OFW inflows provide stability, credit quality for local banks

Remittances from overseas Filipinos are giving Philippine banks stability and credit quality but competition from technology-driven players would be tricky to challenge, Moody’s Investor Service said yesterday.

Since the Philippines started exporting labor in the 1970s, Moody’s said the resulting remittances to the families of overseas Filipinos have provided a stable source of funds not only for households but also banks.

As a result, according to Moody’s, the reliance of Philippines banks on remittances from the country’s overseas workforce provided enhancements to earnings stability and credit quality over the near and medium term.

“In addition, the combination of rising remittance flows and the renewed interest of banks in building consumer financial services has helped revive domestically retail banking products,” said Richard Lung, Moody’s senior analyst.

According to Lung, overall impact of remittances were partly behind the fact that retail banking products have grown faster than other types of loans.

Lung said remittances have provided a stable source of income and foreign exchange for the Philippines, and at the same time, banks have played a key role in these cross-border cash flows.

“However, while providing banking and remittance services to OFWs presents venues for franchise development and growth, the building of long-term stable retail banking operations may prove challenging,” Lung said, referring to drawbacks.

Lung also said geographic distances and changing immigration patterns and policies played a greater role than in less remittance-dependent economies.

In addition, Lung pointed out that remittances were a service wherein technology could play a transformative role, challenge existing business models and alter the competitive landscape.

“Over the next 10 years, new entrants and the adoption of new technology will erode the banks’ dominance of this market and the profits they derive directly from the remittance business,” Lung said.

“Already, two leading wireless phone service providers have launched lower-cost remittance services via text messaging through mobile phones,” Ling pointed out.

Lung said there was also competition from new entrants that use technology and other innovations to keep their costs below those of the banks.

According to Lung, deployment and hence remittances are also an issue because they depend greatly on host country dynamics and policies.

“If countries allow temporary Filipino workers to become more permanent residents, such a development could impact the flow of remittances as earnings directed to purchasing durables in the Philippines could be increasingly spent in host countries,” Lung said.

Lung said these changes could make redundant the proprietary operations of the banks in certain remittance corridors.

“Those employing the more flexible, but potentially less lucrative, strategy of linking with overseas partners would be less affected,” he said.