Status Report on the Philippine Financial System - · PDF fileStatus Report on the Philippine Financial System This semestral report is prepared pursuant to Secon 39(c), Arcle V of

Sta

tu

s R

ep

ort o

n t

he

Ph

ilip

pin

e F

ina

nc

ial

Sy

ste

m

This semestral report is prepared pursuant to Section 39(c), Article V of Republic Act No. 7653 (The New Central Bank Act) by the Office of Supervisory Policy Development, Supervision and Examination Sector, Bangko Sentral ng Pilipinas. This semester’s report incorporates the report on the implementation of Republic Act No. 7721 (An Act Liberalizing the Entry and Scope of Operations of Foreign Banks and for Other Purposes) and the reports on BSP’s Rules and Regulations Promulgated, as well as Other Actuations in Connection with Thrift Banks/Rural Banks/Non‑Stock Savings and Loan Associations under Section 27 of Republic Act No. 7906 (Thrift Banks Act of 1995), Section 29 of Republic Act No. 7353 (Rural Banks Act of 1992) and Section 26 of Republic Act No. 8367 (Revised Non‑Stock Savings and Loan Association Act of 1997), and the Republic Act No. 6426 (Foreign Currency Deposit Act of the Philippines) respectively. A synopsis of the report is available online at http://www.bsp.gov.ph.

Page Number Glossary of Terms i

Prologue v

The Philippine Financial System: An Assessment 1

The Banking Sector The Philippine Banking System 5 Trust and Other Fiduciary Services 17 Foreign Currency Deposit Units 20 Foreign Bank Branches and Subsidiaries 22

The Non-Bank Financial Institutions Non‑Bank Financial Institutions with Quasi‑Banking Functions 27 Non‑Stock Savings and Loan Associations 30

Appendices 33

Ta

ble

of C

on

te

nts

Table of Contents

Sta

tu

s R

ep

ort o

n t

he

Ph

ilip

pin

e F

ina

nc

ial

Sy

ste

m

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 2‑based Capital Adequacy Framework. It is also designed to meet BSP’s statistical requirements.

2. Total Assets refer to the sum of all 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 (USD) 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 incorporate banks, other equity instruments, retained earnings and undivided profits, other comprehensive income, and appraisal increment reserves. In the case of capital of foreign bank branch, it refers to the sum of permanently assigned capital, undivided profits, and accumulated net earnings which is composed of unremitted profits not yet cleared by the BSP for outward remittance and losses in operations less capital adjustments.

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), 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

i

ii

12. Interest-bearing Liabilities refer to the sum of financial liabilities HFT, financial liabilities designated at FVPL, 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/derecognition of non‑trading financial assets and liabilities, profits from sale/derecognition 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 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.

Glo

ssa

ry

of T

erm

s

Sta

tu

s R

ep

ort o

n t

he

Ph

ilip

pin

e F

ina

nc

ial

Sy

ste

m

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 replaced 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.

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.

iii

B. FINANCIAL AND OTHER RATIOS 1. Capital adequacy ratio (CAR) refers to the ratio of qualifying capital to total risk weighted assets.

With the implementation of the reforms under the Basel III framework, the BSP issued Circular No. 781 dated 13 January 2013 providing the new computation of qualifying capital under the Basel III standards. Two new ratios, the Common Equity Tier 1 and Tier 1 Capital ratios, were introduced apart from the total CAR. While the three major risks (credit, market and operational risks) are still covered by the calculation of risk‑based capital, the qualifying capital was strengthened through the eligibility criteria for recognition as capital including the required loss absorbency features of capital instruments. Foreign bank branches shall comply with the same risk‑based capital adequacy ratios applicable to domestic banks in the same category. In computing the risk‑based capital adequacy ratios, Common Equity Tier 1 (CET1) shall include permanently assigned capital, undivided profits, accumulated net earnings and other capital components. Any net due from head office, branches, subsidiaries and other offices outside the Philippines, excluding accumulated net earnings shall be deducted from CET 1 capital.

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 probable 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.

Glo

ssa

ry

of T

erm

s

iv

Sta

tu

s R

ep

ort o

n t

he

Ph

ilip

pin

e F

ina

nc

ial

Sy

ste

m

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), and is submitted by the Governor to the President and both houses of Congress, in compliance with 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 2014, BSP supervised/regulated financial institutions consisted of 648 banks with 9,700 branches and other offices, 5,989 non‑bank financial institutions (NBFIs) with 11,781 branches and four offshore banking units (OBUs). 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 and 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 issued under Circular 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, through the issuance of the new Financial Reporting Package (FRP) for banks. The FRP is designed to align the Manual of Accounts and the BSP reportorial requirements with the provisions of the PFRS/PAS.

Prologue

v

1

Sy

ste

m A

sse

ssm

en

t

The Philippine Financial System: An Assessment

Post 2007‑2008 Global Financial Crisis (GFC), the global financial market conditions have changed and the demands for regulating the ever evolving financial services industry reached new dimensions. This is characterized by tougher operating conditions, uneven growth prospects and lingering fragilities worldwide. In response to this challenge, the BSP has pursued responsive and pro‑active reforms on banks’ capitalization, corporate governance standards and risk management, foreign participation, macro‑financial surveillance and macroprudential supervision, financial inclusion and capital market reforms to meet the demands of the new emerging market landscape and 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 provisions of Basel III for universal and commercial banks and Basel 1.5 for standalone thrift, rural and cooperative banks. These include the amendment to risk disclosure requirements on loss absorbency features of capital instruments (Circular No. 826 dated 14 February 2014), reduction in the risk weight/capital charge on foreign currency denominated government securities under Basel 1.5 (Circular No. 827 dated 28 February 2014) and the implementing guidelines on the framework for dealing with domestic systemically important banks (DSIBs) under Basel III (Circular No. 856 dated 29 October 2014). Parallel to these, the minimum capital requirement of all bank categories was increased to further strengthen the banking system by holding sufficient capital buffers against unforeseen shocks during times of stress. Accordingly, solvency ratios remained both well above BSP’s regulatory minimum of 10 percent and the international standard of 8 percent with the capital adequacy ratio (CAR) of 17.0 percent and 16.2 percent on consolidated and solo bases, respectively. Moreover, it is second highest in ASEAN‑5 and already Basel III‑compliant.

