Banking sector improves stability, strength in 2013
December 31, 2013
The Philippine banking industry, despite global challenges, is now Basel 3-compliant and in the past year, has build up capital buffers and its sights set on expansion both local and for the large financial institutions, exploring a bigger pie of the regional business.
The country’s credit rating upgrade which gave it the much-coveted investment grade status, in part is a nod to the banking sector’s stability and strength.
As stated by Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr., international rating agencies Moody’s, Fitch Ratings and Standard & Poor’s have recognized the banking system for its “well-capitalized, profitable and liquid with deposit-funded balance sheets and sound loss-absorption capacities.”
In its December 16 report, Moody’s positive outlook has been maintained, it was first given in December 2012. The rating firm said the positive outlook is good for 12 to 18 months more and it was arrived at by assessing the banks’ operating environment which is a positive; asset quality and capital – stable; funding and liquidity – stable; profitability and efficiency – stable; and systemic support, also a positive.
Both Fitch and S&P also viewed the banking system as resilient. According to Fitch in its December 17 updated analysis, Philippine banks continue to be well-capitalized which will support major expansion plans in 2014 and also enough resilience to buck external shocks.
The BSP’s balancing act of managing the high level of liquidity – and in an environment which is also highly volatile – and making sure economic expansion is not inflationary, has also made it imperative that it closely watch credit growth and therefore, banks’ credit standards.
As in 2013, there are expectations this year of sustainable lending growth and at the same time, keeping the non-performing loans and assets portfolio at manageable levels. As such, banks expect credit demand to grow.
As of the end of the third quarter, the industry’s total loan portfolio amounted to P3.92 trillion from P3.44 trillion the year before. Banks’ non-performing loans gross-wise totaled P102 billion from P103 billion the same period in 2012 and net NPL is P17.8 billion from P13 billion. The NPL ratio overall is still declining.
Tetangco noted that credit growth is sustainable, in fact the credit-to-GDP ratio continue to indicate that there is no “unwarranted expansion”.
The BSP’s several bank stress tests also continue to show that the balance sheet of banks can absorb extreme credit shocks.
Tetangco said to sustain the banking sector’s position of strength, they maintain and implement new prudential measures to ensure financial stability. One very visible sign of change is the adoption of Basel 3 which contains the new global standard for managing banking-related risks.
Other changes implemented in the last 12 months are reforms in the framework of over-the-counter derivatives, financial market infrastructure, corporate governance standards, consumer protection and accounting.
These changes are necessary to address identified weaknesses if the BSP is to sustain financial stability, said Tetangco.
External factors specifically any news coming from the US Federal Reserve continued to color market sentiments and the first half of 2013 saw a higher level of financial market volatility. Other foreign-related worries include the uncertain recovery in Europe, China’s growth and Japan’s “Abenomics” and its impact to the region.
The BSP’s macro-prudential tools have been effective, so far, according to BSP Deputy Governor Diwa C. Guinigundo. He has reason to believe that the worse impact of the global market volatility in the wake of the US Fed tapering issues were tempered as far as the Philippine market is concerned.
For one, the country’s current account surplus and foreign exchange reserves provided enough buffers to keep markets calm. For 2013, the central bank expects current account surplus to reach $11.1 billion and $10.4 billion this year. The gross international reserves or GIR are forecast at $88 billion for 2014. As of end-November GIR stood at $83.57 billion.
Guinigundo said the gradual exit of the US Fed stimulus program will keep financial markets on its toes for some time. Initially, the US Fed indicated a reduction of its monthly bond purchases by $10 billion. “While tapering has started, the start was small and nominal, more of a signal than a statement of aggressive monetary stance,” Guinigundo noted in December.
In the next months, the BSP official expects US Fed actions will become more orderly which will only settle global markets. “I sense a more orderly conduct of tapering and more appropriate normalization of interest rate policy,” said Guinigundo. “I also sense a stronger traction of output and employment and reasonable adjustment in inflation. Overall, this should augur well for the global markets, erasing much of the uncertainty.”
The central bank remains confident that the country’s solid fundamentals have served and will continue to serve as strong buffer against external hits or challenges. But while not immune to the impact of possible market corrections following US Fed announcements and actions related to the qualitative easing, the BSP said the country has sufficient buffers to ride out the financial market volatility.
More challenges ahead
Both Tetangco and Guinigundo reiterated that for 2014 – in truth what they have been doing for the past three to five years — their focus will remain on the rapid domestic liquidity growth, strong domestic credit growth and potential asset bubbles.
The central bank reported that as of end-November, domestic liquidity increased by 36.5 percent year-on-year to P6.7 trillion, it accelerated its growth due to the flood of liquidity into the system exiting from the BSP’s special deposit account (SDA) facility.
The BSP revised its liquidity management strategy when it forced out non-pooled trust investments from SDAs, partially in July and in full last November 30. An estimated P1 trillion of funds was pulled out of the facility back to bank deposits or other trusts instruments such as unit investment trust fund while some will flow into the stocks and bond market.
BSP officials expect M3 growth will start to normalize over the next few months after SDA adjustments are completed. In the meantime, the central bank said it will keep a closer eye on the potential impact of strong liquidity growth on the outlook for inflation as well as on financial asset prices. “The BSP stands ready to deploy appropriate measures as needed to ensure that liquidity conditions continue to be in line with the BSP’s objective of maintaining price and financial stability conducive to sustainable economic growth,” it said.
Tetangco, in a speech he gave foreign media last November, said increased liquidity growth will only be for a short transition period, as banks adjust to operational refinements to the access to the BSP’s SDA facility. “With banks rebalancing portfolios to take these changes into consideration, banks could be expected to more expeditiously and effectively channel the SDA funds to the productive sectors,” he explained.
On credit growth, he continued: “In our assessment, the banks have made very deliberate choices to continue to lend bulk of their funds to the relatively capital-intensive productive sectors of the economy, i.e., the manufacturing and real estate sectors. Our surveys show also that even as banks have increased their lending activities, they have not relaxed their lending standards.”
“We are confident that given the current regulatory environment and the banks’ observed risk appetite, banks will continue to be discriminating in the projects they will fund. Indeed, there is room to grow further in this respect, given our ratio of credit to GDP remains below that of our peers in the region,” said Tetangco.
“On strong asset prices, we do not yet see asset bubbles forming,” he stressed. “But developments bear watching.”
The BSP, noted Tetangco, has been criticized as fuelling a credit and asset bubble through low interest rates. “This view is rather narrow (the BSP) has reduced its policy rates to support growth to the extent the inflation outlook has allowed it to. In addition, we have deployed macro-prudential measures during the early stages of strong capital inflows and even earlier to help tighten regulatory screws.” These include concentration limits on real estate lending, limits on open foreign exchange positions, and higher risk weight for non-deliverable forward transactions, he pointed out.