The Philippines banking industry remained resilient and strong despite global headwinds such as the rising interest rates, the geopolitical crisis in Eastern Europe and the lingering impact of the COVID-19 pandemic.
Bangko Sentral ng Pilipinas Governor Felipe Medalla said in a Bankers Association of the Philippines forum in October that banks had sustained their solid footing amid these challenges. This was characterized by adequate capital buffers, expanding assets, ample liquidity, growing deposits and lending recovery.
“Our banks are growing in a healthy way without sacrificing the stability of the system and, at the same time, protecting depositors,” Medalla said in his speech.
The strength of and positive outlook on the Philippine banking system was complemented by the prudential and strategic reforms undertaken by the BSP over the years and its swift and time-bound relief measures.
The BSP commenced the unwinding of monetary policy support measures given the strong recovery momentum in the first half of 2022 on account of increased mobility and expanded vaccination coverage. Targeted prudential relief measures remained in place to further sustain credit growth and provide continued access to financial services to households and vulnerable sectors.
Assets growth
The Report on the Philippine Financial System for the first semester of 2022 released by the BSP showed that the total resources of the Philippine banking system expanded to P21.347 trillion as of end-June. The expansion was largely funded by deposits and, in turn, channeled to lending and investment activities of banks.
The total assets’ year-on-year growth rate of 7.8 percent was faster than the 6.4-percent growth rate in June 2021 and the 6.6-percent average growth rate during the pandemic.
By banking group, universal and commercial banks had the largest share of the total assets of the banking system at 94.0 percent (P20.072 trillion), followed by thrift banks at 4.4 percent (P929.2 billion) and rural and cooperative banks at 1.6 percent (P345.4 billion).
Big banks’ total assets went up 9.5 percent year-on-year, faster than the 6.3-percent growth rate in June 2021. Meanwhile, thrift banks’ total assets declined by 21.7 percent, compared with the 6-percent increase the year before owing to the streamlining within the industry.
Rural and cooperative banks’ total assets grew 16.5 percent, faster than the 9.0-percent expansion the previous year.
Loan expansion
Bank lending growth continued to accelerate and is expected to maintain its growth streak with the sustained recovery of the economy. The banking system’s gross total loans went up by 8.7 percent year-on-year to P11.715 trillion as of end-June. This rate was a turnaround from the 0.4-percent contraction in June 2021.
“This growth was an improvement from the 2-percent average growth during the pandemic but still lower than the double-digit average growth of 13.0 percent before the pandemic,” the BSP said.
The loan expansion largely came from the manufacturing, real estate, information and communication, wholesale and retail trade and construction sectors. Collectively, these sectors accounted for 48.7 percent (P5.701 trillion) of the banking system’s gross total loans.
“Such broad-based lending indicates recovery across industry sectors. Banks remain optimistic on credit growth as the results of the latest industry survey showed that loans are seen to post double-digit growth in the next two years,” the BSP said.
Higher interest rates
The BSP kept policy rates low and maintained an accommodative policy stance during the COVID-19 crisis in 2020. As such, banks were able to pass on lower interest rates to their borrowers. With the reopening of the economy and upside risks to inflation, the BSP started to raise the policy rate in the second quarter of 2022 after a series of policy rate cuts in 2020.
Mean and median weighted average interest rates have generally gone down since the start of the pandemic. These rates started to inch up in the second quarter of 2022 compared to levels reported in 2021.
The consolidated real estate exposures of universal/commercial banks and thrift banks increased by 6.2 percent to P2.906 trillion as of end-June 2022, lower than the 9.4-percent growth in June 2021. Real estate loans continued to make up the majority of real estate exposures, with a share of 86.2 percent, while real estate investments held the remaining portion of 13.8 percent.
The growth of total real estate loans scaled up by 7.2 percent to P2.505 trillion as of end-June 2022, surpassing the 6.1-percent growth recorded in June 2021. While the growth rate in this period was slower than the pre-pandemic average of 12.0 percent, it was slightly faster than the 6.5 percent average growth during the pandemic.