Key reforms on corporate governance and risk management in 2014 respond to the need to develop a deeper culture of good governance and prudent risk taking. Toward this end, amendments on the qualifications of a director (Circular No. 840 dated

02 July 2014) and rules on interlocking positions (Circular No. 851 dated 30 September 2014) were in place to reinforce the role and accountability of the Board of Directors as corporate decision makers. In order to strengthen the credit risk management culture of BSP‑supervised institutions, the BSP issued the consolidated guidelines on credit risk management framework (Circular No. 855 dated 29 October 2014) and progressively align the same with the Basel Core Principles for Effective Banking Supervision as well as institute enhancements in the existing bank reports on salary loans (Circular No. 837 dated 18 June 2014) in response to the rising trend of salary loans in terms of volume and number of accounts and ensure that the rising bank exposure to this consumer finance segment are well‑managed and conform to fair and sound credit practices. During the review period, salary loans reached P47.6 billion but remained manageable as they only accounted for 5.6 percent of the total loan portfolio.

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 tap consequential opportunities from the ASEAN Banking Integration by 20201. In 2014, the banking system was fully liberalized with the passage of amended Rural Bank Act (Republic Act No. 10574) which allowed the infusion of foreign equity in the capital of rural banks and Foreign Banks Law (Republic Act No. 10641) which allowed 100 percent foreign participation in the provision of banking services including foreclosure proceedings. These initiatives are seen to pave the way for more foreign direct investments and fully prepare the banking system towards regional competition (Box Article 1).

Cognizant that ample liquidity in the system could boost real estate financing and push the gradual shift towards higher yield‑higher risk consumer finance, which both have procyclical effect on the economy and may pose financial stability concerns, the BSP expanded its macro‑financial surveillance tools i.e., real estate stress test (REST) limit (Circular No. 839 dated 27 June 2014), cross‑border financial positions of banks (Circular No. 850 dated 08 September 2014) and deposit interest rate report (Circular No. 848

The Philippine financial system is riding the competitive wave of change in 2014 with responsive, responsible and and remarkable performance.

_______________________________________________

1 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

2

Sta

tu

s R

ep

ort o

n t

he

Ph

ilip

pin

e F

ina

nc

ial

Sy

ste

m

The forthcoming ASEAN banking integration presents both opportunities and challenges for banks and other market players.

There are advantages and benefits to having an integrated regional financial market.

Financial integration encourages competition and technology transfer. The Philippine banking system stands to gain from the opening of new markets to local players as this will expand banks’ customer base. Market integration will also facilitate ease in mobilizing savings and allocating funds to more productive investments. In turn, this will help reduce operational cost and enhance productivity. Banking market integration is also expected to improve financial infrastructure when regionally competitive ASEAN banks integrate their technologies and innovations in their operations at the host country.

Notwithstanding the advantages, there are challenges and risks to an integrated market.

There is the key issue of the governance of banks and managing competing opportunities against limited resources. Heightened competition may spur banks to expand into areas which they are not familiar with or not yet fully geared for from a risk perspective. Banks must be able to manage the risks that arise from new business opportunities brought about by an integrated ASEAN banking market. The key to being able to compete in such an environment is by having a sound governance structure and risk culture.

The emergence of an integrated banking community in the region also exacerbates the need to further develop core competencies. This is so because market players, as well as regulators, have to be at the comparative level of their peers in the region.

Banks need also to invest in information and communication technology. The delivery of banking services has seen significant changes in recent years because of the availability of affordable technology and this has affected the minimum scale needed for the effective conduct of banking operations.

Responding to the Challenges of Financial Integration

From a regulatory standpoint, the BSP’s move to liberalize the financial sector and pursue policy reforms is seen to boost the competitiveness of domestic banks in preparation for the regional integration.

Foreign bank liberalization. The Monetary Board (MB) has approved the Implementing Rules and Regulations (IRR) of Republic Act No. 10641 (An Act Allowing the Full Entry of Foreign Banks in the Philippines, Amending for This Purpose R.A. No. 7721). R.A. No. 10641 was signed into law in July 2014, allowing more foreign banks to operate in the country

without constraints on foreign ownership and the number of foreign bank branches that may be set up.

Under the new law, foreign banks can now own up to 100 percent (from 60 percent) of the voting stock of an existing domestic bank or a new banking subsidiary incorporated in the Philippines. In recognition of the added economic contributions by foreign banks, their aggregate share in the banking system was also increased from 30 percent to 40 percent. With the expected increase in the share of total assets under the management of foreign banks, the MB shall adopt necessary measures to ensure that the 60 percent domestic‑controlled proportion is preserved. Such measures shall consider vested rights and non‑impairment of contracts that will be non‑discriminatory to existing foreign banks.

Meanwhile, the minimum capital requirements applicable to foreign bank branches have been aligned with that of domestic banks of the same category. However, foreign banks entering under R.A. No. 10641 shall comply outright with the new capital requirements as well as with the prescribed minimum capital ratios.

Foreign banks can avail of any of the three modes of entry into the Philippines. At any time, however, they must only avail of one mode of entry subject to compliance with all the requirements.

Pursuing proactive reforms. The BSP has also sought to establish the prudential norms within which banks operate, creating an enabling environment while encouraging competition among banks but within the limits of acceptable risk management practices. Reform initiatives pursued along this line include the increase in the minimum capitalization of banks, the recent changes in the eligibility and quality of bank capital under the Basel III framework, the adoption of pre‑emptive macroprudential measures to strengthen the banking system’s ability to withstand shocks, prescribing prudential ratios (CAR, NPL, RELs among others) as a means to mitigate and manage risks, setting standards for a sound governance culture, and institutionalizing the collection of data on cross‑border financial positions of banks on a periodic basis. The latter aims to provide the BSP with a comprehensive view of potential financial risks and transmission channels emanating from foreign counterparts of Philippine banks and can thus be considered an important development in preparation for the forthcoming regional integration.

The upcoming regional integration is deemed to be a potential game changer for ASEAN countries. For Philippine banks, the opportunities for growth and expansion must be carefully considered vis‑à‑vis the challenges and risks of an integrated financial market. Banks need to be properly positioned to be able to tap these opportunities and reap the benefits of integration.

____________________Reference:“Preparing the Philippine Banking System for Economic Integration: A Central Banker’s Perspective”, paper presented by Deputy Governor Nestor A. Espenilla, Jr. at the Angara Center in December 2014.

Moving Towards Financial Integration

Box Article 1

_______________________________________________

a In its “Vision 2020”, the ASEAN Economic Community (AEC) espouses an integrated, efficiently functioning regional financial market by year 2020.

3

Sy

ste

m A

sse

ssm

en

t

dated 08 September 2014) to mitigate the buildup of systemic risk and provide the groundwork for effective macroprudential supervision in the future.

The BSP also recognized and responded to the valuable contribution of micro, small and medium enterprises (MSME) in economic development in terms of employment generation. In order to generate a more comprehensive and accurate picture of the scale and scope of banking services delivered to the MSME sector and support the overall financial inclusion agenda, existing microfinance reports were amended to redefine microfinance loans as well as the small and medium enterprises loans in the Financial Reporting Package (FRP) of banks (Circular No. 836 dated 13 June 2014). During the review period, there were 179 banks engaged in microfinance operations with a total loan portfolio of P10.9 billion and serving a total of 1.2 billion micro borrowers.

