On 30 April 2001, the Bangko Sentral ng Pilipinas submitted to the President and the Congress the semestral Status Report on the Philippine Financial System as of end-December 2000. The report also includes selected articles on special topics (e.g., Electronic Banking, Philippine Compliance with International Banking Standards, BSP Initiatives on Microfinance, Regulatory Framework for Anti-Money Laundering).
The Philippine financial system, anchored by the banking system, remained under stress in 2000 as a hoped for strong economic recovery failed to develop full steam due to increased political fragility particularly in the latter half of the year. The strains were particularly reflected in the weak earnings performance for the year and the persistent accumulation of non-performing assets.
However, the financial system as a whole proved to be resilient to the stresses so far despite the failure of some individual institutions. A generally healthy liquidity position and a strong capital buffer were key assets that helped the banking system weather the storm (see Table 1). As a result, confidence has been maintained. To some extent, non-banks with quasi-banking functions due to limited access to safety nets, proved to be more vulnerable and their liquidity position has suffered.
In such a tough banking environment, financial institutions with strong internal management systems and deeper financial resources as well as those who have acted more pro-actively to improve upon weaknesses that were uncovered in the aftermath of the Asian crisis, were at an advantage. As a group, foreign banks have also done well as evidenced by their respectable profit performance and healthily expanding loan and other asset portfolio. This resulted in an increase in their share of total banking assets that now exceeds the share of non-expanded domestic commercial banks.
Strategic mergers and partnerships, especially with strong regional players have also made sense in this market that also features increasing global competition and a riskier financial environment. This could very well pay off once full recovery occurs. However, the challenges posed by the integration of people, systems, and cultures cannot be underestimated.
The most vulnerable institutions were those that have delayed difficult but necessary internal reforms, essentially waiting for better times to resolve current problems. This could prove to be a costly strategy in the long run.
The market-driven restructuring of the banking system progressed as more mergers and consolidations, as well as acquisitions, were completed. The BSP also moved expeditiously to close problem banks in accordance with law. Meanwhile, the viable banks sustained their efforts to control costs and to strengthen risk management. In order to expand client reach, a significant number of banks turned to mobile and Internet banking solutions as a more efficient delivery channel to service the needs of a more mobile and technology-oriented populace.
Banking System Developments
Banking operations during the year focused on continued savings mobilization efforts. This facilitated an undisrupted flow of funds to productive sectors, and led to sustained albeit modest asset growth and at least a positive even if low bottom line figure. Further substantial deterioration in asset quality was also contained to a large extent. Meanwhile, liquidity and solvency positions remained within acceptable levels though somewhat weaker compared to the previous period (see Table 2).
This year’s developments also saw the further increase in the participation of foreign bank branches and subsidiaries. The share of foreign bank branches and subsidiaries to total assets inched up to 14.7 percent from 13.0 percent as of end-December 1999 (Chart 1). On the other hand, domestic commercial banks sustained their dominance of the Philippine banking industry. Rural and cooperative banks’ share was sustained at 2.0 percent while the share of domestic thrift banks declined to 6.8 percent.
Largely due to lower operating income and a reduction in extraordinary credits, bank profitability as measured by, the average return on assets and on equity failed to stage a recovery. The return on assets was maintained at 0.4 percent while the return of equity slipped to just 2.7 percent (see Table 3). Rural banks posted the highest returns for the period, earning 1.60 centavos for every peso of assets and 10.0 centavos for every peso of capital. Commercial banks gained 0.4 centavos for every peso of assets and 3.1 centavos for every peso of capital. Meanwhile, thrift banks lost 0.4 centavos for every peso of assets and 2.3 centavos for every peso of capital (Chart 2).
As of end-December 2000, there were fewer operating banks, i.e., 947 vs. 960 in end-June 2000 and 976 in end-December 1999. Their branches likewise declined to 6,606, fewer by 72 offices from last semester and by 107 offices from last year. Nonetheless, nationwide density ratio was maintained at an average of 5 offices per city/municipality. In terms of population, each of the 7,497 banking offices will service an average of 10,184 Filipinos (see Table 4).
To promote systemic stability, the BSP continued to build upon the many financial reforms that were started even before the outbreak of the Asian crisis. Reform priorities remained focused on the overall objective of promoting a sound, stable and globally competitive financial system anchored on prudent risk management. Accordingly, the major thrusts of the additional reforms were directed towards further enhancement of the legal and regulatory framework, propagating market practices that conform to internationally accepted standards and further upgrading the quality of financial institutions supervision. Auxiliary services included the BSP’s initiative related to the implementation of the E-commerce Act.
On 23 May 2000, the passage into law of R. A. No. 8791,otherwise known as The General Banking Law (GBL) of 2000 institutionalized a critical mass of banking reforms in the Philippines. The BSP moved quickly to draft implementing rules and regulations, particularly those relating to the adoption of a risked based capital adequacy ratio, the observance of fit and proper rule on bank management, the acquisition of a domestic bank by foreign banks/nationals, and the granting by financial institutions of microfinance loans.
With the GBL in place, BSP started its advocacy in Congress towards the expeditious approval of the proposed amendments to the 1993 New Central Bank Act (CBA) as well as the enactment of anti-money laundering legislation. Broadly speaking, the proposed amendments to the CBA are directed at enhancing the supervisory and enforcement powers of the Bangko Sentral. On the other hand, the proposed anti-money laundering law and the related relaxation of strict bank deposit secrecy laws are intended to cause the country’s immediate removal from an international blacklist issued by the Financial Action Task Force (FATF) on 22 June 2000.
Going forward, the key to sustained viability of the financial system over the medium- and long-term would involve decisive action to reduce the overhang of non-performing assets to more manageable levels, the further strengthening of internal risk management systems to conform with international best practices commensurate to the scale of bank operations, and the upgrading of the regulatory framework to facilitate alignment of local standards with international standards particularly those relating to capital adequacy, transparency, and corporate governance.