Second Semester 2015 - Center for Financial Stability (CFS)

Second Semester 2015

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Office of Supervisory Policy Development

This semestral report is prepared pursuant to Section 39(c), Article V of Republic Act No. 7653 (The New Central Bank Act), Republic Act No. 7906 (Thrift Bank Act of 1995), Republic Act No. 7353, as amended by Republic Act No. 10574 (Amended Rural Bank Act of 1992), Republic Act No. 7721, as amended by Republic Act No. 10641 (Amended Foreign Bank Law) and Republic Act No. 6462 (Foreign Currency Deposit Act of 1972), Republic Act No.8367 (Revised Non-Stock Savings and Loans Association of 1997), and Republic Act 10000 (Agri-Agra Law of 2009), by the Office of Supervisory Policy Development, Supervision and Examination Sector, Bangko Sentral ng

Pilipinas. A synopsis of the report is available online at http://www.bsp.gov.ph.

3 333Supervision and Examination Sector

Page Number Glossary of Terms i

Prologue v

The Philippine Financial System: An Assessment 1

The Banking Sector The Philippine Banking System 9 Trust Operations 22 The Foreign Currency Deposit Unit (FCDU) System 26 The Foreign Bank Branches and Subsidiaries 31

The Non-Bank Financial Institutions Non-Bank Financial Institutions with Quasi-Banking Functions 35 Non-Stock Savings and Loan Associations 38

Appendices Tables Schedules

Annexes Bank Regulations Issued between 1 January to 31 December 2015 Directory of Philippine Banks as of 31 December 2015 Survey on the Effects of Foreign Bank Entry Into the Philippine Banking System

Table of Contents

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Office of Supervisory Policy Developmenti

A. SELECTED ACCOUNTS1. Financial Reporting Package (FRP) is a set of financial statements for prudential reporting purposes

composed of the Balance Sheet, Income Statement and Supporting Schedules. The FRP is primarily designed to align the BSP reportorial requirements with the provisions of the Philippine Financial Reporting Standards (PFRS)/Philippine Accounting Standards (PAS) and Basel 3-based Capital Adequacy Framework. It is also designed to meet BSP’s statistical requirements.

2. Total Assets refer to the sum of all net assets, adjusted to net of “Due from Head Office/Branches/Agencies” and “Due to Head Office/Branches/Agencies” of foreign bank branches.

3. Financial Assets (Other than Loans and Receivables) refer to the sum of all investments in financial assets, net of direct equity investments. These include financial assets held for trading (HFT), designated at fair value through profit or loss (DFVPL), available-for-sale (AFS), held-to-maturity (HTM), unquoted debt securities classified as loans (UDSCL) and investments in non-marketable equity securities (INMES).

4. Equity Investments refer to equity investments in subsidiaries, associates and joint ventures.

5. For purposes of computing the average, one period covers 12 months. a. Average assets refer to the sum of total assets as of end of two periods divided by 2.

b. Average capital refers to the sum of total capital accounts as of end of two periods divided by 2.

c. Average earning assets refer to the sum of earning assets as of end of two periods divided by 2.

d. Average interest-bearing liabilities refer to the sum of interest-bearing liabilities as of end of two periods divided by 2.

6. Financial Liabilities Held for Trading (HFT) refer to the sum of derivatives with negative fair value held for trading and liability for short position.

7. Financial Liabilities Designated at Fair Value Through Profit or Loss (DFVPL) refer to financial liabilities that upon initial recognition are designated by the bank at fair value through profit or loss.

8. Unsecured Subordinated Debt (UnSD) refers to the amortized cost of obligations arising from the issuance of unsecured subordinated debt which may be eligible as Tier 2 (supplementary) capital of the bank, subject to certain terms and conditions.

9. Redeemable Preferred Shares refer to preferred shares issued which provides for redemption on a specific date.

10. Total Capital refers to the sum of paid-in capital of locally incorporated banks, assigned capital and the allowable component of the net “Due To/Due From Head Office/Branches/Agencies” accounts of branches of foreign banks, other equity instruments, retained earnings and undivided profits, other comprehensive income, and appraisal increment reserve.

11. Earning Assets refer to the sum of due from BSP, due from other banks, financial assets-debt securities (net of allowance), financial assets HFT-derivatives with positive fair value HFT-interest rate contracts (stand-alone and embedded), and TLP inclusive of IBL and RRPs (net of allowance).

Glossary of Terms


12. Interest-bearing Liabilities refer to the sum of financial liabilities HFT, financial liabilities at DFVPL, deposit liabilities, bills payable, unsecured subordinated debt, bonds payable, redeemable preferred shares, derivatives with negative fair value held for hedging and finance lease payment payable.

13. Liquid Assets refer to the sum of cash and due from banks and other financial assets (net of allowance for credit losses).

14. Total Operating Income refers to the sum of net interest income and non-interest income.

15. Net Interest Income refers to the difference between interest income, provision for losses on accrued interest income from financial assets and interest expense.

16. Provision for Losses on Accrued Interest Income from Financial Assets refers to the impairment loss on accrued interest income from loans and other financial assets, net of equity securities, charged against current operations.