In 2014, total corporate bond issuances (Source: Bloomberg) reached a record high of 26 percent (P295.0 billion) year‑on‑year expansion led by financial corporations with an annual growth of 71 percent (P184.1 billion) which broadly indicate a small but palpable shift towards capital market financing given the relatively low interest rate environment, System’s ample liquidity, favorable investor sentiment and improved macroeconomic environment. In response to the call of expediting the development of the local capital market to prepare the System with this competitive challenge, reforms were focused on widening the array of available financial products and services to the market: long‑term negotiable certificates of time deposits (LTNCD), unit investment trust funds (UITF), financial derivatives, personal equity and retirement account (PERA) products and the revised cross‑selling framework (Cf: Circular Nos. 824 dated 30 January 2014, 834 dated 26 May 2014, 852 and 853 dated 21 October 2014, 860 dated 28 November 2014, and 844 dated 11 August 2014).

The Philippine financial system is still primarily bank‑based, a stable structural feature of the domestic economy, with the total assets of the banking system accounting for 80.8 percent of the total assets of the financial system and 88.3 percent of economic output (GDP) and with deposit liabilities funding 76.4 percent of intermediation activities. With these, it is paramount that the System becomes highly responsible and accountable to its various stakeholders. To address this concern, reforms were pursued in the area of bank protection (Circular No. 823 dated 10 January 2014) and consumer protection (Circular Nos. 857 dated 24 November 2014, 845 dated 15 August 2014, and 859 dated 24 November 2014). Alongside, the delivery of banking services was improved through the liberalization of

banking hours (Circular No. 835 dated 05 June 2014) and branch network expansion to promote further financial inclusion. During the review period, there was an increasing footprint of bigger banks into the 2nd and 3rd class municipalities to compete on consumer financing as the patterns of urbanization gradually moving away from congested big cities and regional hubs into rural growth frontiers.

These deep financial sector reforms coupled with a favorable macroeconomic environment all supported the banking system’s continued remarkable performance in 2014. The System expanded by 12 percent on double‑digit growth in loans (19.5 percent) and portfolio investments (13.3 percent) with stable funding from domestic, retail deposits which similarly grew by 12.1 percent year‑on‑year. Despite the robust expansion, the quality of banks’ credit underwriting standards and commitment to asset cleanup are still on point as gross non‑performing loan (NPL) ratio further eased to 2.3 percent from 2.8 percent last year. This is 1.7 percentage points lower from the pre‑1997 Asian Financial Crisis level of around 4 percent and a significant turnaround from the peak of 16 percent during the Oil Crisis in 2001. There was also ample liquidity in the system for further expansionary credit as liquid assets‑to‑deposit ratio rose to 55.6 percent from 59.5 percent last year. Apart from stronger balance sheets, banks reported a positive bottom line as net profit, albeit growth dipped by 6.9 percent, to P135.0 billion from P144.9 billion in 2013. Thus, it came as no surprise that international credit watchers and market analysts consider the Philippine banking system as one of the strongest in the region as it is currently the only banking system out of the 69 rated banking systems in the world that received a POSITIVE outlook from Moody’s in 2014 (two times in a row). The country’s financial freedom score also improved by 10 notches on continuing modernization and liberalization of the banking system with the removal of limits to foreign bank entry in 2014 against the backdrop of an efficient regulatory environment. The movement in the country’s financial freedom score largely contributed to the improvement of country’s ranking in the 2015 Index of Economic Freedom, which the Heritage Foundation also considers as “one of the 10 best score improvements” and “above world and regional averages”.

Summing up, the Philippine financial system’s performance in 2014 can be summarized in three Rs: responsive to competitive shifts and growing demands of the market, responsible to its various stakeholders, and remarkable against regional and global standards.

4

Sta

tu

s R

ep

ort o

n t

he

Ph

ilip

pin

e F

ina

nc

ial

Sy

ste

m Philippine Banking SystemOverview

Banks instituted significant strategies to re‑position their ability to determine and better service the changing and differentiated needs of their stakeholders thereby, increasing customer base. Banks also enhanced credit underwriting and administration practices that are infused with a deeper culture of good governance to siphon soured loans and strengthen their capacity to absorb losses under stress conditions. Finally, bank strengthened their capital base in response not only to regulatory reforms that have capital implications but also to prime themselves in anticipation of ASEAN banking integration which will usher in the entry and withstand increasing market competition whose funding source is slowly veering towards non‑bank financing particularly those made available by capital markets. As of end‑December 2014, the volume of peso‑denominated bonds increased by 45.4 percent to P4,655.1 billion compared to the P3,202.4 billion outstanding issuances as of end‑December 2010. Cognizance of this circumstance, universal and commercial banks (U/KBs) are now branching out to 1st to 3rd class municipalities to further improve their of new foreign bank entrants whose capital may be bigger than those of local banks.

Banking landscape remained streamlined but with

notable expansion in branch network

The banking system landscape remained streamlined as a result of the ongoing industry consolidation.

There were 648 operating banks (from 673 last year) with a network of 9,713 branches/other offices (from 9,262 branches/other offices last year). Of these branches/other offices, 46 (down from 51 banking offices at end‑December 2013) were domiciled offshore.

Since the start of the rationalization of merger and consolidation incentives of the BSP in 1998, the banking landscape became more streamlined over the years. The current number of operating banks was 348 banks less than the peak of 996 banks in 1998 (Figure 1).

Notwithstanding the decline in the number of operating banks, the overall branch network was further augmented with the establishment of additional regular branches and other banking offices (OBOs). This led to a more inclusive financial system since these OBOs served as vital access points for the effective delivery of banking services ranging from credit, savings, remittances, foreign exchange, electronic money (e‑money) conversion, bills payment, and government pay‑out benefits. (Appendix 4)

Major bank categories are universal and commercial banks (U/KBs), thrift banks (TBs) and rural and cooperative banks (R/CBs). There were 36 universal and commercial banks with 5,797 branches/other offices; 69 thrift banks with 1,851 branches/other offices; and 543 rural and cooperative banks with 2,065 branches/other offices. This brought the total number of operating banking units to 10,361 (inclusive of 13 representative offices abroad of domestic banks) from 9,935 at end‑2013.

U/KBs have the largest distribution network at 59.7 percent followed by R/CBs at 21.2 percent. TBs, on the other hand, had a share of 19.1 percent.

The composition of banking offices is detailed in Figure 2.

