Philip­pines banks gain sta­bil­ity

The bank­ing sys­tem in the Philip­pines is gain­ing sta­bil­ity af­ter the coun­try’s fi­nan­cial sys­tem was badly af­fected by the fi­nan­cial cri­sis of 2007-2008

Banking Frontiers - - Contents - Cen­tral Bank Build­ing

The bank­ing sys­tem in the Philip­pines is gain­ing sta­bil­ity af­ter the coun­try’s fi­nan­cial sys­tem was badly af­fected by the fi­nan­cial cri­sis of 2007-2008

Bank­ing sec­tor in the Philip­pines is con­sid­ered sta­ble even though the sec­tor faces is­sues re­lat­ing to poli­cies of the new gov­ern­ment headed by pres­i­dent Ro­drigo Duterte, which has sig­nif­i­cantly de­parted from the pol­icy mak­ing process fol­lowed by the ear­lier gov­ern­ment. How­ever, many bank­ing sec­tor an­a­lysts feel banks in the coun­try are known for their cap­i­tal­iza­tion and liq­uid­ity, the coun­try has a strong reg­u­la­tor and there is mod­est growth in debt among pri­vate sec­tor units. A re­cent re­port by Stan­dard and Poor’s Global Rat­ings says there is ‘strength­ened over­sight’ of the cen­tral bank, Bangko Sen­tral ng Pilip­inas (BSP) on banks in the coun­try. The rat­ing agency also as­signed 7 on a scale of 10 (1 hav­ing the high­est risk, 10 the low­est) in its bank in­dus­try credit risk assess­ment to Philip­pine banks.

The Philip­pine bank­ing sys­tem is com­posed of univer­sal banks, com­mer­cial banks, thrift banks, ru­ral banks and co­op­er­a­tive banks. Ru­ral and co­op­er­a­tive banks com­prise 82.6% of the to­tal num­ber of banks, thrift banks 10.9%, univer­sal banks 3.31% (21) and com­mer­cial banks 3.15%.

CON­SOL­I­DA­TION

The sec­tor has seen a sort of con­sol­i­da­tion in the re­cent years. Some of the ru­ral banks, which were con­sid­ered weaker, have van­ished re­sult­ing in the to­tal num­ber of banks in the coun­try at 616. There are 41 big or univer­sal and com­mer­cial banks, in­clud­ing for­eign banks op­er­at­ing in the coun­try. Twelve are pri­vate do­mes­tic banks, three gov­ern­ment-run and six for­eign bank hav­ing branches. The 20 com­mer­cial banks are made up of 13 for­eign bank branches, five pri­vate do­mes­tic banks and two for­eign bank sub­sidiaries. Ru­ral and co­op­er­a­tive banks now num­ber 513, 19 less than 2015’s midyear to­tal. There are 64 thrift banks. The reg­u­la­tor has so far al­lowed 8 for­eign banks to op­er­ate in the coun­try – Shin­han Bank of South Korea, the In­dus­trial Bank of Korea, and Seoul-based Woori Bank from Korea, Yuanta Bank, Cathay United Bank of Tai­wan and First Com­mer­cial Bank of Tai­wan from Tai­wan, Su­mit­omo Mit­sui of Ja­pan and the United Over­seas Bank of Sin­ga­pore. The com­bined as­sets of the banks in the coun­try is pegged at ap­prox­i­mately $273 bil­lion (PhP 13,591 bil­lion). The com­mer­cial banks dom­i­nate the sec­tor and ac­count for more than 90% of the bank­ing sys­tem’s to­tal re­sources. These banks can per­form the func­tions of an in­vest­ment house (such as se­cu­ri­ties un­der­writ­ing) and in­vest in non-al­lied un­der­tak­ings, in ad­di­tion to reg­u­lar com­mer­cial bank­ing ac­tiv­i­ties. These banks and some thrift banks are also li­censed to en­gage in de­riv­a­tives ac­tiv­i­ties.

The de­ci­sion to open the bank­ing sec­tor to more for­eign banks was taken in July 2014 by the then Pres­i­dent Benigno Aquino III. This was part of the coun­try’s ef­forts to ac­com­plish the in­te­gra­tion pro­posed un­der the ASEAN Eco­nomic Community (AEC) Blue­print. The full in­te­gra­tion of the pro­posed ASEAN Fi­nan­cial In­te­gra­tion Frame­work is ex­pected in 2018 and the cen­tral bank is working on var­i­ous mea­sures to im­prove the bank­ing sys­tem in the coun­try. The cen­tral bank has been up­grad­ing the su­per­vi­sion frame­work in line with in­ter­na­tional stan­dards, es­pe­cially on cor­po­rate gov­er­nance and risk man­age­ment; re­quir­ing cap­i­tal build-up and en­cour­ag­ing merg­ers and con­sol­i­da­tions; and open­ing bar­ri­ers to en­try. The in­te­grated sys­tem of­fers scope for the Philip­pines as it can tar­get a larger por­tion of ASEAN sav­ings as it lags be­hind In­done­sia, Malaysia, Sin­ga­pore and Thai­land. The ASEAN re­gion rep­re­sents $2.4 tril­lion in com­bined gross do­mes­tic prod­uct, mak­ing it among the 10 big­gest economies in the world.