17. Non-Interest Income refers to the sum of dividend income, fee-based income (including income from fiduciary activities), trading income, foreign exchange profits, profits from sale/de-recognition of non-trading financial assets and liabilities, profits from sale/de-recognition of non-financial assets, profits on financial assets and liabilities DFVPL, profits on fair value adjustment in hedge accounting and other non-interest income.

18. Dividend Income refers to cash dividends earned on equity securities held as HFT, DFVPL, AFS and INMES.

19. Fee-based Income refers to the sum of income from payment services, intermediation services, custodianship, underwriting and securities dealership, securitization activities, fiduciary activities and other fee-based income.

20. Trading Income refers to the sum of realized gains/(losses) from sale/redemption, and unrealized gains (losses) from marking-to-market of HFT financial assets, and realized gains/(losses) from foreign exchange transactions.

21. Non-Interest Expenses refer to the sum of compensation and fringe benefits, taxes and licenses, other administrative expenses, depreciation and amortization, impairment losses and provisions.

22. Losses or Recoveries on Financial Assets refer to the sum of provision for credit losses on loans and receivables and other financial assets, bad debts written-off and recovery on charged-off assets.

23. Income Tax Expense refers to provision for income tax.

24. Net Profit or Loss refers to the difference of total operating income and non-interest expenses, plus (less) the recoveries/ (losses) on financial assets, share in the profit/(loss) of unconsolidated subsidiaries, associates, joint ventures and minority interest in profit/(loss) of subsidiaries.

25. Non-Performing Loans (NPL) refer to past due loan accounts whose principal and/or interest is unpaid for 30 days or more after due date. This applies to loans payable in lump sum and in quarterly, semi-annual or annual installments, including: the outstanding balance of loans payable in monthly installments when three or more installments are in arrears; the outstanding balance of loans payable in daily, weekly or semi-monthly installments when the total amount of arrearages reaches 10 percent of the total loan receivable balance; and restructured loans which do not meet the requirements to be treated as performing loans under existing rules and regulations, including all items in litigation. Effective January 2013, Circular No. 772 dated 16 October 2012 removed the exclusion of loans qualified as loss from NPL classification for the reporting of gross NPLs and the ratio of gross NPLs to gross TLP. The complementary

ii

Glossary

6


Office of Supervisory Policy Developmentiii

concepts of net NPLs (gross NPLs less specific allowance for credit losses on TLP) and the ratio of net NPLs to gross TLP were also introduced.

26. Real and Other Properties Acquired (ROPA) refer to real and other properties, other than those used for banking purposes or held for investment, acquired by the bank in settlement of loans through foreclosure or dacion in payment and/or for other reasons, whose carrying amount will be recovered principally through a sale transaction.

27. Non-Performing Assets (NPA) refer to the sum of NPL and ROPA, gross. Effective March 2003, NPAs exclude performing sales contract receivables, which met certain requirements under Circular No. 380.Based on the new FRP framework provided for under Circular No. 512 dated 3 February 2006 and effective on 31 December 2006, NPA should also include non-current assets held for sale.

28. Distressed Assets refer to the sum of NPLs, ROPA, gross, non-current assets held for sale and performing restructured loans replacing the current restructured loans.

29. Gross Assets refer to total assets plus allowance for credit losses on loans; allowance for credit losses on sales contract receivables (SCR); and allowance for losses on ROPA. For purposes of computing the NPA ratio where gross assets serve as the denominator, allowance for equity investments is excluded. Said allowance refers to the cumulative amount of impairment loss incurred on equity investments in subsidiaries, associates and joint ventures which shall be accounted for in accordence with PAS 36.

30. Allowance on NPAs refers to the sum of allowance for credit losses on loans, allowance for credit losses on SCR, allowance for losses on ROPA.

31. Non-Current Assets Held for Sale refer to ROPAs that are available for immediate sale in their present condition subject only to terms that are usual and customary for sales of such assets and the sale must be highly probable.

32. Sales Contract Receivable (SCR) refers to the amortized cost of assets acquired in settlement of loans through foreclosure or dacion in payment and subsequently sold on installment basis whereby the title to the said property is transferred to the buyers only upon full payment of the agreed selling price.


B. FINANCIAL AND OTHER RATIOS1. Capital adequacy ratio (CAR) refers to the ratio of capital to risk weighted assets computed in

accordance with the Basel III risk-based capital adequacy framework under Circular No. 781 dated 15 January 2013.

2. Cost-to-Income ratio refers to the ratio of non-interest expenses to total operating income.

3. Density ratio refers to the ratio of the total number of domestic banking offices to the total number of cities/municipalities in the Philippines.

4. Distressed assets ratio refers to the ratio of distressed assets to total loans (gross of allowance for probable losses), inclusive of interbank loans, plus ROPA (gross of allowance for losses).