996976

947929

912 899 893 879862 847

818 785

758726

696673

648

5506006507007508008509009501,000

5,5006,0006,5007,0007,5008,0008,5009,0009,500

10,000

1998* 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Head Offices (RHS) Branches (LHS)

No. of Head Offices (RHS)

Figure 1Philippine Banking SystemTotal Banking UnitsFor End-Periods Indicated

* Start of the rationalization of merger and consolidation incentives

No. of Branches (LHS)

TotalHead Office

Branches/Other

OfficesTotal

Head Office

Branches/Other

OfficesAll Banks 9,935 673 9,262 10,361 648 9,713 Universal and Commercial Banks 5,461 36 5,425 5,833 36 5,797 Thrift Banks 1,828 71 1,757 1,920 69 1,851 Rural and Cooperative Banks 2,646 566 2,080 2,608 543 2,065

`

Figure 2

End-Dec 2014

Bank Category

Philippine Banking SystemPhysical Composition: Share to Total Banking OfficesFor End-Periods Indicated

End-Dec 2013

5.4% 5.6% 10.5% 10.6%

84.1% 83.8%

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

End-Dec 2013 End-Dec 2014

In Percent (%)Head Office

Universal andCommercial Banks

Thrift Banks

Rural andCooperative Banks

58.6% 59.7%

19.0% 19.1% 22.4% 21.2%

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

End-Dec 2013 End-Dec 2014

In Percent (%) Branches/Other Offices

Universal andCommercial Banks

Thrift Banks

Rural andCooperative Banks

_________________________2 Inclusive of representative offices (ROs) abroad of domestic banks

5

Ba

nk

ing

Sy

ste

m

Banks accounted for 36.8 percent (up from 35.6 in end‑December 2013) of all financial institutions being supervised by the BSP. Non‑banks3 held the remaining 63.2 percent. Meanwhile, there were four offshore banking units (OBUs) operating in the Philippines and 13 representative offices (ROs) abroad of domestic banks. (Figure 3.1)

By banking category, R/CBs had the most number of head office units at 83.8 percent (Figure 3.2). U/KBs, though fewer in terms of head office units, have the widest network consisting of large private domestic banks (89.2 percent), government banks (8.4 percent) and foreign bank branches and subsidiaries (2.4 percent). (Figure 3.3)

For banks domiciled onshore, domestic banks by far outnumbered the foreign banks with 629 head offices composed of: 17 private domestic banks; three government banks; 66 stand‑alone TBs; and 543 R/CBs. On the other hand, there were 19 foreign bank branches and subsidiaries (16 U/KBs and three foreign bank‑linked TBs) operating in the country (Figure 3.4).

The Top 5 banks in the country held the bulk of the

total assets of the banking system

The Top 5 banks4 in the country – composed of four universal banks and one government bank – accounted for 53.6 percent (up from 51.7 percent last year) of the total assets of the Philippine banking system. In terms of deposit share and capital accounts, these banks also represented a sizeable proportion at 57.4 percent (up from 54.6 percent) and 52.4 percent (up from 52.3 percent), respectively.

Bank coverage remains predominant in NCR and

other urbanized areas in terms of income class and

regional profile

In terms of distribution of banking offices per city/municipality income class, bank coverage is predominant in NCR with 3,175 head offices/branches. Outside NCR, banking offices are mostly found in 1st class cities (1,779 head offices/branches) and municipalities (1,525 head offices/branches). Notably, U/KBs have expanded their reach in areas considered as the home turf of rural banks, i.e., in 1st to 3rd class municipalities with a total of 680 banking offices vis‑à‑vis R/CBs’ network of 1,026 offices/branches. Network expansion in these areas is indicative of banks’ initiatives to support inclusive growth by providing access to finance for all Filipinos, regardless of their socio‑economic status.

By regional distribution, banking presence remained concentrated in highly urbanized areas of the country. National Capital Region (NCR) had 100 percent bank coverage, followed by CALABARZON (Region IV‑A) with 95.1 percent, Central Luzon (Region III) with 93.1 percent, Cagayan Valley (Region II) with 81.7 percent and Western Visayas (Region VI) with 78.9 percent. These regions are densely populated and mostly _________________________3 The BSP also supervises non‑banks with quasi‑banking functions and/or trust license,

financial allied subsidiaries/affiliates of banks and quasi‑banks, non‑stock savings and

loan associations, pawnshops and other financial institutions which under special laws are

subject to BSP supervision. Of these financial institutions, pawnshops held the lion’s share

at 61.9 percent or 17,422 offices at end‑December 2014 (down from 63.2 percent or 17,652

pawnshops a year ago).4 Based on Published Balance Sheet as of 31 December 2014

Fig. 3.4 Domestic Banks vs. Foreign Bank Branches and Subsidiaries

172.7% 66

10.5%

54386.3%

30.5%

Universal andCommercial BanksThrift Banks

Rural andCooperative BanksGovernment Banks

629 Head Offices

Domestic Banks

Figure 3Philippine Banking SystemComparative Share to Physical NetworkAs of End-December 2014

1684.2%

315.8%

Foreign Bank Branches and Subsidiaries

Universal andCommercialBanks

19 Head Offices

10,348 36.8%

17,770 63.2%

170.1%

Fig. 3.1 Philippine Financial System

Banks Non-Banks OBUs & Foreign ROs

365.6% 69

10.6%

54383.8%

UKBs TBs RCBs

Fig. 3.2 Major Bank Categories

89%

2%

Private Domestic Government Foreign

5,20089.2%

4928.4%

1412.4%

Fig. 3.3 Composition of UKBs - Private Domestic Banks, Government Banks, Foreign Bank Branches & Subsidiaries

6

Sta

tu

s R

ep

ort o

n t

he

Ph

ilip

pin

e F

ina

nc

ial

Sy

ste

m urbanized, making them viable hubs for business and other industries.

Bank coverage in most parts of the country’s cities and municipalities range between 60 to 79 percent as of end‑December 2014 (Figure 4).

The National Capital Region (NCR) leads the Top 5 regions with 3,275 banking offices or 31.7 percent of total banking offices nationwide. Other regions that registered hefty shares are: CALABARZON or Region IV‑A with 1,566 banking offices or 15.2 percent share; Central Luzon (Region III) with 1,033 banking offices or 10.0 percent share; Central Visayas (Region VII) with 683 banking offices or 6.6 percent share; and the Western Visayas (Region VI) with 600 banking offices or 5.8 percent share. These five leading regions accounted for 69.3 percent of the total banking network nationwide (Figure 5 and Appendix 4).