PROB­LEM SEC­TORS

The largest sec­tors that ac­counted for out­stand­ing loans of the bank­ing sys­tem as of end-2016 were real es­tate (17.3%), whole­sale and re­tail trade (12.1%), man­u­fac­tur­ing (11.4%), and house­holds/ con­sumers (10.3%).

The Philip­pines has a de­posit in­sur­ance scheme, ad­min­is­tered by the Philip­pine De­posit In­sur­ance Cor­po­ra­tion (PDIC), on the lines of the U.S. Fed­eral De­posit In­sur­ance Cor­po­ra­tion (FDIC). The PDIC has a per­ma­nent in­sur­ance fund (PIF) of about $60 mil­lion (PhP3 bil­lion), aug­mented by pre­mi­ums paid by mem­ber banks. The in­sur­ance cover per de­pos­i­tor

is ap­prox­i­mately $10,500 (PhP 500,000).

De­posits con­sti­tute the main source of funds for the banks. How­ever, the growth in de­posits has been not very sub­stan­tial, mainly be­cause peo­ple in the coun­try, look­ing for higher re­turns are in­creas­ingly opt­ing for sev­eral in­sur­ance prod­ucts which pro­vides pro­tec­tion and in­vest­ment.

DIGITAL INI­TIA­TIVE

The cen­tral bank has taken up an am­bi­tious pro­gram to make 20% of pay­ments in the coun­try to be done dig­i­tally by 2020. It has pro­posed the Na­tional Re­tail Pay­ment Sys­tem (NRPS) frame­work to fa­cil­i­tate banks, fi­nan­cial in­sti­tu­tions and gov­ern­ment agen­cies to adopt digital so­lu­tions and take up in­no­va­tions for bet­ter ser­vices to the pub­lic. The ini­tia­tive en­vis­ages am elec­tronic credit trans­fer scheme, which will en­able any in­di­vid­ual or busi­ness with an ac­count in any fi­nan­cial in­sti­tu­tion to trans­fer funds and/or make pay­ments to any other ac­count within the frame­work. Once it pushes through, the re­tail pay­ment sys­tem will hope­fully clear con­sumers’ ini­tial hes­i­ta­tion to keep their money in digital form for se­cu­rity pur­poses or im­pend­ing in­con­ve­nience as its use is still lim­ited.

A re­cent sur­vey has brought out that the Philip­pines had the low­est digital bank­ing pen­e­tra­tion in the Asian re­gion. Use of smart­phones to ac­cess digital bank­ing has lagged con­sid­er­ably. Only 35% of digital con­sumers (de­fined as con­sumers who make pur­chases online) own a smart­phone, but only 9% of Filipino con­sumers say they had used a smart­phone to bank, com­pared with 26% in de­vel­op­ing Asia.

How­ever, there is en­cour­ag­ing trend. Many cus­tomers are al­ready go­ing online to re­search bank­ing prod­ucts. About 40% of sur­vey re­spon­dents said they had been in­tro­duced to credit-card of­fers online and had also eval­u­ated them online. Life in­sur­ance poli­cies also are heav­ily re­searched online be­fore cus­tomers make pur­chases in person.

2-PRONGED STRAT­EGY

The cen­tral bank has adopted a twopronged strat­egy - leg­isla­tive frame­work and in­ter­na­tion­ally ac­cepted reg­u­la­tory and su­per­vi­sory prac­tices. It has re­cently made a shift to risk-based su­per­vi­sory frame­work, thereby fo­cus­ing on as­sess­ing the abil­ity of banks to man­age the var­i­ous risks. It also seeks to pro­mote re­spon­si­ble bank be­hav­ior and bench­mark that against in­ter­na­tion­ally ac­cepted stan­dards of safety and sound­ness. It is in­sist­ing that just pa­per com­pli­ance is not suf­fi­cient but banks must adopt high gov­er­nance stan­dards, strengthen the com­pli­ance frame­work in­tro­duce re­forms to up­grade the man­age­ment of risks – credit, mar­ket, op­er­a­tions, and in­for­ma­tion tech­nol­ogy, among oth­ers. This has brought in re­sults.