5. Earning asset yield refers to the ratio of interest income to average earning assets.

6. Funding cost refers to the ratio of interest expenses to average interest-bearing liabilities.

7. Interest spread refers to the difference between earning asset yield and funding cost.

8. Liquid assets ratio refers to the ratio of liquid assets to total deposit liabilities.

9. Net interest margin refers to the ratio of net interest income to average earning assets.

10. NPA coverage ratio refers to the ratio of allowance on NPAs to total NPAs.

11. NPA ratio refers to the ratio of NPAs to total assets, gross of allowance for credit losses.

12. NPL coverage ratio refers to the ratio of allowance for credit losses on loans to total NPLs.

13. NPL ratio refers to the ratio of NPLs to total loans (gross of allowance for credit losses), inclusive of interbank loans.

14. Population-to-banking offices ratio (Customer Ratio) refers to the ratio of the total population to the total number of domestic banking offices.

15. Return on assets (ROA) refers to the ratio of net profit or loss to average assets.

16. Return on equity (ROE) refers to the ratio of net profit or loss to average capital.

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Glossary

88



The Status Report on the Philippine Financial System is a semestral report prepared by the Office of Supervisory Policy Development, Supervision and Examination Sector, Bangko Sentral ng Pilipinas (BSP), to be submitted by the Governor to the President and the Congress, pursuant to Section 39 (c), Article V of Republic Act No. 7653 or The New Central Bank Act. This report is basically culled from the various periodic reports submitted by BSP supervised/regulated institutions to the Supervisory Data Center, Supervision and Examination Sector. At end-December 2015, BSP supervised/regulated financial institutions consisted of 632 banks with 10,124 branches and other offices, 5,846 non-bank financial institutions (NBFIs) with 11,768 branches and four offshore banking units (OBUs) and 13 foreign representative offices (ROs). Effective 3 July 1998, the supervision and regulation of the BSP over non-banking entities were turned over to the Securities and Exchange Commission (SEC) for corporations and partnerships, and to the Department of Trade and Industry (DTI) for single proprietorships, in accordance with Section 130 of Republic Act No. 7653, except the following: non-banks with quasi-banking functions and/or with trust licenses, non-banks which are subsidiaries/affiliates of banks and quasi-banks, non-stock savings and loan associations and pawnshops.

Likewise, the supervision and regulation over building and loan associations were transferred to the Home Guarantee Corporation (HGC) effective 7 February 2002, in accordance with Section 94 of Republic Act No. 8791 (The General Banking Law of 2000). Finally, pursuant to Circular No. 512 dated 3 February 2006, as amended by Circular No. 644 dated 10 February 2009, and in line with the adoption of the Philippine Financial Reporting Standards (PFRS) and Philippine Accounting Standards (PAS), the BSP amended the Manual of Accounts and the BSP reportorial requirements consisting of the Consolidated Statement of Condition (CSOC), Consolidated Statement of Income and Expenses (CSIE) and their supporting schedules with the issuance of Circular No. 108 dated 9 May 1996, as amended, for universal and commercial banks, Circular No. 270 dated 19 December 2000, as amended, for thrift banks, and Circular No. 249 dated 26 June 2000, as amended, for rural and cooperative banks, prescribing a new and amplified Financial Reporting Package (FRP). The FRP is designed to align the Manual of Accounts and the BSP reportorial requirements with the provisions of the PFRS/PAS.

Prologue

v


Assessment

The Philippine Financial System: An Assessment

Asset expansion ensued on account of banks’ sustained credit to productive sectors of the economy, including the consumer finance market (Box Article 1). Treasury activities slowed down and banks rebalanced their investment portfolio towards more liquid and longer tenured financial instruments to mitigate increasing market risk from rising domestic interest rates. Moreover, banks remained domestically oriented as cross-border financial position of banks was minimal and diversified although there may be potential exposure to contagion risks from linkages and spillover from the United States and Asia Pacific countries (Box Article 2).

Nonetheless, funding remained relatively stable as it is largely sourced from retail and peso deposits of residents. Overall asset quality (Box Article 3) and solvency of the banking system improved amidst continuing asset expansion during the year. This largely bespeaks of banks’ commitment to strengthen their balance sheets to pursue further growth opportunities in the regionally integrated ASEAN by 2020.

On the whole, risk-taking activities had manageable impact on capital and profitability. The current capital adequacy ratio (CAR) at 14.9 percent on a solo basis of the universal and commercial banks indicates strong capital buffer against unforeseen shocks from risk-taking activities. Such fundamentally strong capital base is a byproduct of the country’s early and full adoption of Basel III capital standards on 01 January 2014. This resulted to the current risk-based capital to be of higher quality, with the bulk consisting of core equity tier 1 (CET 1) capital, and above prudential and international standards both on normal and stressed conditions1. On the other hand, rising interest rates affected the trading gains of the banking system as non-interest income was tempered by the ripples of mark-to-market losses from trading in 2015. Nevertheless, overall bottom line stayed in a positive trajectory.

Other non-bank financial institutions similarly exhibited prudence in their overall risk-taking activities and provided sufficient buffers for unforeseen shocks from their operating environment. Thus, overall performance resulted to strong balance sheets and positive net profit with improving asset quality and continued solvency.

In response to the increasing sophistication of the global financial services industry and changing needs of the market, the BSP has pursued responsive and pro-active reforms on banks’ capitalization, corporate governance standards and risk management, foreign participation, financial inclusion and capital market reforms to meet the demands of the new emerging market landscape and ASEAN regional integration.