Low bank coverage has been noted in the Autonomous Region of Muslim Mindanao (ARMM) with merely 0.2 percent of the region’s cities and municipalities having banking offices. This was followed by Cordillera Autonomous Region (CAR) at 1.5 percent, Eastern Visayas (Region VIII) at 1.8

percent, and the Zamboanga Peninsula (Region IX) at 1.9 percent. Establishing bank branches in these parts of the country remains a challenge due to the generally low population density, geographic inaccessibility, and prevailing geo‑political and socio‑economic situations in these localities.

Universal banks have strong presence in the Middle

East and in the Asia-Pacific regionOverseas bank branches are clustered mostly in the Middle East followed by Asia‑Pacific, North America and Europe (Figure 6). Bank branches in the Middle East stood at 20 offices (from year ago’s 22 offices), representing 43.5 percent of total branches abroad. Banking offices in the Middle East are mostly remittance desk offices (14 offices)5, reflecting the strong remittance inflows coursed through the banking system.

In the Asia‑Pacific region, domestic banks have set up either branches or representative offices (17 offices or 37.0 percent of total branches abroad). Some of these offices are in Japan with six offices (two ROs of

Figure 4Philippine Banking SystemHeat Map of Bank CoverageAs of End-December 2014

Figure 5Philippine Banking SystemRegional Distribution of Banking Offices:Top Five RegionsAs of End-December 2014

TotalWith

Banking Offices

Without Banking Offices

Total Banking Offices

Head Office

Branches

Grand Total 10,361 648 8,541 Nationwide 1,634 1,039 595 10,315 648 8,528 National Capital Region (NCR) 17 17 0 3,275 83 3,092 Region III Central Luzon 130 121 9 1,033 87 878 Region IV-A CALABARZON 142 135 7 1,566 119 1,194 Region VI Western Visayas 133 105 28 600 58 447 Region VII Central Visayas 132 84 48 683 46 571

Number of City/Municipality Number of Banking Offices

37.0%

8.7%

10.9%

43.5%

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0

Asia-Pacific

Europe

North America

Middle East

% to Total Overseas Banking Network

Figure 6Philippine Banking SystemDistribution of Offshore Banking OfficesAs of End-December 2014

_________________________4 Section X154 of the Manual of Regulations for Banks (MORB) sets down the rules

for the establishment of branches or other offices abroad by domestic banks. These

offices cover not only branches but also agencies, representative offices, remittance

centers, remittance desk offices and other offices which are integral in the operations

of the parent domestic bank.

7

Ba

nk

ing

Sy

ste

m

domestic banks, two regular branches, one extension office and one sub‑branch). Domestic banks also have banking offices in Hong Kong (two regular branches and one RO), Singapore (one regular branch, one RO and one limited purpose branch), Korea (two regular branches), Taiwan (one regular branch and one RO) and China (one RO).

The financial industry also displayed strong support to the funding needs of its clients with improved

customer ratio

The country’s bank density ratio, as measured by banking offices per city/municipality, remained unchanged from last year at six banks. Customer ratio, nevertheless, improved by 2.4 percent to 9,682 persons served per banking office from 9,917 persons per each banking office in end‑December 2013. Banks’ density ratio mirrored the population dispersion pattern which is concentrated in highly populous, urbanized and higher income areas of the archipelago (Appendix 5).

The use of electronic banking (e-banking)

technology allowed greater access to financial services

Banks have capitalized on the use of various electronic banking (e‑banking) channels, allowing for greater access to financial services. E‑banking platforms such as electronic wallet are being offered by 62 banks, internet banking by 44 banks, cash/remittance cards by 26 banks, and hybrid mobile/internet via BancNet‑MegaLink switch by 47 banks (Figure 7 and Appendix 7).

Automated teller machines (ATMs) also remained a key e‑banking platform. The number of banks with ATM network reached 115 (from 102 banks at end‑December 2013), composed of 107 domestic banks and eight foreign bank branches and subsidiaries. The system’s ATM network grew by 1,165 units (8.0 percent) to 15,695 from year ago’s 14,530 units (Figure 8). These ATMs were mostly on‑site ATMs at 57.8 percent (down from last year’s 58.3 percent). Off‑site ATMs6, nonetheless, grew at a faster rate by 9.5 percent compared to on‑site ATM’s growth of 6.9 percent year‑on‑year (Figure 9).The faster growth in

off‑site ATMs may be attributed to the BSP’s policy initiative of removing the restriction on the itinerary of mobile ATMs7 which was previously confined to Metro Manila alone, giving banks greater flexibility to utilize innovative delivery channels to provide financial services to more Filipinos.

Many banks saw the need to merge with, or acquire,

other banks as part of their market strategy

Many banks also saw the need to merge with, or acquire, other banks as part of their market strategy.

0 10 20 30 40 50 60 70

Mobile

Phone banking

Internet

Proprietary

Mobile/ Internet thru Bancnet & Megalink Switch

Bancnet POS Cash-out Aggregator/Acquirer

ETFPS (BIR)

Cash Card/Remittance Card

Electronic Wallet…

Electronic Wallet (Smart Money)

Figure 7Approved E-Banking and E-Money ApplicationsAs of End-December 2014

600

2,600

4,600

6,600

8,600

10,600

12,600

14,600

16,600

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Number (N)

Figure 8Philippine Banking SystemNumber of ATM UnitsFor End-Periods Indicated

Off-site On-site

Total = 15,695 unitsYoY Growth = 8.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014On-site 6.7 -1.2 6.1 20.1 12.0 9.4 4.5 6.0 5.9 7.3 7.2 10.2 16.4 6.9Off-site 16.2 45.0 4.5 18.1 17.9 13.4 3.5 13.8 17.1 18.1 26.4 22.0 22.5 9.5Total 8.6 8.3 5.7 19.6 13.6 10.5 4.2 8.2 9.3 10.8 13.8 14.7 18.9 8.0

-5.00.05.0

10.015.020.025.030.035.040.045.050.0

Gro

wth

Ra

te (

%)

Figure 9Philippine Banking SystemComparative ATM GrowthAs of End-Years Indicated

Figure 10Philippine Banking SystemMerger/Consolidation/AcquisitionEnd-December 2014

Bank Category

Involved EntitiesBank

CategoryEffectivity Date

1 China Bank Savings, Inc. TB China Bank Savings, Inc. TB 20-Jan-14Unity Bank, A Rural Bank, Inc. RB

2 East West Banking Corporation UB East West Banking Corporation UB 31-Jul-14Green Bank (A Rural Bank), Inc. RB

Bank Category

Constituent EntitiesBank


1 Bank of Florida, Inc. (A Rural Bank) RB Bank of Florida, Inc. (A Rural Bank) RB 2-Jan-14Bank of Lubao, Inc. (A Rural Bank) RB