The growth in residential real estate loans was accompanied by a rise in residential real estate prices in the Philippines in the second quarter of 2022. The Residential Real Estate Price Index rose 2.6 percent, driven by increase in prices across housing types. By area, residential property prices in the National Capital Region grew by 6.3 percent due mainly to increase in the prices of townhouses and condominium units.
Credit to MSMEs
While the mandatory credit allocation for micro, small and medium enterprises set forth in Republic Act 6977, as amended by R.A. Nos. 8289 and 9501, ended on June 16, 2018, the BSP continues to monitor the credit allocation of banks to the MSME sector.
Based on bank-submitted MSME reports, the banking system provided a total of P447.7-billion credit to MSMEs, which was 5.1 percent of total loan portfolio, net of exclusions, as of end-June 2022.
The banking system’s total credit allocation to micro and small enterprises and medium enterprises reached P174.4 billion and P273.3 billion, respectively. The total MSME credit allocated as of end-June 2022 of P447.7 billion declined by 1.6 percent when compared with the P454.8 billion credit in June 2021.
During the pandemic, the average growth of credit allocated to MSMEs dropped 10.3 percent, a turnaround from the 4.7-percent average growth rate before the pandemic.
“In view of these developments, the BSP continues to foster a regulatory environment conducive to the sustained development and growth of MSMEs. In particular, the BSP retained the effectivity of the prudential measures that aim to channel funding and extend more credit to MSMEs until end of 2022,” the BSP said.
Increased deposits
Amid the pandemic, domestic deposits continued to expand, reflective of the economy’s gradual recovery and the depositors’ increased awareness of the importance of saving in the face of future contingencies.
The lending and investment activities of the banking system were largely funded by deposits which grew by 7.5 percent year-on-year to P16.492 trillion as of end-June. This growth, however, remained far from the 9.0 percent and 9.2 percent, respectively, during and prior the pandemic.
The expansion in total deposits as of end-June 2022 was driven by demand and regular savings accounts which grew year-on-year by 12.6 percent and 12.2 percent, respectively. As to deposit mix, savings deposits made up the biggest share of total deposits at 48.3 percent, followed by demand deposits and negotiable order of withdrawal accounts at 30.3 percent and time certificates of deposit with 20.3 percent.
Long-term negotiable certificates of deposit accounted for a minimal 1.1 percent of the total. Savings deposits have consistently accounted for around half of total deposits in the past six years. The share of demand deposits and NOW accounts to total deposits, however, has been increasing the past three years.
Savings deposits were comprised of regular savings (80.9 percent share, P6.452 trillion), kiddie and teen savings (0.7 percent share, P55.0 billion), other savings accounts (18.3 percent share, P1.460 trillion), and basic deposit accounts (0.1 percent share, P5.1 billion).
The regular savings, kiddie and teen savings and basic deposit accounts grew by 12.2 percent, 9.0 percent, and 5.1 percent, respectively, lower than the 12.7 percent, 12.3 percent, and 9.8 percent growth in June 2021, respectively.
By size of account, deposit accounts holding P5,000 and below had the highest increase in volume, growing by 11.3 percent year-on-year to 62.9 million accounts, reflecting banks’ heightened efforts to target small savers.
Adequate capital
The banking system posted a stronger capital position amid the uncertainties caused by the COVID-19 pandemic. As of end-June 2022, the banking system’s capital accounts grew by 2.7 percent year-on-year to P2.576 trillion, lower than the 5.9-percent growth rate in the previous year.
Retained earnings and undivided profits held the largest share of total capital accounts at 49.5 percent and increased by 1.1 percent year on year to P1.275 trillion. This was followed by paid-up capital, which accounted for about 47.0 percent share and was the main driver of total capital growth with its 15.2 percent (P160.2 billion) year-on-year expansion to P1.211 trillion as of the same reference period.
Across banking groups, big banks continued to hold the largest share of the banking system’s capital accounts at 92.4 percent, posting a 4.0 percent increase during the year. Rural and cooperative banks, having the smallest share of 2.4 percent, also grew by 9.3 percent. The remaining 5.2 percent was held by thrift banks with a capital reduction of 18.1 percent as of end-June 2022.