In order to strengthen the local banks’ risk-based capital and align the domestic capital standards with international norms, more reforms in the existing capital rules were pursued to align the same with the remaining provisions of the Basel III accord. Circular No. 881 dated 09 June 2015 was issued to provide for the banking system’s capital buffer should there be stress and implement guidelines on the Basel III leverage ratio framework. Accordingly, solvency ratios remained both well above BSP’s regulatory minimum of 10 percent and the international standard of 8 percent.

Key reforms on corporate governance and risk management in 2015 respond to the need to continually foster a thriving culture of good governance and prudent risk taking in the banking system. Landmark reforms include the rules on related party transactions (Circular No. 895 dated 14 December 2015), revised compliance framework for quasi-banks (Circular No. 893 dated 16 November 2015), strengthened risk management guidelines covering the sale and marketing of financial products (Circular No. 891 dated 09 November 2015) and treasury activities of BSP supervised financial institutions (Circular No. 889 dated 02 November 2015), tightened the fit and proper rules governing the qualifications and appointment of directors and officers of the bank (Circular No. 889 dated 02 November 2015 and Circular No. 887 dated 07 October 2015) and the issued revised guidelines on internal control and audit (Circular No. 871 dated 05 March 2015).

On further liberalization of the banking sector, the BSP is setting the stage for foreign investment and competition as the country joins the ASEAN Economic Community by 2015 and stands ready to

The Philippine financial system, with the banking system at its core, stayed on an even keel as it continued to extend bank credit to the domestic economy in 2015.

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1 The BSP conducts a uniform stress test of banks’ capital every semester.

2 22



Consumer lending registered substantial growth in 2015. In particular, total Consumer Loans (CLs) of Universal and Commercial Banks (U/KBs) and Thrift Banks (TBs) stood at P1,060.9 billiona as of end-December 2015, accounting for 16.6 percent share of the total loan portfolio (TLP) of P6,408.6 billionb. CLs increased year-on-year (Y-o-Y) by 17.5 percent (Figure I).

The sustained growth in consumer lending was attributed to the improving economy due to the steady increase in OFW remittances, growing BPO industry and solid performance of the services sector, which heightened consumer spending and investingc. The growth in 2015 slowed down year-on-year (Y-o-Y) (Figure II) from 25.1 percent as of end-December 2014, mainly due to the Y-o-Y decline in growth rate of residential real estate loans (RRELs) which comprised 41.9 percent of total CLsd. Meanwhile, long-term trend of CLs maintained its Y-o-Y growth at 17.8 percent. Current CL is slightly below long-term trend.

Housing Loan Growth Moderated

After five years of upward expansion, residential real estate loans (RRELs) decelerated to an annual growth of 11.5 percent (Figure III) to P444.0 billion. According to Jones Lang LaSalle’s Philippine Real Estate Digest Q4 2015e, RRELs climbed as households’ investments on residential property continued to thrive amidst seasonal demand along with strong rent and purchases by young professionals for convenient houses near the business districts or near their workplace to lessen travel expenses and to cut travel time, by high income Filipino individuals and expatriate population for luxury residential properties (condominiums), and by Overseas Filipino (OF) workers for investment or personal use. However, the

Y-o-Y growth of RRELs declined in 2015 in line with the reduction in the number of applications for licenses to sell for mid- and high-end condominiums and a shift towards the affordable housing segment. Developers have been shifting to less expensive projects to tap unserved housing demand in these markets.

Continued Growth in Vehicle Sales or Motor Vehicle Loansf

Figure IV shows that the Y-o-Y growth of motor vehicle loans (MVLs) accelerated to 32.1 percent from last year’s 23.5 percent. MVLs are made up of auto loans (96.6 percent) and motorcycle loans (3.4 percent). According to the Chamber of Automotive Manufacturers of the Philippinesg, sales grew in this segment as new car models were introduced and financing strategies were intensified throughout the year. (Figure V). In addition, the growth

Consumer Finance Remained Upbeat in 2015

Box Article 1

8.7

14.4 15.5 15.3 14.7

25.1

17.5

-

5

10

15

20

25

30

-

200

400

600

800

1,000

Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

Figure IConsumer Loans of U/KBs and TBs on solo basisLevels and Year-on-Year Growth Rates(As of end-Periods indicated)

Levels (LHS) Year-on-Year Growth Rates (RHS)

in Billion Pesos (LHS)

in Percent (RHS)

0

5

10

15

20

25

30

2009

Q1

2009

Q2

2009

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2009

Q4

2010

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2010

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2010

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2011

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2011

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2011

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2011

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2012

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2013

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2014

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2015

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2015

Q4

Figure II Growth in Consumer Loans of U/KBs and TBs on solo basis*Year-on-Year Growth Rates, in Percent(As of end-Periods Indicated)

Consumer Loans Y-o-Y Growth Rate

Consumer Loans Y-o-Y Growth Rate, Long-Term Trend

*Long-term trend extracted using Hodrick-Prescott Filter.

