Yearender: RP banks sail through rough financial seas in 2008

As global markets reel from the impact of the financial crisis that has claimed among its victims corporate giants from the US to Europe, Philippine banks have, thus far, emerged largely unscathed, the country’s top central banker points out.

“The Philippine banking system is in a comfortably manageable state from a capital and liquidity standpoint, and our past investments in banking and other financial reforms have helped shield us from catastrophic fallouts that the other jurisdictions have seen,” says Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr.

He explains that Philippine banks remain fundamentally sound and insulated from the external turbulence due largely to their domestic orientation, thus avoiding large exposures to foreign financial institutions.

The exposure of Philippine banks to potentially “at risk” multinational funds and institutions stand at only around one percent of their total assets at the most, Tetangco notes.

For instance, their collection exposure to Lehman Brothers – the New York-based investment fund whose collapse last September precipitated a global financial turmoil – was a mere 0.3-0.4 percent of the banking system’s total assets.

Tetangco stresses that this level of exposure by a few bank is definitely well within their ability to absorb should these eventually become actual losses given their strong capital base and liquidity.

Even the private banking sector acknowledges that their collective strength will carry them through the expected rougher seas in 2009.

Bankers Association of the Philippines (BAP) president Aurelio R. Montinola III says the Philippine banking system remains stable, as he points out that the industry was required by monetary authorities to increase capital in the aftermath of the equally-catastrophic 1997 Asian financial crisis.

“That played a big role, in a present scenario where profits are higher today and non-performing loans (NPLs) are very low,” Montinola, who is also the president of the Bank of the Philippine Islands (BPI), adds.

The country’s banking sector includes expanded commercial banks or universal banks, commercial banks, thrift banks, rural and cooperative banks, and microfinance-oriented banks.

The entire industry has P5.3 trillion worth of assets as of June this year, with the commercial banking system accounting for the bulk at P4.6 trillion.

In terms of capital stock, their consolidated base is still well above both the 10-percent minimum prudential requirement set by the BSP and the eight percent standard required by the Switzerland-based Bank for International Settlement (BIS), often called the central bank of all central banks.

The figure stood at 14.32 percent on solo basis and 15.25 percent on consolidated basis at the end of the first semester of 2008.

But while most of the universal and commercial banks reported lower-than-expected net earnings in the first nine months of the year, bankers argue that not one of the major banks recorded net losses.

Another key point is that Philippine companies have become much stronger than they were 10 years ago, allowing them to look for other sources of financing other than self-generated funds or through the commercial banks.

This, in turn, has allowed banks to re-position a bigger portion of its loan portfolios to the middle market, the small and medium enterprises (SMEs) and the retail market. For some banks, it has also paved the way for the opening of facilities for the microfinance sector.

The share of corporate loans has slightly fallen but still accounts for over 70 percent of total loans, with the remaining 25 percent between consumer loans and SME loans.

The banking industry likewise continues to invest in technology — from ATMs, point-of-sale (POS), Internet and mobile phone banking, to credit cards, debit cards and pre-loaded cards.

London-headquartered credit rating firm Fitch Rating Agency, in a report, notes that loan activity in the Philippines has been picking up, spurred mainly by consumer financing.

It also cites an increase in fee income opportunities from the businesses of remittance, cash management and wealth management.

“These revenues are more recurring in nature than the volatile trading gains Philippine banks used to enjoy and depend on,” Fitch Ratings says.

But the consolidation of the country’s banking industry has also resulted in more intense competition, the BSP’s Tetangco points out.

Rural banks, for example, are exhibiting robust asset growth and strong capital build-up. As of end 2007, the total assets of the rural banking system reached P149.5 billion, while its capital adequacy ratio (CAR) stood at a healthy 15.7 percent.

The Rural Bankers Association of the Philippines (RBAP) notes that the sector’s loan portfolio expanded by a record 21.5 percent to P93.6 billion in 2007, fuelled by lending to the agricultural sector, microenterprises and SMEs.

Hence, the rural banks market share in deposits 26 percent from 2002 and 2007, grabbing significant market share from commercial and thrift banks.

“Using these indicators, rural banks are faring equally or even better than its universal, commercial and thrift bank counterparts while remaining true to its core mission of serving the needs of the countryside,” Tetangco adds.

Still, bankers and regulators agree that the banks that have deepest footing in the domestic market will continue to have the competitive edge coming into 2009.