. This growth rate was about 3 times higher than the end-year 2001, but still lower compared to periods prior to the crisis.

The banking system’s resources were primarily held by private domestic universal banks, 55.9 percent (vs. 56.3 percent end-year 2001). The rest of the system’s market share on assets were:

  • private domestic commercial banks - 8.0 percent (vs. 7.9 percent end-2001);
  • government banks - 11.7 percent (vs. 11.2 percent end-year2001);
  • foreign branches/subsidiaries* - 14.5 percent (vs. 16.0 percent end-year2001);
  • domestic thrift banks - 7.6 percent (vs. 6.5 percent end-year2001); and
  • rural/cooperative banks - 2.3 percent (vs. 2.2 percent end-year2001).

Total loan portfolio amounted to P1,800.2 billion. Excluding Interbank Loans (IBL), total loans contracted from last semester by 1.5 percent or by P24.8 billion. Most of the banking industry’s major exposures to the different economic industry sectors registered contractions. Only thrift banks and rural banks recorded loan growths of 7.3 percent or P9.8 billion and 10.5 percent or P4.5 billion, respectively. Commercial bank lendings reflected the slack in business activities with the loan (gross, exclusive of IBL) contraction of 2.7 percent or P39.1 billion

Although non-performing loans (NPL) grew by 8.9 percent from end-June 2001 (vs. the double-digit NPL growths from the years 1998 to 2001), it was still a major concern considering that the banking system’s loan portfolio at end-June 2002, exclusive of interbank loans (IBL) showed a contraction from the relative period in 2001. In fact, it was the IBL growth of 42.5 percent or P66.0 billion that buoyed loan growth, despite the 1.5 percent or P24.7 billion contraction in other lendings.

Non-performing assets (NPAs) of the banking system reached P520.0 billion to post an NPA ratio of 14.9 percent at end-June 2002, up from the 13.7 percent at end-June 2001. This was due to the high ROPOA growth of 16.3 percent from end-June 2001. The thrift banking industry recorded the fastest ROPOA growth of 18.7 percent. The rural banking industry had 17.5 percent, while the commercial banking industry was 15.9 percent. However, volume-wise the commercial banking industry held the most ROPOA that amounted to P167.8 billion, equivalent to 82.5 percent of the banking system’s ROPOA, while the thrift banking industry had P28.5 billion of ROPOA, equivalent to 14.0 percent and the rural banking industry had P7.1 billion of ROPOA, equivalent to 3.5 percent.

Banks were defensively managing funds by channeling them to alternative income generating sources that are less risky such as government securities and interbank lendings. Banks contending with the risk of loan defaults and the capital provisioning warranted under current circumstances remained generally reluctant to resume regular lending activities.

The banking system’s capital base sustained a continuing build-up. The semester recorded a P6.9 billion increase from end-June 2001. This was mostly contributed by private domestic commercial banks that put in P6.8 billion.

For the semester ended June 2002, NIAT amounted to P14.1 billion or a staggering 100.8 percent growth from semester ended June 2001 NIAT of P7.1 billion. On account of the improvement in earnings, the cost-to-income ratio of the banking system improved to 76.3 percent from 80.0 percent a year ago. The comparative cost-to-income ratios bear out foreign bank branches as consistently the most cost-efficient as a group, with an efficiency level even above the overall banking industry. This was followed by government banks. On the other hand, private domestic commercial banks tracked the average cost-efficiency level of the industry. Foreign bank subsidiaries, domestic thrift banks, and rural banks reported below the industry cost efficiency levels.

The return on assets (ROA) for the period at 0.7 percent was an improvement from the 0.4 percent a year ago. Return on equity (ROE) likewise improved to 4.8 percent from 3.1 percent in the relative period of last year.

As of end-June 2002, the number of operating banks was fewer by 11 players on account of 5 cases of mergers, the closure of a thrift bank, a cooperative bank and 6 rural banks. Along with it was the reduction of branch network by 82 banking offices. The Bank of China was the semester’s lone entrant to the banking system.

Consequently, the number of industry participants now number 918 (vs. 929 end-December 2001) with 6,525 (vs. 6,599 end-December 2001) branches/other offices. The operating banks consist of 44 commercial banks, 98 thrift banks, and 776 rural banks.

Policy Initiatives

The main obstacle to the full normalization of banking activity remained the large overhang of non-performing assets that has left banks with little maneuvering room. Unless and until this is decisively resolved, the system will remain trapped in low level equilibrium. On a hopeful note, the House of Representatives managed to pass in March 2002 the so-called SPAV bill which would facilitate the creation of asset management companies that can help clean out non-performing assets. Unfortunately, the counterpart bill at the Senate was bogged down. However, as latebreaker, the Senate finally managed to pass its version in October 2002, setting the stage for a bicameral conference committee and possibly a signed law by November 2002.

Important qualitative progress was made as well particularly in promoting improved corporate governance in banks. The mandatory bank director education program finally got off the ground. This new Bangko Sentral program ambitiously aims to expose every bank director, from the mightiest universal bank to the smallest rural bank, to world class level corporate governance practices appropriate to their particular industry segment. This is an important element of a three-pronged approach to strengthen the financial system by improving the quality of internal corporate governance, enhancing the quality of bank supervision, and strengthening the role of market discipline.

The Bangko Sentral has also moved to put in place critical market structure that had long been missing. An important project is the large payments settlement system by way of an RTGS (real-time gross settlement) which would be operated by year-end. The Bangko Sentral is also supporting the plan of the Bankers Association of the Philippines to set up a Fixed Income Exchange which could serve as an efficient and transparent trading platform for debt securities. These serve as major steps towards developing a domestic capital market to complement the financial services of the banking system.

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