MANILA, Philippines — If they were wary last year, local banks are extremely more cautious in 2012 but while the global and domestic market and economic uncertainties may keep financial institutions from becoming too aggressive or optimistic with their outlook, it will not derail expansion plans especially for opening new branches.

“Economic growth this year will not be as fast as we would all want it to be but demand will still be there, and so we’re going to be meeting that demand,” Nestor V. Tan, President of BDO Unibank Inc. said.

“We’re still looking to expand our branch (network) this year,” Tan added. “There are certain markets that need coverage (banking services) and we will provide it.”

The Henry Sy-controlled BDO is the largest bank in the country with P1.05 trillion assets, followed by Metropolitan Bank and Trust Co. of the Ty family, and in third slot was the Ayala-led Bank of the Philippine Islands. The three banks combined control about 70 percent of the entire banking network.

In the consumer loans business especially in mortgages and automotive loans, thrift banks held a big share of the market. One of the two largest thrift banks – the other one being BPI Family Savings Bank – was Metrobank’s subsidiary PS Bank.

PS Bank President Pascual M. Garcia III said he prefers to be optimistic about economic growth prospects for this year and that it was possible to achieve the government’s official 4.5-5.5 percent GDP growth projection for 2011 despite a disappointing 3.2 percent final GDP at the end of the third quarter vis-à-vis 2010’s 7.3 percent.

For 2012, Garcia expects some improvements to boost growth, mainly state spending to counter the adverse effects of continued global economic slowdown. “I expect higher growth than what other forecasters were saying because of government spending,” he said, adding that the Aquino administration would have to be more active in encouraging economic activities by increasing expenditures.

“I want to be optimistic (and) there are positive factors to (hope for),” said Garcia. Similar with BDO, the thrift bank also has big plans for network expansion this year. The Metrobank unit is raising P3 billion to finance the establishment of more branches in the next months.

The Bangko Sentral ng Pilipinas (BSP) heeded banks’ appeal to help them further expand their branch network and in July, in order to help banks increase its physical presence in terms of bank branches, the BSP partially lifted its 15-year moratorium on establishing branches in eight restricted areas in Metro Manila. The move was mainly for the benefit of second-tier banks which needed a break to perform in a more competition-friendly regulatory environment. In November, the BSP approved seven banks’ request to open 162 branches in the eight restricted cities.

Modest loan growth

Bankers expect loan growth, particularly consumer loans, would have moderate growth this year.

“We did fine in 2011 but for this year, we think consumer loans will have lower growth,” said Tan.

To ensure loan growth, bankers knew they have to be more accessible and open branches in more areas to reach more borrowers.

In 2011, there was weaker-than-expected demand for consumer loans. According to a BSP survey with banks’ loan officers as respondents, credit standards for loans to households showed overall net easing at the end of the third quarter 2011, relative to the previous quarter, reflecting easing standards for housing loans.

Still, borrowers weren’t pounding on banks’ doors to avail of credit. The surveyed banks, said the BSP, also reported that credit standards for credit card, auto, and personal/salary loans were unchanged, which should have encouraged lending growth to this sector. In addition, loan margins for housing and auto loans were also eased while credit lines were increased and loan maturities made longer for housing loans.

Overall including loans to the productive sector which induce economic growth, based on the latest BSP report, as of end-October commercial banks’ outstanding loans, minus overnight placements, increased 22.2 percent year-on-year to P2.66 trillion. This was a faster pace of growth compared to the end of the third quarter last year.

Loans for household consumption expanded by 20.2 percent, also faster compared to end-September’s 17.9 percent

For 2012, bankers expect consumer loan growth to be lower than 20 percent and maintaining 2011 levels would be a challenge for most, given the slower GDP growth projection.

BSP Governor Amando M. Tetangco Jr. however said credit growth would be sustained this year and this would help fuel GDP growth despite external worries and he sees steady lending growth for this year.

Tetangco said monetary authorities would continue to monitor economic developments, especially liquidity expansion, to “ensure that the monetary policy stance also remains supportive of domestic economic activity consistent with the price stability objective.”

BSP, private banks’ 2012 outlook

Tetangco said last year, events kept the regulators and the banking community “on their toes” but warns that 2012 and what was expected for this year was something “to gear up for.”

During the past 12 months, the BSP has kept policy rates steady, tweaking reserve ratios to control liquidity growth in the wake of a subdued domestic economic, weak global economic activity and continued concerns over Europe’s sovereign and banking sectors. “Notwithstanding the resilience of domestic private consumption, growth of aggregate demand remained modest due to strong external headwinds and lower-than-program fiscal spending,” a report on Monetary Board proceedings on policy stance said.

The BSP has raised interest rates by 50 basis points to 4.5 percent overnight borrowing and 6.5 percent overnight lending rate, and adjusted higher reserve requirements to 21 percent to keep inflation contained in the wake of pending power and fare hikes. By December, the forecast for inflation was 4.52 percent for 2011, 3.51 percent for this year and 3.12 percent for 2013.

Tetangco expects December inflation would likely range to a high of 4.9 percent (using the 2000-base consumer price index) to a low of four percent, compared to November’s 4.7 percent. The outlook for inflation remains manageable, he said, but he admits to unabated concerns about global developments.

The central bank in a paper discussing policy rates said it has considered the risks surrounding the inflation outlook to remain tilted to the downside. “Weak global economic recovery is likely to be reflected in easing global demand and commodity price pressures,” it said, but it also noted that some upside risks to prices remain, including potential increases in liquidity due to sustained capital inflows.

Tetangco said for this year, key performance indicators such as loans, deposits and bank profits show that the industry has strength in terms of balance sheet accounts, assets base, credit growth, sufficient capital and liquidity.

He also believes that the domestic economy is self-sustaining and could withstand the continued global economic slowdown.

“(The) domestic demand will remain a major contributor to growth,” he said in December.

There were four concerns that he warned the public about: the uncertainties in trade given the global economic condition particularly export markets such as the US, Japan and Europe; concerns on services and remittances which the Philippines is dependent on as sources of foreign exchange; and finally, a possible decline in foreign direct investments as well as foreign financial aids to the country this year.

Tetangco reiterates that monetary authorities were prepared to implement measures that would continue to counter the negative effects of the global slowdown. He said the BSP has proven that has flexibility and capable of swift action to adjust to a “changing global environment to protect the gains on the inflation front and help support growth as necessary.”

“The Philippines has policy space,” he stressed, adding that policy makers would make certain that measures would be “maximized” this year.

Both Tan and Garcia agreed that monetary policy conditions seemed steady and stable, mindful of where interest rates and inflation situation were right now. But while expansion plans were still on, bankers' inherent cautious attitudes would probably still hold them back on making aggressive decisions in the name of competition.

"It's still early, we want to wait for 2012 but for now, capital-wise, we've more than enough," said Tan.

Garcia, for his part, said outlook this year indicates some measure of sustainability in terms of growth but caution and a dose of stubborn optimism, were called for. "I prefer to be an optimist," he said.