5.7

15.8 17.2 19.8 21.1

24.3

11.5

-

5

10

15

20

25

30

- 50

100 150 200 250 300 350 400 450 500


Figure III Residential Real Estate LoansYear-on-Year Growth(As of end-Periods indicated)

Levels (LHS) Year-on-Year Growth (RHS)

In Billion Pesos (LHS) In Percent (RHS)

20.4 24.5

18.3 14.9 16.5

23.5

32.1

-

5

10

15

20

25

30

35

-

50

100

150

200

250

300

350


Figure IV Motor Vehicle LoansYear-on-Year Growth(As of end-Periods indicated)



78,917

21.4

-30-20-1001020304050

010,00020,00030,00040,00050,00060,00070,00080,00090,000

Q1

2011

Q2

2011

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2011

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2011

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2012

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2015

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Q4

2015

Figure V Automotive Vehicle SalesFor Periods Indicated

Sales (LHS) Year-on-Year Growth (RHS)

No. of Units Sold (LHS) In Percent (RHS)

*Data are annualized for four quarters. Data Source: Chamber of Automotive Manufacturers of the Philippines, Inc. (CAMPI)


Assessment

in MVLs was due to the attractive financing package employed by car dealers in their bid to increase sales and grab a bigger share of the market. There was a growing demand for cars in the Philippines, which was fuelled by affordable rates from financial institutions coupled with very low down payment. Also, strong demand from a wide selection of low priced automobiles of smaller engine displacement (below 1300 cc) and more favorable price of gasoline increased the appetite of consumers for auto loans.

Usage of Credit Cards Went Up Credit card receivables (CCRs) stood at P179.3 billion as of end-December 2015, a 9.1 percent expansion from last year’s P164.3 billion (Figure VI). This growth rate is higher than the 4.4 percent Y-o-Y increase recorded in 2014. It could be noted that there was a sustained increase in the number of consumers who depend on financial cards for many of their purchases and transactions. This was primarily attributed to the favourable macroeconomic environment, increasing income of Filipinos, advancements of new technology and improved partnership of issuers and operators with major retailers throughout the countryh.

Salary-Based General-Purpose Consumption Loans Expanded

Salary-Based General-Purpose Consumption Loansi (SBGPCLs) registered a Y-o-Y growth of 68.1 percent to P104.3 billion (Table I). The increase in SBGPCLs was due to revision in the structural definition of SBGPCLs as a result of the issuance of Circular No. 886 dated 8 September 2015j. Also, there was an increasing awareness of this facility as a means to finance major expense needs such as education, hospitalization, emergency, travel, household and other personal consumption needs. Said facility is offered in light and flexible installment plans where payment would come from salary deduction.

Other Consumer Loans was on a Declining Trend

The downtrend in the growth of Other Consumer Loans (OCLs) continued to settle at a Y-o-Y decline of 38.6 percent. The slowdown in growth in OCLs was due to the reclassification of OCLs to SBGPCLs, following the change in definition of SBGPCLs. OCLs refers to the amortized cost of loans granted to individuals to finance other personal

and household needs such as purchase of household appliances, furniture and fixtures and/or to pay taxes, hospital and educational bills on the basis and under a repayment scheme other than those described under salary-based general-purpose consumption loans.

Quality of Consumer Loans Slightly Improved

There was a slight improvement in the quality of consumer loans as the ratio of non-performing CLs to total CLs declined to 4.5 percent from last year’s 4.8 percent. The growth of total CLs rose at a faster pace than the growth of non-performing CLs. U/KBs and TBs also provisioned for 58.7 percent (specific) of their non-performing CLs as a cushion for potential credit losses.

Compared to ASEAN-5 Counterparts, Consumer Finance in Philippines Has Room For Growth

Philippine banks’ CL exposures were lower compared to ASEAN-5 counterparts (Figure VIII). As a percentage to total loans, Malaysia’s CL exposure came first at 56.8 percent, followed by Thailand at 28.8 percent, Indonesia at 28.0 percent, Singapore at 26.6 percent and Philippines at 16.9 percent.

4.4 4.2

9.9

12.4

5.8 4.4

9.1

-

2

4

6

8

10

12

14

- 20 40 60 80

100 120 140 160 180 200


Figure VI Credit Card ReceivablesYear-on-Year Growth(As of end-Periods indicated)



Table I

Dec '14 Dec '15 % Change YoY

62.1 104.3 68.1

(Amount in Billions)Salary-Based General-Purpose Consumption Loans

9.4 14.4 15.8

4.8 2.0

(16.6)

(38.6)

(50)

(40)

(30)

(20)

(10)

-

10

20

-

10

20

30

40

50

60

70


Figure VII Other Consumer LoansYear-on-Year Growth(As of end-Periods indicated)