The cen­tral bank has also up­graded reg­u­la­tions on in­for­ma­tion tech­nol­ogy (IT) risks in fi­nan­cial in­sti­tu­tions in the wake of con­cerns over in­creas­ing in­ci­dents of cy­ber at­tacks and sys­tems glitches. There are now new guide­lines and stan­dards in place to en­sure that banks im­ple­ment se­cu­rity con­trols to ad­e­quately pro­tect their in­for­ma­tion as­sets from unau­tho­rized ac­cess and de­lib­er­ate mis­use or fraud­u­lent mod­i­fi­ca­tion, in­ser­tion, dele­tion, or sub­sti­tu­tion.

FINTECHS

The Philip­pines has been see­ing lot of fi­nan­cial tech­nol­ogy com­pa­nies be­ing set up. Ob­vi­ously, there is interest among in­vestors in such star­tups. Ac­cord­ing to gov­ern­ment statis­tics, the trans­ac­tion value in the fin­tech mar­ket in the Philip­pines amounts to $ 4.9 bil­lion in 2016. Its fu­ture pro­jec­tion shows that this trans­ac­tion value will grow an­nu­ally at the rate (CAGR 20162020) of 21.0 %, which will grow this to $10.5 bil­lion by 2020. Among the fin­tech com­pa­nies, the largest mar­ket share is for digital pay­ments seg­ment with a to­tal trans­ac­tion value of $ 4.9 bil­lion in 2016. The coun­try has 38 mil­lion in­ter­net users and an equal num­ber of mobile phone users. The in­ter­net us­age went up 600% be­tween the years 2000 to 2008.

Apart from digital pay­ment ser­vices, there is scope for fintechs in ar­eas such as al­ter­na­tive in­vest­ment in­stru­ments, peer to peer pay­ment, digital com­merce trans­ac­tions, Robo-ad­vi­sory, au­to­mated wealth man­age­ment sys­tem and crowd fund­ing. A World Bank re­port says 69% of adult pop­u­la­tion in the coun­try is un­banked and this cre­ates a huge op­por­tu­nity for fintechs. Some of the emerg­ing fi­nan­cial tech­nolo­gies com­pa­nies are PawnHero, an online pawn­shop, Ayana, which runs digital com­merce and pay­ment ser­vices, Len­don, which de­ter­mines cred­it­wor­thi­ness by an­a­lyz­ing so­cial media data, Coins.ph which trans­fers money us­ing blockchain tech­nol­ogy and Meet­ing which spe­cial­izes in credit an­a­lyt­ics. A mobile app, PaidUp, helps users to buy any­thing on credit from its part­ner stores while Tag­cash pro­vides mi­cro­pay­ments so­lu­tion. The top in­vestors in fin­tech ven­tures are Idea­s­pace Foun­da­tion, Kick­start Ven­tures, UP En­ter­prise Cen­ter, Ayala TBI Network, Hatchd Digital, WaveMak­ers Labs, Narra Ven­ture Cap­i­tals and 500 Star­tups.

The cen­tral bank has brought in re­forms in KYC norms. It has al­lowed fi­nan­cial in­sti­tu­tions to rely on third-party ver­i­fi­ca­tion of KYC. The ID re­quire­ments for open­ing a bank ac­count have also been re­laxed. This has en­abled banks to out­source some of their ver­i­fi­ca­tion pro­cesses to fi­nan­cial tech­nolo­gies. For in­stance, Bank of the Philip­pines Is­lands, which had col­lab­o­rated with a lead­ing telecom­mu­ni­ca­tions com­pany Globe Tele­com and one of the big­gest con­glom­er­ates Ayala Cor­po­ra­tion to op­er­ate as the first mobile bank in the coun­try in 2012, can now open ac­counts of peo­ple without any gov­ern­ment IDs.

The cen­tral bank is fram­ing reg­u­la­tions to make them rel­e­vant to the chang­ing fi­nan­cial en­vi­ron­ment in the coun­try. It feels that the reg­u­la­tions should cover any devel­op­ment, which serves the ob­jec­tive of in­clud­ing peo­ple in the fi­nan­cial sys­tem. For ex­am­ple, it has created norms to al­low tele­com com­pa­nies to of­fer mobile money ser­vices through their sub­sidiaries. This al­lows tele­com com­pa­nies to com­pete with banks and ease down bank­ing has­sles and en­rich the sec­tor with a va­ri­ety of of­fers.

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