Philippine banks shaping up for recovery

A study made by one of the region’s prestigious financial publications showed that Philippine banks seem on track for a recovery although its regional counterparts remain millions of dollars ahead.

However, the pestering political uncertainty not only threatens whatever gains were achieved, but it can be expected if the economy slows down.

"The Philippine banking sector is shaping up for a possible recovery over the medium-term, with banks posting modest results in 2004 due to better-than-expected domestic economic expansion," Benny Zhang, research analyst at The Asian Banker said.

Although low compared to Asian peers, profitability has improved for three consecutive years, with banks witnessing strong loan growth for some segments, better margins from higher interest rates, increasing interest in retail investment products, and a high influx of remittances.

Regulators maintained a favorable interest rate environment to stimulate loan growth, especially in the retail loan sector, hence the improving performance of banks.

Equitable PCI Bank (EPCIB) posted a 37-percent increase in net income to $34 million, the largest in six years, from higher interest and fee income. It ranked third best among the country’s commercial banks last year.

The Bank of the Philippine Islands (BPI) also recorded profits of over 18 percent and the highest return on asset (ROA) in the country, at 1.4 percent. It ranked second best in 2004.

The capital adequacy ratio (CAR) for major banks stood between 14-20 percent at end-2004, well above central bank and international guidelines, but necessary given the sticky situation of the country’s high non-performing loans (NPLs) level.

"The root of the problem lies in major shareholders (close-knit families) who do not want to infuse fresh capital, yet are averse to the idea of dilution due to an injection from prospective new investors," said Zhang. Thus it appears that banks are issuing more Tier 2 capital to boost their capital base, in line with central bank regulations.

After several years of dragging their feet, banks started unloading their non-performing assets (NPAs) in bulk through special purpose vehicles (SPV) that availed of tax incentives under the 2002 SPV Law.

As at end-2004, the NPL ratio of commercial banks stood at 12.5 percent, down from 13.8 percent the previous year. The industry’s NPA ratio was also favorably lower at 11.4 percent from 12.9 percent in the same period.

But the country’s NPL ratio is still among the region’s highest.

"With high political uncertainty, a deterioration can be expected if the economy slows down," the project report said.

Banks are plagued with high CIRs, averaging 70 percent, compared to the region’s 50 percent. One factor behind the poor cost efficiency is the lack of economies of scale.

"The market is fragmented with over 40 banks, many of which are sub-scale," it added.

It added that although larger banks have been restructuring their operations in the past years, there is limited ability and interest to merge. Smaller banks have had to contend with issues of family control and asset quality, which discourages potential buyers from making them takeover targets.

The Asian Banker earlier stated that 2004 was upbeat for Asian banks in general. The 300 biggest banks produced $51.5 billion in net profits as compared to the net loss of $4.8 billion in 2003.

The largest banks by asset size remained largely unchanged from the 2003 ranking with Japanese banks still leading the pack.

Of Asia Pacific’s 50 largest banks by asset size, only 18 of these banks made it to the list of top 50 banks by strength. Twenty-three of the largest 50 banks by asset size failed to even strike the top 100 list by strength" Emmanuel Daniel, managing director and editor-in-chief of The Asian Banker, said.

The survey highlights the ongoing consolidation activities to weed out weak players and lay the foundation for stronger financial institutions with better scale and fundamentals to be competitive. "The reform-driven Chinese, Taiwanese and Indian banks will soon rise as star players in Asia’s rosy financial service industry," Zhang added. – Ted Torres