November 24, 2017 (10:22) | Publication: EIU - Industry Reports

Philippines - Banks

The Philippines had 599 banks at end-March 2017 (down from 622 in the year-earlier period, according to the BSP), a larg e chunk of which (498) were classified as rural
banks, specialising in small loans to farmers. There were 42 universal and commercial banks, including the subsidiaries and local branches of foreig n banks, and a further
59 thrift banks (some of which offer microfinance). There were also 5,646 non-bank financial institutions, almost all of which were pawn shops.

In local-currency terms, bank loans g rew by 19.6% year on year in September, according to the latest data from the BSP, up from 16.3% in the year-earlier period. The
Economist Intellig ence Unit expects lending g rowth to moderate in the forecast period as economic activity cools, averag ing around 12% a year in 2018-22. We forecast
that bank deposits will g row at a similar pace. According ly, we expect the ag g reg ate loans-to-deposit ratio to remain stable, at an averag e of 75%, in 2018-22.

An improving labour market, relatively low interest rates, a booming business-process outsourcing sector and healthy remittances from Filipinos abroad have fuelled
demand for property. The BSP responded initially to concern over bank exposure to a frothy property market by lifting the reserve requirement for all banks and non-banks
with quasi-banking functions by 1 percentag e point in 2014, to 20%. Before taking this step, in 2012 the BSP set a cap on real-estate loans of 20% of an individual bank's
total loans while increasing overall supervision.

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Financial sector
2013a 2014 a 2015 a 2016 a 2017 a 2018 b 2019 b 2020 b 2021 b 2022 b
Total financial sector
Total loans (US$ bn) 79.6 90.3 93.8 100.8 111.8 123.7 141.9 156.6 181.5 205.4
Short-term loans (US$ bn) 31.2 35.4 36.7 39.5 43.8 48.5 55.6 61.3 71.1 80.5
Long -term loans (US$ bn) 48.4 54.9 57.0 61.3 68.0 75.3 86.3 95.3 110.4 125.0
Deposits (US$ bn) 230.5 260.8 270.5 290.5 321.7 355.5 407.3 448.9 519.6 587.7
Current-account deposits (US$ bn) 46.3 53.3 59.4 64.3 71.1 78.8 90.4 100.2 115.8 130.8
Time & saving s deposits (US$ bn) 184.3 207.5 211.1 226.2 250.6 276.7 316.9 348.7 403.7 456.9
a Economist Intellig ence Unit estimates. b Economist Intellig ence Unit forecasts.

Source: The Economist Intellig ence Unit.

More recently in September, the BSP issued new g uidelines to tig hten its super-vision of banks' exposure to real estate and project finance. The enhanced prudential
reporting g uidelines, for one, will require banks to submit detailed information of their real-estate loans involving mid- and hig h-end residential property from June 2018.
The recent sharp decline in residential property prices looks to have prompted this move; the BSP's residential real-estate price index fell by 5.1% year on year in the
second quarter of 2017 (albeit due partly to hig h base effects), after g rowing at an averag e rate of 1.2% in the preceding three quarters.

The BSP is not solely focused on mitig ating systemic risks in the banking system. Encourag ing ly, financial sector liberalisation also remains on the ag enda in pursuit of
broader policy g oals. Mr Espenilla announced in July 2017 that the BSP has ag reed to ease the sing le borrower's limit (SBL), which stipulates that a debtor cannot account
for more than 25% of a bank's total loan portfolio. In a bid to make the financial system more efficient, the central bank's decision will remove banks' short-term exposures
to clearing and settlement banks from the SBL restriction. In October the BSP also decided to exclude banks' loans to their subsidiaries as long as such credit is
g uaranteed by multilateral lenders, to support the g overnment's ambitious infrastructure drive.

Althoug h total consumer loans will continue to g row rapidly in 2018-22, retail banking services will remain small compared with corporate banking services. Nevertheless,
the country has been the subject of pilot projects in mobile banking that seek to reach poor rural people who live far from traditional bank branches. With an estimated 60-
70% of the adult population in the countryside still lacking a bank account, the expansion of rural banking services is set to be an important g rowth area.

Filipinos are modest users of bank accounts. About 31% of adults had an account at a formal financial institution in 2014, and over 20% had a debit card, according to the
World Bank's latest Global Financial Inclusion Database. However, only about 15% of adults had saved money in an account with a financial institution, while just over
9% had used community-based saving s methods (such as a saving s club). Althoug h almost 70% of adults had borrowed money, just under 12% had used a formal financial
institution, while almost 49% of adults borrowed from family and friends. Only about 5% of Filipinos had an outstanding mortg ag e in 2014, and just 3% had a credit card.

