Phl banks awash with cash,well stocked

MANILA, Philippines - The country’s banking system is awash with cash, and there appears to be no direct threat from the turmoil being experienced by the European and US economies.

That was thed general assessment of two of the leading foreign banks operating in the Philippines.

Hongkong and Shanghai Banking Corp. Ltd. (HSBC) managing director and co-head of Asian Economics Research Frederic Neumann said that Philippine banks continue to park vast amounts of the liquidity with the country’s central bank (Bangko Sentral ng Pilipinas) while the loan to deposit ratio is “rather low.”

“Philippine banks have only recently started to lend more, after keeping a tight rein on credit growth for many years. During this time, they continued to acquire deposits. So, despite the recent pick-up in lending activity, banks still have ample liquidity,” Neumann added.

Philippine banks need to acquire new sources of loan demand. In the property sector, this is already sufficiently strong demand.

The HSBC official said that the challenge is to channel liquidity into more productive sectors of the economy, and find ways to finance infrastructure projects together with the government. “Asset diversification is thus a key challenge for local banks at the moment, especially as they look to deploy their vast liquidity,” Neumann added.

The BSP reported recently that domestic liquidity grew by 9.4 percent in August this year to reach P4.3 trillion. At the same time, the non-performing loan (NPL) ratio of the commercial banking system remained at a cautious 2.52 percent.

Standard Chartered Bank (SCB) regional head of Research for Asia Nicholas Kwan said that high liquidity parked in “idle” instruments carries costs.

“But at time of economic uncertainty and financial volatility, high liquidity is a blessing since it cushions banks from facing unexpected liquidity stresses – which are major causes of bank failure in most financial crisis,” Kwan added.

The SCB regional research head said that loan growth in the Philippines is running close to 25-percent year-on-year and still accelerating.

He said that there are a lot of lending opportunities domestically from both the private and public sector. Banks however should be cautious in their lending and risk management.

“However, with capital adequacy ratio (CAR) at 17 percent and NPL ratio at around three percent, the need for Philippine banks to aggressively raise their loan provision seems limited,” Kwan added.

The commercial banks provisioning for probably lending losses stood at 121.5 percent end August from the previous month’s 126.24 percent. Its non-performing asset (NPA) coverage ratio narrowed to 62.31 percent from 62.5 percent a month earlier. But it widened from the 59.17 percent recorded in August 2010.

The economic depression experienced by the European and the US markets have no direct impact on the country’s banking system. However, local exports are getting a beating, which could indirectly impact on the bank’s relative position.

Neumann said that unlike other financial systems in Asia, the Philippine banking system is not overly exposed to financial stress in Europe or the United States.

“But, there are few direct channels of impact and we don’t expect the Philippine banking system to be vulnerable to any potential escalation of financial stress elsewhere in the world,” the HSBC managing director said.

Meanwhile, Kwan said pointed out that European banks account for 48 percent of foreign bank lending in the Philippines, which is about the average of other Asian economies (ranging from 31 percent to 64 percent).

In the post-Lehman period, European banks withdrew about 20 percent of their lending in the Philippines.

“Depends on how the European debt problems unfold, chances are any major withdrawal by European banks may be less than the post-Lehman levels given better preparedness and the Philippines’ solid fundamentals proven in the past three years,” he added.