2 Network Consolidated Cooperative Bank CB Cooperative Bank of Agusan del Sur CB 8-Sep-14Capiz Settlers Cooperative Rural Bank, Inc. CBCooperative Bank of Camarines Norte CBCooperative Bank of Leyte CBSorsogon Provincial Cooperative Bank CBSouthern Leyte Cooperative Bank CB

Bank Category

Acquired EntityBank


1 BDO Unibank, Inc. UB Citibank Savings, Inc. TB 25-Mar-142 China Banking Corporation UB Planters Development Bank TB 15-May-143 Philippine Bank of Communications KB Rural Bank of Nagcarlan, Inc. RB 24-Jul-144 BDO Unibank, Inc. UB The Real Bank (A Thrift Bank), Inc. TB 8-Aug-145 Philippine Bank of Communications KB Banco Dipolog, Inc. RB 4-Sep-14

Parent Entity

MERGER

Surviving Entity

CONSOLIDATION

Consolidated Entity

ACQUISITION

_________________________6 Off‑site ATMs or stand‑alone ATM units are mostly found in university belts,

convenience stores, private‑public offices, shopping malls, LRT/MRT stations,

airports, seaports and bus terminals.7 BSP Circular No. 735 dated 16 August 2011

8

Sta

tu

s R

ep

ort o

n t

he

Ph

ilip

pin

e F

ina

nc

ial

Sy

ste

m The bigger banks, specifically, are in acquisition mode with five cases of acquisition reported during the year. In addition, there were four cases of mergers and consolidations that transpired in 2014 (Figure 10).

Meanwhile, the banking landscape was also characterized by the exit of weaker players with the reported closure of 15 banks – one thrift bank, 13 rural banks and one cooperative bank. (Figure 11)

Banks instituted balanced and defensive portfolio in 2014 to sustain a positive operating income, balance sheet growth, and firmed up capital base

Revenue from lending activities sustained positive bottomline, albeit moderated by lower gains from revaluation of financial investments

The system’s performance recorded a net profit of P135.0 billion driven mainly by interest income from increased lending (Figure 12). The proportion of interest to operating income was at 59.6 percent (P274.3 billion). Interest income from financial assets other than loans stood at 18.1 percent (P83.4 billion) while fees and commission income at 14.2 percent (P65.2 billion) of total operating income. Further, interest income picked up with banks taking advantage of market’s foresight of potential reversal of yields downtrend (Figure 13) by increasing credit

activity and Held‑to‑Maturity (HTM). Interest earned on loans to individuals, corporate and government of P285.6 billion increased by 21.2 percent YoY accounting for a significant portion at 70.4 percent (Figure 14). Interest Income from HTM assets of P31.8 billion, or 80.0 percent increase YoY mitigated the 30.5 percent drop in interest income from AFS assets to P5.9 billion.

Interest expense related to deposit taking activity, on the other hand, slightly rose by 0.2 percent to P70.6 billion.

Non‑interest income from foreign exchange of P3.4 billion (down by 69.4 percent YoY) and sale/redemption/de‑recognition of non‑trading financial instruments of P5.6 billion (down by 80.7 percent YoY) posted lower profit due to softening8 of the peso‑dollar exchange rate and revaluation loss9 from

_________________________8 The peso softened against the US dollar by 4.6 percent to PhP44.4/US$ owing to

expectations of increase in US interest rates as the US Federal Reserve winds down

bond purchases.9 Lingering uncertainties in the global financial market and local equities’ performance

that is highly influenced by market development in the external front pulled down

value of financial assets.

Figure 11Philippine Banking SystemNumber of Closed BanksEnd-December 2014

Bank Category

Date of Closure

1 Silangan Savings and Loan Bank, Inc. TB 9-Jan-142 Rural Bank of Reina Mercedes (Isabela), Inc. RB 7-Feb-143 Rural Bank of Montevista (Davao del Norte), Inc. RB 6-Mar-14

4 Rural Bank of Pres. M.A. Roxas (Zamboanga del Norte), Inc.

RB 20-Mar-14

5 Rural Bank of Lingayen, Inc. (Operating under the business name/style "GULF BANK", a Rural Bank)

RB 3-Apr-14

6 Cavite Rural Banking Corporation RB 9-May-147 Asian Consumers Bank (A Rural Bank), Inc. RB 26-Jun-14

8 Rural Bank of Oroquieta (Mis. Occ.), Inc. RB 21-Jul-149 Banco Carmona (Cavite), Inc., A Rural Bank RB 1-Aug-14

10 Rural Bank of Lobo, Inc. RB 18-Sep-1411 Fil-Agro Rural Bank, Inc. RB 25-Sep-1412 Rural Bank of Padre Burgos (Southern Leyte), Inc. RB 12-Sep-14

13 Cooperative Bank of Tarlac, Inc. CB 24-Oct-1414 Synergy Rural Bank (Batangas), Inc. RB 6-Nov-1415 Rural Bank of Burauen (Leyte), Inc. RB 4-Dec-14

Name of Bank

200

300

400

500

Figure 12Philippine Banking System

Results of Operations(In Billion Pesos, For End-Periods Indicated)

Non-Interest Income

trimmed down

0

100

2006 2007 2008 2009 2010 2011 2012 2013 2014

Net Interest Income Non-Interest Income


Selected Ratios and Domestic Interest RatesFor End-Periods Indicated

In Percent (%)

9.0

Selected Ratios

10.0 11.0

Domestic Interest RatesIn Percent (%)

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Earning Asset Yield

Funding Cost

Net Interest Margin

-1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

10.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Savings Deposit RatesBank Average LendingT-bills (91-day)Short-Term Time Deposit (<360 days)

Yield Reversal

300

400

500


Interest Income(In Billion Pesos, For End-Periods Indicated)

Financial Liabilities Held for TradingOther Interest ExpenseLoans and Receivables21.2%

(100)

-

100

200

300

2013 2014

Loans and ReceivablesHeld-to-Maturity Financial AssetsAvailable-for-Sale Financial AssetsFinancial Assets Held for TradingDue from Bangko Sentral ng PilipinasOther Interest Income

21.2%

Averted further losses by ↑ HTM and ↓ AFS

9

Ba

nk

ing

Sy

ste

m

selling/redeeming/de‑recognizing of Available‑For‑Sale (AFS) assets (Figure 15 and 16).

Non‑interest expenses are comprised largely of compensation/fringe benefits at 36.2 percent (P104.0 billion) followed by taxes and licenses at 9.5 percent (P27.3 billion).

The registered net profit is, however, 6.9 percent lower than last year’s P144.9 billion on tempered trading gains and marked‑to‑market (MTM) losses of banks on financial assets arising from the uptick in domestic interest rates (Figure 15). Specifically, the decline was brought about by the decrease in non‑interest income of 17.4 percent to P144.8 billion which partly offset higher net interest income of P320.2 billion, or 16.4 percent increase from last year’s P274.9 billion (Figure 12).