Both the capital adequacy ratio and common equity tier 1 ratios of universal and commercial banks, on a consolidated basis, were above the BSP minimum requirements of 10 percent and 6 percent, respectively.
“These indicate that U/KBs are prepared to withstand shocks to their balance sheet, including those related to the COVID-19 pandemic,” the BSP said.
As of end-June 2022, the CAR of big banks stood at 16.0 percent on a solo basis and 16.5 percent on a consolidated basis, while the CET1 ratio hit 14.8 percent on a solo basis and 15.4 percent on a consolidated basis.
Non-performing loans
Philippine banks’ net non-performing loans to capital ratio at 8.2 percent as of end-June 2022 showed a downtrend from 9.3 percent in December 2021 and 10.8 percent in June 2021 (pandemic peak).
Banks, however, have yet to return to the pre-pandemic quarterly average of 3.5 percent or a range of between 2.5 percent and 5.3 percent (March 2013- December 2019).
Sustained profits
The net profit of the Philippine banking system increased 16.7 percent year-on-year to P143.1 billion for the period-ended June 2022, lower than the 42.9-percent growth in June 2021. More than half of the total interest income came from lending to private corporations and households and investment in debt securities.
Interest income increased 6.4 percent year on year to P409.4 billion, a turnaround from the 13.3-percent contraction in the same period last year.
Meanwhile, interest expense dropped by 6.9 percent to P55.0 billion due mainly to the change in deposit mix wherein lower-cost deposits, particularly demand accounts, grew faster than the savings deposits. This translated to lower interest expense since these accounts normally carry lower interest rates than savings deposits.
Net interest margin slightly dropped to 3.5 percent in the period ending June 2022 from the previous year’s 3.6 percent. Lower non-core income, mainly from sales of non-trading financial assets and nonfinancial assets and higher non-interest expenses, contributed to the deceleration of the profit growth rate.
Non-interest income fell 7.3 percent year-on-year to P117.0 billion due to lower income from sales of other assets. Operating expenses rose 5.2 percent to P266.9 billion, higher than the 3.2 percent recorded from the same period a year ago, as banks upgraded technology and developed personnel.
Meanwhile, banks recorded trading income of P10.3 billion for the period-ended June 2022, with P7.8 billion profits in sales and/or redemption of trading securities and P4.6 billion realized gains from foreign exchange transactions, offsetting the P2.0 billion unrealized MTM losses incurred on trading portfolio (financial assets/liabilities measured at FVTPL).
Majority of banks’ income were derived from lending activities, a core business, as the ratio of annualized net interest income to total operating income ratio hovered around 77.7 percent.
The annualized cost-to-income ratio, an indicator of operational efficiency, inched up to 58.9 percent for the period ended June 2022 as annualized non-interest expenses grew by 5.5 percent, faster than the year-to-date June 2022 inflation of 4.4 percent (2018=100) and driven by increases in other administrative expenses.
Rationalized operations
The banking system’s asset expansion was accompanied by a leaner and stronger banking landscape. The total number of bank head offices declined to 498 as of end-June 2022 from 523 head offices a year ago.
“This is in view of bank mergers and consolidations as well as closures in an effort to promote resilient institutions,” the BSP said.
The total number of branches, branch-lite units, representative offices, remittance desk offices, marketing offices and sub-branches (collectively referred to as other offices) increased to 12,692 from 12,603 a year ago. This physical network expansion is in line with the industry’s commitment to the BSP’s financial inclusion agenda.
The banking system’s network consisted of 45 universal/commercial banks with 7,136 other offices, 43 thrift banks with 2,532 other offices, 406 rural and cooperative banks with 3,024 other offices, and 4 digital banks. Big banks made up a relatively smaller proportion in terms of head office count at 9.0 percent but held the bulk or about 94.0 percent of the system’s total assets
Rural and cooperative banks consistently constituted the majority of operating banks, making up 81.5 percent of the offices, many of which were stand-alone units.
