THE Philippine banking sector is proving to be resilient amid the major downturn, with bankers and even the Central Bank chief pointing to robust capital accounts as main defense against headwinds brought about by the battle against a pandemic.
“A bank is healthy if it has healthy capitalization, period,” UnionBank Chief Economist Ruben Carlo O. Asuncion told the BusinessMirror.
“Now that there is a pandemic affecting not just the health of people, but also the health of the economy, it is key that a bank is healthy,” Asuncion added, noting that poor capital level can lead to banks closing.
Latest data from the Bangko Sentral ng Pilipinas (BSP) shows such is still distantly worrisome.
Trajectory
INDEED, the banking system registered P2.38-trillion capitalization as of end-July, which is nearly 7 percent higher than the P2.23 trillion booked last year for the same period. In January the sector’s capital level was at P2.32 trillion.
Looking at the trajectory from a decade ago, Philippine banks saw a substantial growth in capital. Capitalization has grown by nearly nine times from P268.12 billion as of end-July of 2010.
The capital adequacy ratio (CAR), meanwhile, stood at 12.69 as of end-July. This is, however, lower compared to the 12.85 CAR registered in the previous year for the same period.
Nonetheless, both figures are above the regulatory requirement.
“The Philippine banking industry’s capitalization has been well above the minimum requirements for many years and decades, as set by local [10-percent CAR] and international regulators [8-percent CAR],” RCBC Chief Economist Michael L. Ricafort said.
Jolted
RICAFORT said that the banking sector’s being profitable is supporting its capitalization.
“Philippine banks have been among the most profitable industries in the country in recent years and decades, as GDP [gross domestic product] and economic growth has been consistently at least 6 percent from 2012 to 2019,” he added.
However, the recent figures—while still showing profitability—show the banking sector was also jolted when government attacked the Covid-19 pandemic with lockdown measures.
In the first half, the Central Bank reported that the financial system saw its net income slide by around 22 percent to P86.48 billion from P110.97 billion year-on-year. The net earnings were dragged by the increasing provisions for potential credit losses as borrowers struggle to settle payments amid the enhanced community quarantine that the government imposed.
Contributory
MEANWHILE, Ricafort pointed out that the growth of the loan portfolio and deposit—which are at least two times to three times faster than the country’s economic growth in recent years—has supported higher interest rate income.
The recorded uptick contributed to the banking sector’s healthy capital, according to Ricafort.
He also emphasized that the “robust” trading gains were also a contributing factor.
“The underlying declining trend in interest rates and bond yields over the last five to 15 years, as reflective of further developments and/or improvements in the local capital markets, has supported robust trading gains, especially recently with bond yields reaching new record lows or bond prices reaching new record highs, thereby adding to banks’ net income and capital,” he said.
Policy
ASUNCION commended the Central Bank for assisting the local financial institutions in maintaining a healthy capital level.
The economic and financial crises of yesteryears have taught the regulators across the globe, including the BSP, that keeping a sufficient capital is priority to stay afloat, he explained.
“For the Philippine case, I can say that the local financial system will continue to guard capitalization moving forward amid the delirious impacts of this once-in-a-lifetime event,” Asuncion said.
Ricafort also recognized that the BSP has implemented a series of initiatives—monetary easing measures and regulatory relief—to help banks amid the ongoing crisis.
Monetary authorities have trimmed the key policy rates by 175 points so far this year, bringing the overnight reverse repurchase facility to 2.25 percent. This move has released over P1 trillion worth of fresh liquidity into the financial system.
The Central Bank, at the same time, brought down reserve requirements for the banks to channel more financing to lending—a move seen boosting demand for borrowings.
Indebtedness
HOWEVER, rising nonperforming loans (NPLs) or bad debts remain a major threat to the banking sector’s capitalization. NPLs are borrowings left unpaid for 30 days or more after the due date.
“Rising NPLs are definitely the challenge because it can eat up into banks’ capitalization,” Asuncion said.
Latest BSP data shows that bad loans reached P290.1 billion as of end-July, which is 32 percent higher compared to P219.57 billion last year for the same period. Gross NPL ratio stood at 2.67 as of end-July, the highest in the recent years.
Coinciding with the increase in NPLs is the growth of the total loan portfolio by 5 percent to P10.86 trillion for the period from P10.33 trillion year-on-year.
Economists have been saying that the surge in bad loans was due to the reduced capability of the borrowers to settle payments. This is expected given that many Filipinos were left jobless as lockdown measures restricted mobility and business operations.
Ample
DEALING with a major financial constraint, many families have opted to prioritizing spending on the essentials only to survive—and payment of loans has become least of their priorities for now.
De La Salle University (DLSU) Economist Maria Ella C. Oplas said she considers this behavior as “normal considering the situation that we are in right now where we need to prioritize spending.”
Still, BSP Governor Benjamin E. Diokno said that the local banking system is healthy enough to survive the accumulating bad loans, thanks to robust capitalization.
“We are confident that this [NPL ratio] will remain within manageable levels considering the Philippine banking system’s adequate capital and ample provisions to absorb the rise in bad loans,” Diokno told the BusinessMirror earlier.
Allowance for credit losses rose by around 60 percent to P321.85 billion as of end-July from P202.22 billion last year.
Divestment
ASUNCION said banks are expecting a bill proposed by lawmakers, which they dubbed the “Financial Institutions Strategic Transfer Act,” or Fista, can help ease the burden of the financial intuitions whose NPLs are rising. The bill allows the creation of special-purpose vehicles (SPVs), or companies created to protect parent firms from risks.
“The creation of SPVs, or special-purpose vehicles, special entities where banks can essentially transfer NPLs to unburden their balance sheets, will be crucial for banks to continue operations and not succumb to the pandemic’s terrible impacts,” Asuncion explained.
The proposed Fista allows financial institutions to get rid of their nonperforming assets by selling them to asset management firms. That way, they can attain better management of their debt levels during this pandemic.
Bankers Association of the Philippines President Cezar P. Consing earlier said the Fista could be deemed successful if 30 percent to 40 percent of nonperforming assets will be sold to asset management companies.
Nonperforming assets as of end-December could qualify for third-party selling under the bill. But the coverage may be extended until the second quarter of next year.
That is, if the bill is approved and enacted into law.
Image credits: Arden Paolo | Dreamstime.com, Bernard Testa