PH banking system resilient amid external concerns

This positive ratio, along with a very little exposure to foreign funds, are the main factors why the domestic banking system is not greatly affected by the negative developments that their counterparts overseas had experienced. (Shutterstock Photo)

MANILA — The Philippine banking system has remained fundamentally strong despite having its share of challenges over the years, and 2018 proved to be no exception.

Its resiliency has been time-proven and has been cited by several rating agencies, as well as research firms, as among the strongest globally.

Bangko Sentral ng Pilipinas (BSP) Deputy Governor Chuchi Fonacier said the country’s banking system “remained robust and continued to exhibit strong capital position and sustained growth in core earnings.”

Citing BSP data, Fonacier told the Philippine News Agency (PNA) that industry’s assets expanded by 11 percent year-on-year and totaled to PHP16.239 trillion as of end-October this year.

These assets were primarily funded by deposits, which grew 9 percent at the end of the third quarter this year, she said.

“The expansion of the banking system’s assets was evident in the broad-based growth of the total loan portfolio (TLP) across various borrower and industry types,” she said.

At the end of the first nine months this year, TLP amounted to PHP9.758 trillion while non-performing loan (NPL) ratio remained low at 1.8 percent.

“The satisfactory quality of the banking system’s loan portfolio shows that banks continued to adhere to sound credit underwriting standards,” she said, citing that “banks are prepared to bear credit losses as they have set up adequate provisions for possible defaults.”

To date, domestic banks’ NPL coverage ratio is over 100 percent, she said.

This positive ratio, along with a very little exposure to foreign funds, are the main factors why the domestic banking system is not greatly affected by the negative developments that their counterparts overseas had experienced.

The BSP official said domestic banks’ have sufficient liquidity and funding buffers even as regulators continue to increase capital requirements.

As of August this year, the liquidity coverage ratio (LCR) of universal and commercial banks (U/KBs) stood at 161.8 percent on solo basis, higher than the 90 percent threshold set by the BSP.

During the same period, big banks’ capital adequacy ratio (CAR) remained above the 10 percent regulatory requirement, with the solo basis at 15.2 percent and 15.8 percent on consolidated basis.

“Banks’ sustained core earnings have contributed to the industry’s strong capital position,” she said.

The industry’s net profit as of end-September this year reached PHP129.9 billion, 6.6 percent up year-on-year.

“The overall profitability was buoyed by the 13.2 percent increase in net interest income to PHP371.2 billion primarily from lending activities,” she said.

IHS Markit Asia Pacific Chief Economist Rajiv Biswas told the PNA that the research firm has a moderate risk assessment with a stable outlook on the Philippines’ banking system.

He explained that the moderate risk score “is due to a combination of factors signaling a healthy banking sector.”

He said the industry enjoys low credit risk amid strong credit growth.

This, he pointed out, reflects “a balanced loan portfolio and robust economic growth.”

Other factors that boost the domestic banking sector are the higher capital ratios with good asset quality and strong regulatory supervision.

He also cited that NPL and restructured loans or the “distressed asset ratio” account for only 2.4 percent of TLP.

This figure, he said, is “a low level by historical and regional comparison.”

“Bank capital buffers are expected to remain robust in the near term, strengthening further after full BASEL III implementation in 2019,” he added.

BASEL III is the third BASEL reform on banks’ capital base that is focused on the quality of capital to increase resilience of banking systems around the world to periods of stress.

The Basel Committee on Banking Supervision (BCBS) has set a staggered implementation of BASEL III from 2016-18 but the BSP’s policy-making Monetary Board (MB) decided to implement it in full four years ahead of the deadline, starting on January 4, 2014 for U/KBs.

This reform requires banks to have not only a 10 percent CAR but also a Common Equity Tier 1 (CET1) ratio of at least 6 percent and Tier 1 capital ratio of at least 7.5 percent by 2019.

Recently, the BSP announced the BASEL III countercyclical capital buffer (CCyB) rules, which covers U/KBs and their subsidiary, as well as the quasi-banks, using the players’ CET1 capital.

The BSP said that during periods of stress, the MB can lower the CCyB requirement, which was initially set at zero percent, to provide banks with more risk capital to deploy.

The Board may also raise the CCyB during positive periods to allow banks to be more ready in times of needs, it said.

“The CCyB expands our toolkit for systemic risk management and is specifically designed to provide a steadying hand to counter the common occurrence of boom-and-bust periods within the financial cycle,” BSP Governor Nestor A. Espenilla Jr. said earlier.

Aside from this new policy, Fonacier said the central bank “shall continue to build on our existing regulatory and supervisory framework to proactively mitigate emerging risks that may affect the financial system.”

She stressed that “over the years, the BSP has adopted significant policy reforms covering capital, liquidity and enhanced risk governance standards that are aligned with international standards.”

“Our policy reform agenda for 2019 shall further embed effective risk management systems in banks.”

Fonacier said monetary officials “will also look into the conduct and culture in our supervised financial institutions cognizant that good corporate governance is the underpinning of safe and sound financial institutions.”

“Apart from promoting risk management at the institutional level, the BSP shall expand our existing financial risk surveillance toolkit through improvements in our supervisory processes, better capture of data to gain a deeper understanding of the interconnectedness of the financial system and potential spillover and feedback effects of external developments and the prudent use of pioneering technology,” she said.

The BSP executive stressed that “enhancements to our financial risk surveillance toolkit shall be accompanied by an interactive, transparent and clear communication agenda and strengthened collaborative arrangements with a wider stakeholder base, including financial regulators, the financial industry associations as well as information technology experts and providers, given the country’s shift towards a more digital economy.”

“Insights obtained from these arrangements enable the BSP to better understand industry developments and emerging risks which are used as input to the BSP’s surveillance and policy-making process,” she added.