THE worst is over for Philippine banks.

The banking industry’s performance in the first quarter of 2009 was impressive indeed, with a few major players posting double-digit growth rates in revenues and profits.

Traditional revenue streams, like interest income and fees and commissions, all posted significant increases.

There was a drop in profits in 2009, though. The main reason was the loss of income from trading securities. But the first-quarter results showed some banks posting double-digit increases in income from trading securities and foreign-exchange gains.

This clearly showed that the local banks were not really hit hard by the financial crisis in the United States. True, a few suffered losses from their investments in the collapsed Lehman Brothers Holdings, but they have since covered for such losses from their internal funds.

Some weak banks have been acquired by the big banks, some rural banks have been shut down, portfolios have weakened, but in general the domestic banking industry remains in good financial health.

Confidence, an essential element in banking, remains, and that’s the reason we did not see any panic withdrawals.

Contrary to what happened in the United States and other major economies where bank lending virtually stopped as a result of the crisis, bank lending here in the Philippines continued to grow.

Data from the Bangko Sentral ng Pilipinas showed that outstanding consumer loans extended by universal, commercial and thrift banks increased by 18.7 percent to P385.8 billion as of end-March 2009 from P325.1 billion in the same period last year. On a quarter-on-quarter basis, the latest consumer- loans level was up 1.5 percent from P380 billion as of end-December 2008.

Real-estate purchases accounted for P160.4 billion or 41.5 percent of total consumer loans. As of end-March 2009, the exposure of banks to the real-estate sector totaled P367.6 billion, up 27.3 percent from P288.7 billion in the same period last year. That explains the numerous development projects in the real-estate industry, again contrary to the housing slump in the United States.

The fears spawned by the global recession discouraged people from spending, and they opted for putting their money in savings. With fresh signs that the crisis is easing and recovery may begin soon, consumers have begun to spend again, and this will contribute to economic growth, including banking.

There are several factors behind the strength of the domestic banking industry which contribute to its growth amid the global crisis.

First is the low ratio of nonperforming loans (NPL) to total loan portfolio. As of end-April 2009, the NPL ratio of universal and commercial banks stood at 3.65 percent, well below the 4.0-percent level before the 1997 Asian financial crisis.

The NPL ratio is one of the most closely watched indicators of the banking industry’s health. At the height of the Asian financial crisis, the NPL ratio hovered at double-digit levels.

Second, the International Monetary Fund has suggested that domestic banks be put through stress tests like banks in the United States, which uncovered financial problems.

But I agree with the Bangko Sentral’s position that stress-testing is not needed here, for the simple fact that local banks are already being closely and constantly monitored as a result of the 1997 crisis.

The Monetary Board even imposed a capital-adequacy ratio of 10 percent, higher than the 8 percent suggested by the Basel 2 Convention, to ensure that banks maintain adequate capital. At present, Philippine banks have maintained a capital-adequacy ratio higher than 10 percent.

Also, except for the few banks that invested in Lehman, domestic banks do not have toxic assets, which led to the collapse of US institutions; and local banks have not engaged in overlending.

Frankly, I don’t believe the banks are lending enough to really drive the economy. I said before that we were not hit as hard as the United States, so our banks should not react like the banks in the United States.

Coming from the fall in earnings in 2008 compared with 2007, and given their performance during the first quarter of 2009, I believe the banks will report better results at the end of this year.

The banking system provides the fuel for the economic machine, and we need a full tank of fuel to drive our economy through the recession. The low-interest environment being promoted by the monetary authorities, as well as the declining inflation, should encourage more borrowings for productive activities, not only for consumer purchases.

The banking system is liquid, according to the Bangko Sentral, but that liquidity must flow through the economy so it can run smoothly.

The worst is over for the banks, but it can come back if the banks remain too restrictive in their lending activities. If the economy really slowed down in the first three months of 2009, then banks can play a role to ensure that the remaining three quarters will post higher growth rates.

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