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Banking sector
2013a 2014 a 2015 a 2016 a 2017 b 2018 c 2019 c 2020 c 2021 c 2022 c
Bank performance
Banking assets (% chang e in local currency) 23.9 12.0 8.2 12.4 14.1 12.1 12.1 12.1 12.1 12.1
Bank loans (% chang e in local currency) 15.8 19.1 11.9 16.6 19.6 11.8 11.8 12.1 12.3 12.6
Bank deposits (% chang e in local currency) 32.2 12.0 8.3 13.8 15.3 12.0 12.0 12.0 12.0 12.0
Net interest income (% chang e in local currency) 10.9 -4.8 33.4 10.5 15.8 11.6 11.6 12.1 12.1 11.6
Net marg in (net interest income/assets; %) 2.8 2.3 2.9 2.8 2.9 2.9 2.9 2.9 2.9 2.8
a Actual. b Economist Intellig ence Unit estimates. c Economist Intellig ence Unit forecasts.

Source: The Economist Intellig ence Unit.

Local banks are g enerally well capitalised, with universal and commercial banks having an averag e risk-weig hted capital-adequacy ratio (CAR) of 15.8% at the end of the
first quarter of 2017, up from the 15.1% reg istered in the preceding quarter. This is well in excess of the 8% CAR called for by the Basel III interna-tional capital-
adequacy standards and the more string ent 10% threshold set by the BSP.

The BSP is encourag ing merg ers between the numerous small reg ional banks under its Consolidated Prog ramme for Rural Banks (CPRB). The scheme, which commenced in
2015 and has been extended to end-October 2019 (after expiring in Aug ust), offers financial and reg ulatory incentives to banks in the same g eog raphic area to merg e.
Support for the prog ramme is provided by the BSP, the Philippine Deposit Insurance Corporation and the g overnment-owned Land Bank of the Philippines. It is now easier
for banks to qualify in the renewed CPRB: a merg er can now include fewer than five banks as long as the final entity has a combined capital of P100m (US$2m) or more
and a CAR of at least 12%. The incentives include: a subsidy for the financial advisory cost relating to the merg er; technical support for the merg er process; and the
possibility that Land Bank may provide an equity injection for the newly merg ed bank.

A law sig ned by the former president, Benig no Aquino, in 2014 provided for the full entry of foreig n players. Foreig n interest in the Philippine banking industry remains
healthy despite the decision of UK-based Standard Chartered to sell its retail banking unit in late 2016. Crucially, that decision did not stem from any disenchantment with
the country or its future potential, as Standard Chartered's manag ement made clear. Rather, it reflected a strateg ic review of its g lobal operations-driven by the g oal of
reducing costs and focusing on activities where it has sufficient scale. Reinforcing this point, Standard Chartered retained its corporate and institutional business in the
Philippines, which it views as a core part of its reg ional operations in the Association of South-East Asian Nations (ASEAN).

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Top ten banks, end-2016
(P m unless otherwise noted)
Bank Classification Total assets Loans and receivables (net) Deposit liabilities Stockholders' equity Return on equity (%)
BDO Unibank Domestic, universal 2,198,231 1,475,723 1,831,771 216,328 11.5
Metropolitan Bank and Trust Domestic, universal 1,552,520 893,686 1,205,687 187,400 8.7
Bank of the Philippine Islands Domestic, universal 1,451,041 824,742 1,184,746 160,549 14.1
Land Bank of the Philippines Government, universal 1,395,366 508,734 1,236,291 85,380 15.6
Philippine National Bank Domestic, universal 711,285 368,031 542,210 101,837 7.5
Security Bank Corporation Domestic, universal 695,661 284,536 348,850 96,541 9.6
China Banking Corporation Domestic, universal 552,868 327,323 469,735 57,409 10.3
Development Bank of the Philippines Government, universal 535,780 234,285 356,242 44,124 9.5
Union Bank of the Philippines Domestic, universal 458,744 191,573 328,039 62,333 15.7
Rizal Commercial Banking
Domestic, universal 419,293 229,550 260,165 62,605 6.4
Corporation
National totals 13,591,203 7,612,119 10,506,562 1,548,091 10.5
Source: Bang ko Sentral ng Pilipinas.

Reports in November 2017 sug g ested that Malaysia's CIMB, the second-larg est bank in the country by assets and one of the top five in ASEAN, will soon g et an
approval from the BSP to start operating in the Philippines. Chuchi Fonacier, a deputy g overnor at the BSP, said in October that eig ht foreig n banks in total have
expressed an interest in entering the market. Overall, the entry of foreig n institutions will help to streng then the capital base of the banking system, introduce into the
market a new rang e of financial services and products, as well as ensuring best g lobal practices and broadening market access.

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