PHL banking sector unscathed by global headwinds

By Bianca Cuaresma - DECEMBER 31, 2016

Repeatedly during the year, especially during the several waves of financial-market volatility that
were about to hit the local financial sector, Bangko Sentral ng Pilipinas (BSP) officials often
stepped in to say there is nothing to worry about our own banking industry, as it remains strong
and prudent in its operations.

Latest data from the central bank showed local banks profitability, indeed, seemed unaffected by
the bouts of negative sentiment during the year, as a 16.7-percent overall growth of the industry
was seen in terms of net profit in the third quarter of the year, from the P98.4-billion net profit in
end-September 2015 to P114.8 billion in end-September this year. This is just some P20 billion
short of the end-2015 net profit of the banking industry in 2015.

Banks total assets also grew double digits at 11.7 percent, from P11.5 trillion in end-October in
2015 to P12.9 trillion in October 2016, already surpassing the P12.09-trillion total assets recorded
in December 2015.

Their total loan portfolio grew in total by 16.9 percent, from P6.1 trillion in October 2015 to P7.2
trillion in the same month this year.

The industry also showed prudence through their ability to bring down their past due loans to
2.38 percent of their total loan portfolio as of end-October this year, from the 2.51 percent of
their total loan books in October 2015.

The lenders physical network also expanded from 10,615 total offices at the end of the third
quarter of 2015 to 11,024 total offices in end-September 2016.

The strong numbers of the Philippine banking system lay the groundwork for the central bank
officials recurring theme to their statements of a robust banking sector that is resilient to
global economic changes and supportive of the countrys economic growth momentum.

The BusinessMirror talked to two of the three international major credit watchers on their views of
the Philippine banking system and how the industrys numbers compare with the banking
systems in other jurisdictions.

In separate exclusive press chats, analysts from both Moodys Investor Service and Fitch Ratings
confirmed the local banking systems strength in 2016, as compared with similarly rated
counterparts, and forecast a smooth-sailing path for financial institutions in the country next year
despite foreseen volatility in the international scene.

We think that the Philippine banks managed fairly well against the recent volatilities. We see
that economic backdrop for the Philippine banks is quite stable and resilient, Fitch Ratings
Financial Institutions Director Elaine Koh told the BusinessMirror. Koh forecasts the Philippine
banks loan portfolio to grow in the high-teens pace next year.

[In 2017] we do think Philippine banks will be able to manage volatility. Clearly, some of the
aspects that have affected banks, like the interest rates, are extremely soft, but banks have been
able to take advantage, Moodys Investors Service Vice President and Senior Analyst for
Financial Institutions Alka Anbarasu also told the BusinessMirror.

Pockets of risks
While the two analysts from the international ratings agencies mirrored the confidence shown by
local officials, they warned of pockets of risks that may threaten certain sectors of the local
banking industry going forward in 2017.

Among the sectors most monitored for financial institutions in the Philippines is their exposure to
the real-estate sector, as prices continue to rise, fueling some concerns of a potential asset
bubble in the country.

Anbarasu said they are watching the banks exposure to real estate, particularly, as it comprises
a large bulk of the lenders total loan portfolio in the country, and could spell problems for banks,
should property prices start to correct or soften, and should supply outpace demand in the
industry.

Fitchs Koh also admitted they are watching the banks exposure to the property sector, but
expressed more optimism on the health of the real-estate loans and the strong demand to back
up the supply.

Koh also said potential unforeseen deterioration of remittance inflows and sudden changes in the
business-process outsourcing (BPO) flows could spell uncertainty and volatility for banks, but this
is not their baseline scenario.

However, Philippine banks will most likely be resilient to the bigger waves of investor concerns for
the year, including the Federal Reserves seemingly more hawkish take on interest-rate hikes for
next year, as well as political developments in the Philippines and in the United States, where
recently elected leaders have been showing unorthodox styles in leadership and policy
implementation.

Bangladesh bank heist

In 2016 one of the biggest issues to shake the Philippine banking sector was the $81-million
crossborder bank heist involving the Bangladesh Bank, whose laundered money ended up in the
local banking stream through deposits made at Rizal Commercial Banking Corp. (RCBC).

Asked if this spells potential threat and negligence on the side of the local banking system,
Moodys Anbarasu said they believe the heist is a one-off incident, as Philippine banks are
subject to one of the most stringent regulations in the world implemented by the Bangko Sentral
ng Pilipinas (BSP).

Fitchs Koh, on the other hand, said the recent incident continues to highlight some areas of
weakness, but added there has been sufficient attention being paid to the issue, especially by
the central bank and the legislative branch. She also said Fitch is currently tracking the progress
on the legislative side of the issue to prevent local financial institutions from being used in
money-laundering schemes.

Tetangcos term ends

Both credit watchers also said the BSP, under the leadership of the central bank Governor
Amando M. Tetangco Jr., did well to take advantage of the banks resilience to boost its strength
and implement prudential measures to shield the industry from potential risks down the line.

We think of the BSP as an institution with a very high credibility, Anbarasu said.

The BSP has shown a fairly prudent approach to bank regulation and we expect that to
continue. The governor has done commendable work in strengthening banks and we see this as
something that will remain for the longer term, Koh also said.
Asked if Tetangcos end of term in the middle of 2017 is something they see as a risk to the
strength of the local banking system, Fitchs Koh said they are still monitoring developments,
although there is always a degree of uncertainty in transitions.

Source: Cuaresma, B. (2016, December 31). PHL banking sector unscathed by global headwinds.
Retrieved from http://www.businessmirror.com.ph/phl-banking-sector-unscathed-by-global-headwinds/

Synthesis:

The article talks about the Philippine banking system remaining strong and prudent in
its operations. Latest data from the central bank showed local banks profitability seemed
unaffected by the bouts of negative sentiment during the year, as a 16.7-percent overall
growth of the industry was seen in terms of net profit in the third quarter of the year. The
strong numbers of the Philippine banking system lay the groundwork for the central bank
officials recurring theme to their statements of a robust banking sector that is resilient to
global economic changes and supportive of the countrys economic growth momentum.
According to Elaine Koh, Fitch Ratings Financial Institutions Director, they think that the
Philippine banks managed fairly well against the recent volatilities. They see that economic
backdrop for the Philippine bank is quite stable and resilient. Also according to Alka
Anbarasu, Moodys Investors Service Vice President and Senior Analyst for Financial
Institutions, in 2017, they think Philippine banks will be able to manage volatility. Clearly,
some of the aspects that have affected banks, like the interest rates, are extremely soft, but
banks have been able to take advantage.

According to Investopedia (2015), the banking sector is the section of the economy
devoted to the holding of financial assets for others, investing those financial assets as
leverage to create more wealth, and the regulation of those activities by government
agencies. According to Malaya Business Insight (2017), the Philippine banking industry
played a significant role in helping sustain the pace of growth of our economy. Bank lending
continued to expand by double-digit rates and went mostly to productive sectors.

I think our banking sector is sound, stable, and continues to be a source of strength for
our economy. It did not only survive 2016, but it also continued to thrive. I think the leaders
of our banking industry and other institutions that support our baking system did a great job
in nurturing a dynamic banking sector that is sound, stable and globally competitive.

Investopedia. (2015, March 23). What is the banking sector? Retrieved from
http://www.investopedia.com/ask/answers/032315/what-banking-sector.asp

Business Insight, M. (2017, January 16). THE PHILIPPINE BANKING SYSTEM: Helping sustain
the pace of growth of our economy. Retrieved from http://www.malaya.com.ph/business-
news/special-features/philippine-banking-system-helping-sustain-pace-growth-our-economy