The Philippine banking system remains strong and stable. Over the past 20 years, the Bangko Sentral ng Pilipinas (BSP) has been implementing strategic reforms that have resulted in higher capitalization and stronger risk management systems to manage potential threats.
Total assets of the banking system continue to grow, expanding by 11.0 percent in 2018, the bulk of which have been largely channeled to production loans. The increase in the loan portfolio is supported by sound credit risk management (CRM) consistent with the BSP’s comprehensive guidelines on CRM issued in October 2014. These guidelines set a higher standard in managing risk arising from the banks’ lending operations. The CRM guidelines also require banks to set aside allowance for expected credit losses, prompting them to be cognizant of potential losses in their loan portfolio even at an early stage. This has resulted in strong asset quality as indicated by the decline in banks’ non-performing loans (NPLs) ratio to 1.83 percent while loan loss provisioning exceeding 100 percent as of end-October 2018.
Latest data also show that the local banking industry is well-capitalized, with a Capital Adequacy Ratio (CAR) of 15.36 percent as of September 2018, well above the international standard of 8.0 percent and the BSP’s regulatory requirement of 10.0 percent.
With more than adequate capital base, the banking system continues to post strong core earnings. As of end-September 2018, the banking system’s net profit grew by 5.8 percent compared to the previous year’s level. Moreover, the industry remains liquid. As of end-September 2018, the liquidity coverage ratio of universal and commercial banks stood at 157.6 percent on solo basis. This is well above the current regulatory threshold of 100.0 percent.
With its robust capitalization and sufficient liquidity buffer, the Philippine banking system is therefore well-positioned to manage about USD 400 million in loan exposure to Hanjin Heavy Industries and Construction Philippines. The loan exposure represents only 0.24 percent of total loans of the banking system and 2.49 percent of the foreign currency loans of Foreign Currency Deposit Units. Moreover, based on the results of the BSP’s stress-testing exercise, an assumed write-off of the loan exposures to Hanjin will have minimal impact on the industry’s CAR.
More important, as part of the supervisory process, the BSP requires banks to stress test their own loan portfolios. In this respect, banks should have the capability to promptly address threats and stress scenarios.
Based on the latest data, the BSP is confident about the local banks’ ability to manage this specific challenge. They are also equipped to handle the negotiations required to complete Hanjin’s corporate restructuring while remaining compliant with prudential regulations.
As the banking regulator, the BSP shall continue to remain vigilant in monitoring the actions taken by the banks and ensure the orderly resolution of the Hanjin case.