12

17

22

27

32

37

42

47

52

57

62

Q1

20

09

Q2

20

09

Q3

20

09

Q4

20

09

Q1

20

10

Q2

20

10

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20

10

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20

10

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20

11

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11

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11

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12

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12

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13

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13

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13

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14

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14

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20

14

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20

14

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20

15

Q2

20

15

Q3

20

15

Q4

20

15

Figure VIII Consumer Loans to Total Loans RatioFor periods indicated

Malaysia Indonesia Singapore Thailand Philippines

SOURCE: WEBSITES OF CENTRAL BANKS/MONETARY AUTHORITIES/BLOOMBERG

56.8

28.828.026.6

16.6

4 44



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a The December 2015 CL statistics is composed of 100 percent current data for U/KBs and 95.7 percent for TBs.b This was lower than the 16.9 percent share of the gross TLP of P5,913.0 billion as of end-September 2015 and 15.9 percent share of the gross TLP of P 5,692.5

billion as of end-December 2014. c http://www.euromonitor.com/consumer-lending-in-the-philippines/reportd Consumer loans are made up of RRELs (41.9 percent), motor vehicle loans (28.6 percent), credit card receivables (16.9 percent), salary-based general-purpose

consumption loans (9.8 percent) and other consumer loans (2.8 percent).e http://www.ap.jll.com/asia-pacific/en-gb/Research/Philippine-Real-Estate-Digest-4Q15.pdf?85b6fad5-0807-4e1e-bc69-8942c90862b6f This CL component was formerly known as Auto Loans (ALs). The Monetary Board, in its Resolution No. 944 dated 11 June 2015, also known as Circular No. 883,

approved the amendments to pertinent regulations on Motor Vehicle Loans (MVLs). Starting this review period, MVLs are broken down into ALs and Motorcycle

Loans. g http://www.campiauto.org/december-auto-sales-grew-25-1-and-hit-2015-targeth http://www.euromonitor.com/financial-cards-and-payments-in-the-philippines/reporti Formerly known as Salary Loans. The Monetary Board, in its Resolution No. 1380 dated 27 August 2015, also known as Circular No. 886, approved the guidelines

on salary-based general-purpose CLs. jSBGPCLs refer to unsecured loans for a broad range of consumption purposes, granted to individuals mainly on the basis of regular salary, pension or other fixed

compensation, where repayment would come from such future cash flows, either through salary deductions, debits from the borrower’s deposit account, mobile

payments, pay-through collections, over-the-counter payments or other type of payment arrangement agreed upon by the borrower and lender.


Assessment

Philippine banks maintained minimal overseas exposure

For the past quartersb, the share of cross-border financial claims to banking system assets ranged from 8.5 percent to 8.9 percent while the share of cross-border financial liabilities to banking system liabilities ranged from 7.9 percent to 8.5 percent (Figure 1). The Philippine banking system is generally a net cross-border lender with a net cross-border financial asset positionc of $3.6 billion (P168.7 billion) as of end-September 2015, lower than the $4.7 billion in end-June 2015.

The United States (US) was the major foreign counterparty of Philippine banks

Foreign financial claims from the US reached $8.9 billion (3.6 percent of system assets) while financial liabilities to the US stood at $3.7 billion (1.7 percent of system liabilities) (Tables 1 and 2). Overall, the Philippine banking system was a net cross-border lender to the US with a net financial asset position of $5.2 billion (P243.3 billion).

US-Based banks are the major counterparties of Philippine banks in terms of both cross-border financial claims and liabilities (Figure 2.A). Moreover, investments in debt securities comprised the majority of credit exposures to the US while bills payable represented the lion’s share of foreign liabilities to the US (Figure 2.B).

Philippine banks’ biggest regional financial partner was the Asia-Pacific Region

The Philippine banking system is a net cross-border borrower in the Asia Pacific region with a net financial liability position of $794.9 million (P37.3 billion) (Figure 3).

Strengthening Macroprudential Surveillance overPhilippine Banks’ Cross-Border Financial Positiona

Box Article 2

8.5%

Sep-14 Mar-15 Jun-15

Cross-Border Financial Claims (LHS) Cross-Border Financial Liabilities (LHS)Cross-Border Financial Claims to Banking System Assets (RHS)

Cross-Border Financial Liabilities to Banking System Liabilities (RHS)

Sep-15 Sep-14 Mar-15 r/ Jun-15 Sep-15

Figure 1. Cross-Border Financial Position of Philippine Banks

Claims Liabilities

USD 19.8 B

8.9%

USD 21.9 BUSD 21.7 B

8.8%8.9%

USD 21.9 B

8.3%8.4%

7.9%

8.5%



r/ Reflects amended report of BPI Direct Savings Bank

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100% Claims Liabilities

Asia Pacific

North America

Europe

Others

Figure 3. Cross-Border Financial Position: Regional ComparisonAs of 30 September 2015

USD9.8 B

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

USD3.9 B

USD3.7 B

USD0.9 B

USD9.0 B

USD9.0 B

USD2.3 BUSD1.6 B

Note: Others include (1) Africa and Middle East; (2) Latin America and Caribbean;(3) Offshore Centers; and, (4) Multilateral Agencies

As of end-September 2015

6 66



Philippine banks maintained strong financial linkages with other banks in the Asia Pacific region (Figure 4.A), primarily in the form of investments in debt securities and placements/

borrowings of head office/branches/agencies of Philippine branches of foreign banks (Figure 4.B).