Notwithstanding trimmed net profit, net interest margin (NIM) stayed at 3.3 percent reflecting increased income from loans and HTM assets (Figure 17). However, cost‑to‑income (CTI) ratio picked up to 65.0 percent from 60.6 percent because of the deliberate move of banks to expand their branch network as a means to not only increase deposit base and loan potential but also set up scanning posts to improve their ability to service the changing and differentiated needs of stakeholders, consequently increasing customer base and seizing opportunities to compete in the consumer finance market. Return on assets (ROA) and return on equity (ROE) ratios went down to 1.3 percent and 10.8 percent from 1.6 percent and 13.3 percent, respectively, last year due to lower profits10.

System’s asset portfolio exibited considerable growth in credit activity and holdings of financial assets

Banks’ cautious strategy of building a defensive and balanced asset portfolio that will not only withstand unanticipated stress in the funding stream but also alleviate downward pressure of lower trading‑related gains buoyed profitability. It was observed that the percentage of loans to total assets grew to 52.2 percent (up from 49.1 percent last year) and financial assets other than loans booked as Held‑to‑Maturity (HTM) to 7.4 percent (up from 3.6 percent), respectively. Conversely, cash and due from BSP/other banks fell to 22.2 percent (down from 25.6 percent). These overall indicate banks’ behavior to safeguard profitability amid rising domestic interest rates.

______________________________________________

10 Across various subgroups, profitability indicators present that government banks were

the most cost‑efficient at 58.5 percent (up from last year’s 53.2 percent). Meanwhile,

cooperative banks with a ROA of 1.7 percent and government banks with a ROE of 14.2

percent (up from previous year’s ‑3.9 percent and 14.7 percent, respectively) provided

better returns.

50.0

100.0

150.0

200.0


Non-Interest Income(In Billion Pesos, For End-Periods Indicated)

Lower gains from sale/redemption/derecognition of

Available-for-Sale

(50.0)

-

2008 2009 2010 2011 2012 2013 2014

Fees and Commissions Income Dividend IncomeProfit/(Loss) from Sale/Redemption/Derecognition of Non-Trading Financial Assets and LiabilitiesForeign Exchange Profit/(Loss)Profit/(Loss) on Fair Value Adjustment in Hedge AccountingProfit/(Loss) on Financial Assets and Liabilities Designated at Fair Value through Profit or LossProfit/(Loss) from Sale/Derecognition of Non-Financial AssetsTrading IncomeOther income

40

50

60

70


Gains/(Losses) from Sale/Redemption/De-recognition of Non-Trading Financial Assets and Liabilities(In Billion Pesos, For End-Periods Indicated)

Available-for-Sale

Held-to-Maturity

Investments in Unconsolidated Subsidiaries, Associates and Joint Ventures-76.7%

-

10

20

30

2013 2014

Subsidiaries, Associates and Joint VenturesLoans and Receivables

Investment in Non-Marketable Equity Securities

Unquoted Debt Securities Classified as Loans

-76.7%

8.0

10.0

12.0

14.0

16.0

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Figure 17Philippine Banking System Profitability Trends(In Percent, For End-Periods Indicated)

Net Interest Margin, LHS

Return on Equity, RHS

(LHS) (RHS)

0.0

2.0

4.0

6.0

0.0

0.5

1.0

1.5

2.0

2008 2009 2010 2011 2012 2013 2014

Return on Assets, LHS

ROPA

OTHER ASSETS

FINANCIAL ASSETS*a/

CASH AND DUE FROM BSP/OTHER BANKS

TOTAL LOAN PORTFOLIO*


Asset Mix and Funding Source(Year-on-Year growth In Billion Pesos, As of End-Periods Indicated)

Dec-14 Dec-13 Dec-12

(500) 0 500 1,000 1,500 2,000

(500) 0 500 1,000 1,500 2,000

FINANCIAL LIABILITIES HFT

BONDS PAYABLE

BILLS PAYABLE

OTHER LIABILITIES

CAPITAL

DEPOSIT LIABILITIES

*Net Allowance for Credit Losses a/ Financial assets other than loans exclude

Equity Investment in Subsidiaries/ Associates/Joint Ventures.

10

Sta

tu

s R

ep

ort o

n t

he

Ph

ilip

pin

e F

ina

nc

ial

Sy

ste

m

Total assets of P11.2 trillion grew year‑on‑year (YoY) by 12.0 percent (P1.2 trillion YoY). Asset expansion was driven by credit11 activity of P5.7 trillion which rose by 19.7 percent YoY (P934.1 billion) and acquisition of financial assets12 amounting to P2.3 trillion that is higher by 15.0 percent YoY (P296.5 billion). These upturn are remarkably higher than the levels recorded in 2013 when the banking system displayed ample liquidity conditions (Figure 18). Among financial assets other than loans, it is interesting to note that Held‑to‑Maturity (HTM) of P829.9 billion and Held‑For‑Trading (HFT) of P322.3 billion registered a hefty growth of 134.0 percent YoY (P475.2 billion) and 88.8 percent YoY (P151.6 billion), respectively while Available‑For‑Sale (AFS) of P991.8 billion declined by 15.5 percent YoY (P341.4 billion). This dynamics signals prudent stance of banks to manage the negative impact of short‑term fluctuations in interest rates and ensure continued viability and profitability of its balance sheet.

Real estate, renting and business activities remained the largest loan recipients

The banking system’s gross total loan portfolio (TLP) rose by 19.1 percent to P5,827.113 billion from last year’s P4,891.9 billion. Loans are largely peso‑denominated at 87.7 percent (marginally up from 87.3 percent) and short tenured with maturities ‘Up to 12 months’ at 50.1 percent (Figure 19). This reflects banks’ increased exposure to higher yielding credit activities.

Across banking groups, universal and commercial banks (U/KBs) made up the bulk of the banking system’s TLP at 87.8 percent while the rest of the share were for thrift banks (TBs) and rural and cooperative banks (R/CBs) at 9.9 percent and 2.3 percent, respectively. The banking system’s strong loan growth was evident in core lending (TLP exclusive

of interbank loans and RRP transactions with BSP and other banks) which increased by 19.5 percent to P5,271.3 billion from last year’s P4,410.1 billion.

Industries engaged in real estate, renting and business activities still had the largest TLP share14 (Figure 19), ahead of financial intermediation (inclusive of interbank loans and RRP transactions). In particular, real estate’s loan intake of 17.8 percent (down from last year’s 18.5 percent) was higher than financial intermediation’s 17.0 percent (same as last year). The other economic activities with double‑digit percent shares were manufacturing at 13.8 percent (slightly up from 13.7 percent) followed by wholesale and retail trade at 12.5 percent (down from last year’s 12.8 percent).