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Liabilities

Claims Claims

Liabilities

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Bank Non-Financial Non-Bank FI

USD4.5 B USD2.7 B

USD0.2 B

USD1.7B

USD9.1 B

USD0.5 B

Note: Unallocated claims by sector (USD1.7 million), which represent less than1 percent of total cross-border financial claims from the Asia Pacific region, areexcluded in this figure.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Debt SecuritiesUSD3.3 B

OthersUSD1.8 B

LoansUSD3.9 B

Note: Loans refer to interbank call loans receivables (USD1.3 billion) and loansand receivables (USD2.6 billion).

Due to HO/Branches/Agencies Abroad

USD4.1 B

Bills Payable USD3.5 BnOthers

USD2.2 B

Figure 4. Cross-Border Financial Position of Philippine Banks vis-à-vis Asia Pacific RegionAs of 30 September 2015

A. By Sectoral Counterparty B. By Financial Account

Of which: Interbank loans payable,

USD2.0Bn; Repurchase Agreements, USD0.7B

___________________________

a Pursuant to the provisions of Circular No. 850 dated 8 September 2014. The Report on Cross-Border Financial Positions of Philippine Banks is designed

to measure and monitor the cross-border financial claims and liabilities of universal and commercial banks (U/KBs) and their subsidiary thrift banks (TBs).

The report provides the BSP with a comprehensive view of potential financial risks and transmission channels emanating from foreign counterparties of

Philippine banks.b The report for the quarters ending 30 September 2014 and 31 March 2015 are reports under Phase 1 (one-time report on cross-border financial positions

according to geographic region/country and original currency) and Phase 2 (cross-border financial positions are further categorized according to sector of

non-resident counterparty), respectively, of Circular No. 850 (effectivity of which is on 30 September 2014 for Phase 1 implementation and31 March 2015

for Phase 2 implementation). c Cross-border financial claims less cross-border financial liabilities


Assessment

The banking system’s gross total loan portfolio (TLP) grew to P6,530.0 billion at end-2015 from last year’s P5,828.6 billion. Across banking groups, universal and commercial banks (U/KBs) comprised 87.6 percent of the banking system’s gross TLP while the rest of the share were for thrift banks (TBs) and rural and cooperative banks (R/CBs) at 10.5 percent and 1.9 percent, respectively. (Figure I)

The loan quality of the banking system improved as gross non-performing loans (NPLs) were kept relatively constant amid expansion in lending. In particular, despite the rise in TLP, there

was a flat growth in gross NPLs to P136.8 billion (Figure II). Gross NPLs accounted for 2.1 percent of loan portfolio, slightly better than last year’s 2.3 percent NPL ratio (Figure III).

The NPL ratios of the banking system have been generally declining, with the end-2015 NPL ratio as the lowest posted within the last six years (Figure IV). The U/KB industry remains as the driver of the banking system’s improving NPL ratio considering the bulk of U/KBs’ share in the system’s TLP.

While NPLs remained at steady levels, year-on-year (Y-o-Y) TLP growth was at a slower pace in 2015. In particular, total loans expanded by 12.0 percent at end-2015, as compared to the 19.1 percent growth rate at end-2014 (Figure V). Albeit the decelerated growth of the banking system’s loan portfolio, loan quality was still not impaired.

Furthermore, aside from keeping the gross NPL ratio low, the banking system was able to set aside loan loss reserves larger than gross NPLs. In particular, the NPL coverage ratio stood at 118.0 percent with loan loss reserves (LLRs) at P161.5 billion. Specific allowance for credit losses of P94.5 billion made up 58.5 percent of total LLRs while general loan loss provision of P67.0 billion was 41.5 percent of total LLRs.

Loan Quality Improved at End-2015 Amid Loan Growth

Box Article 3

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

PBS TLP U/KBs TLP TBs TLP RCBs TLP

Figure I: Total Loan Portfolio (TLP) Levels by IndustryAs of end of quarters indicated (in billion pesos)

P 6,530.0 B

P 5,719.7 B

P 688.9 B

P 121.4 B

-

25

50

75

100

125

150

Figure II: Non-Performing Loan (NPL) Levels by IndustryAs of end of quarters indicated (in billion pesos)

PBS NPLs U/KBs NPLs TBs NPLs RCBs NPLs

P 136.8 B

P 91.6 B

P 31.2 B

P 14.0 B

Figure IIIPhilippine Banking SystemComparative Loan Quality IndicatorsAs of end of periods indicatedLevels in Billion Pesos, Ratios in Percent

TLP NPLs NPL Ratio TLP NPLs NPL Ratio

All Banks 6,530.0 136.8 2.1% 5,828.6 134.9 2.3%

U/KBs 5,719.7 91.6 1.6% 5,117.9 93.1 1.8%TBs 688.9 31.2 4.5% 576.1 25.4 4.4%RCBs 121.4 14.0 11.5% 134.6 16.5 12.2%

p/ Preliminary; Data for RCBs as of end-September 2015* Data for RCBs as of end-September 2014

2015 p/ 2014 *

2.1 %

1.6 %

4.5 %

11.5 %

-

2.5

5.0

7.5

10.0

12.5

15.0

PBS NPL Ratio U/KBs NPL Ratio TBs NPL Ratio RCBs NPL Ratio

Figure IV: NPL Ratios by IndustryAs of end of quarters indicated (in percent)

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Jan-

14

Feb-

14

Mar

-14

Apr-

14

May

-14

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec

-15

Figure V: Year-on-Year Growth Rates of NPLs and TLPAs of end of months indicated (in percent)

NPLs Y-o-Y Growth Rate TLP Y-o-Y Growth Rate

8 88



In 2011, the ASEAN Central Bank Governors endorsed the ASEAN Financial Integration Framework, (AFIF) with one of its elements being the ASEAN Banking Integration Framework (ABIF).

The ABIF was intended to provide greater market access and operational flexibility to Qualified ASEAN Banks (QABs)a through bilateral agreements among the ASEAN Member States (AMS). These agreements are then developed based on the ABIF guidelines mutually approved by the Central Bank Governors so that intra-ASEAN trade and investment may be facilitated.

It was also agreed by the AMS that each of the ASEAN-5 members should have concluded at least one ABIF arrangement by 2018 while the remaining AMS should begin negotiations at this time. By 2020, each of the remaining member states is expected to have concluded or be in the stage of finalizing at least one agreement.

To this end, the Bangko Sentral ng Pilipinas (BSP) and Bank Negara Malaysia (BNM) held initial talks on 28 November 2015, which concluded with the signing of the Heads of Agreement (HOA) in the first quarter of 2016b.

This HOA is the Country’s first bilateral agreement to be signed under ABIF and marks a milestone within the broader ASEAN community. It is however important to note that although the

HOA provides the market access and operational flexibilities that will be accorded by the Philippines and Malaysia to each other’s QABs, domestic laws and regulations will continue to prevail.

Among the more salient provisions of the HOA is the acceptance of three QABs by the Philippines from Malaysia and vice versa.

Signing of the HOA is seen to strengthen the relationship between the BSP and BNM for better cooperation and implementation of ABIF so that the vision of a single market within the ASEAN may be realized while preserving financial stability.

Paving the Way Towards the Realization of the Region’s Vision

Box Article 4

___________________________

a These QABs are strong and well-managed, indigenously ASEAN banks that meet

the host country’s prudential requirements. Moreover, they have to be endorsed

by their home country regulator. As foreign banks, though, they will continue

to be subject to the stipulations provided by R.A. No. 10641 (Amended Foreign

Banks Law).bOn 14 March 2016, the Heads of Agreement (HOA) was signed by BSP Governor

Amando M. Tetangco, Jr. and Bank Negara Governor Zeti Akhtar Aziz at the

sidelines of The SEACEN Conference on Central Bank Cooperation and Mandates

in Kuala Lumpur, Malaysia. This will be the basis of the commitments of the BSP

and BNM in the banking sector to be inscribed in their respective schedules of

commitment.

tap consequential opportunities from the ASEAN Banking Integration by 2020. The BSP signed the Heads of Agreement (HoA) with Bank Negara Malaysia (BNM) by the first quarter of 20162. The agreement provides guidelines on the entry of qualified ASEAN banks (QABs)3 between the two countries. The preparation for the liberalization of the Philippine banking system began with the amendment to the Rural Bank Act of 1992 (Republic Act No. 10574) in 2013, which allowed the infusion of foreign equity in the capital of rural banks and An Act Allowing the Full Entry of Foreign Banks in the Philippines (Republic Act No. 10641) in 2014, which allowed 100 percent foreign bank interest in the provision of financial services and participation of foreign banks in foreclosure proceedings of real estate properties. These initiatives are seen to pave the way for more foreign direct investments and fully prepare the banking system towards regional integration (Box Article 4).

Significant strides were also achieved in terms of promoting financial inclusion with the completion of

the baseline survey on financial inclusion in the first quarter of 2015 and the launching of the National Strategy for financial inclusion on 01 July 2015. During the review period, there were 171 banks engaged in microfinance operations with a total loan portfolio of P10.7 billion and serving a total of 1.3 billion micro borrowers4.

In response to the call of expediting the development of the local capital market, reforms were focused on widening the array of financial products and services as well as investor protection e.g., segregation of customer funds and securities received by banks.

Summing up, the Philippine financial system navigated 2015 with strong and stable performance supported by sufficient capitalization, improved asset quality and sustained growth in assets, loans and deposit liabilities. This was broadly aligned with BSP’s policy objective of promoting financial stability and a truly inclusive financial system that safeguards the economic and financial well-being of the public.

___________________________

2 The ASEAN Banking Integration Framework (ABIF) was finalized on 21 March 2015 during the 1st ASEAN Finance Ministers and Central Bank Governor’s Meeting in Kuala

Lumpur, Malaysia. As of printing of the report, Bangko Sentral ng Pilipinas and Bank Negara Malaysia signed the HoA on 14 March 2016.3Refers to strong, well-managed banks headquartered in ASEAN, majority-owned by ASEAN nationals, whose QAB status is endorsed by home country regulator and accepted

by host country regulator.4 Preliminary. Data as of end-September 2015

Second Semester 2015 - Center for Financial Stability (CFS)

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