Prudential surveillance report by purpose on real estate exposures (REEs) of Universal/Commercial Banks (U/KBs) and Thrift Banks (TBs) presents a portfolio comprised of real estate loans (RELs) at 85.4 percent at P1,043.4 billion. Of the RELs, mid‑ to high‑end residential housing projects have consistently received favourable15 financial support from banks rather than real estate activities used to support productive activities such as factories, office space, warehouse and storage. The quarterly growth of REEs, however, accelerated from a rate of 3.8 percent as of end‑September 2014 to 5.4 percent as of end‑December 2014 at P1,221.5 billion.

The components of consumer loans (CLs) other than residential RELs, i.e., auto loans, credit card receivables and other consumer loans, also registered year‑on‑year growth. Total consumer loans rose to P902.6 billion from last year’s P721.5 billion (Figure 20). Residential RELs still took the largest share of

__________________11 Net of Allowance for Credit Losses.12 Net of Allowance for Credit Losses.13 Net of Amortization.14 For comparability, classification is based on mapping of data starting June 2014

(using 2009 Phil. Standard Industrial Classification effective June 2014 FRP) with data

of prior periods (using 1994 PSIC, as amended).

COMMERCIAL BANKSECONOMIC ACTIVITYAs of June 30, 2001 Page 1 of 1

Dec 2013 Dec 201418.5% 17.8%17.0% 17.0%13.7% 13.8%12.8% 12.5%8.4% 8.9%7.8% 8.4%5.0% 4.9%4.4% 3.7%2.2% 1.8%

10.2% 11.1%

Figure 20Philippine Banking SystemLoan Portfolio Structure by Economic SectorFor End-Periods IndicatedIn Percent

Real Estate, Renting & Business ActivitiesFinancial Intermediation (including IBL & RRP)ManufacturingWholesale & Retail TradeLoans to Individuals for Consumption PurposesElectricity, Gas & Water SupplyTransport, Storage and CommunicationsAgriculture, Hunting, Forestry and FishingPublic Admin & Defense; Compulsory Social SecurityOthers

DEC 2013 P4,891.9 Billion

DEC 2014 P5,827.1 Billion

Filename: Figure__Loans & NPLs by EconActShee: PBS TLP by EconActDate: 5/17/2015 Time: 8:58 AMDirectory: s:\

Figure 20Philippine Banking System 1

Composition of Consumer LoansLevels in PhP Billions, Ratios in PercentAs of End of Periods Indicated

Level % Share NPL Ratio Level % Share NPL Ratio

Consumer Loans 902.6 100.0 4.8 721.5 100.0 5.3Auto Loans 230.1 25.5 4.3 186.3 25.8 4.2Credit Card Receivables 164.3 18.2 8.2 157.4 21.8 9.6Residential Real Estate Loans 398.2 44.1 3.1 320.5 44.4 3.0

Other Consumer Loans 2 109.9 12.2 7.1 57.4 8.0 10.7

1 excludes rural and cooperative banks2 includes Salary Loans which is a separate account in the FRP effective June 2014 reports

December 2013December 2014

11

Ba

nk

ing

Sy

ste

m

the consumer loan portfolio at 44.1 percent, followed by auto loans at 25.5 percent, credit card receivables at 18.2 percent, and salary loans at 6.9 percent. Compared to its ASEAN‑5 counterparts, Philippines still lagged behind in terms of CL exposures at 15.9 percent of total loan portfolio. Malaysia’s CL exposure comes first at 57.8 percent followed by Indonesia at 28.3 percent, Thailand at 27.8 percent, and Singapore at 25.7 percent. However, the non‑performing CCRs to total CCRs ratio of the Philippines is the highest among the ASEAN 5 at 7.0 percent.

Across banking groups, universal and commercial banks accounted for 63.4 percent of total consumer loans while thrift banks held the remaining 36.6 percent. While non‑performing consumer loans went up from last year’s level, the rate of increase in total consumer loans was higher compared to that in non‑performing consumer loans, resulting to an NPL ratio of 4.8 percent, albeit better than last year’s 5.3 percent.

By counterparty exposures, bank credit is skewed towards resident private corporations amounting P2,964.4 billion with a share of 57.6 percent (Figure 21) and which are involved in manufacturing (P640.5 billion or a share of 20.3 percent), real estate (P516.0 billion or a 16.3 percent share), and wholesale & retail trade, repair of motor vehicles & motorcycles (P421.1 billion or a 13.3 percent share). Thus, U/KBs’ on‑balance sheet credit risk‑weighted assets presents a sizeable portion of loan extended to corporate sector at 69.6 percent.

Aggregating private corporations under one group – conglomerate ‑ a total of 39 banks are exposed to the Top 12 conglomerates as of end‑September 2014. Companies of these Top 12 borrowing conglomerates providing financial and insurance activities (P185.8 billion or a share of 24.5 percent) have the largest aggregate loans from banks, followed by those involved in electricity & gas supply (P175.3 billion or a

share of 23.1 percent) and real estate (P162.4 billion or a share of 21.4 percent) (Figure 22).

Banks continue to set aside funds for MSMEs and agri-agra borrowers, with rural and cooperative banks’ compliance ratios far above the minimum

Banks continuously provide credit accommodations to micro, small and medium enterprises (MSMEs) under R.A. No. 6977 (as amended by R.A. Nos. 8289 and 9501) as funds allocated to MSMEs totaled P396.2 billion, slightly up from last year’s P387.0 billion. This resulted to the banking system’s overall compliance ratio of 10.3 percent, which was above the required ten percent (8 percent for MSEs and 2.0 percent for MEs) under the law. The system’s total credit allocation to MEs a total of P218.0 billion led to a compliance ratio of 5.7 percent. While the banking system’s funds allocated to MSEs totaling P178.2 billion resulting to a compliance ratio of 4.6 percent, the rural and cooperative banking industry’s 22.5 percent MSE compliance ratio far exceeded the 8 percent statutory floor.

It was also able to set aside a total of P336.7 billion of loanable funds for agriculture and agrarian reform credit under R.A. No. 10000 (the Agri‑Agra Reform Credit Act of 2009), higher than last year’s P303.9 billion. In particular, rural and cooperative banks’ overall agri‑agra compliance ratios of 18.3 percent and 40.2 percent were far above the required ratios of 15 percent and 10 percent, respectively. As such, despite its minimal share in the banking system’s total loan portfolio, the rural and cooperative banking industry

__________________15 Classification effective June 2014) with data of prior periods (using 1994 PSIC, as

amended). As of end‑December 2014, the share of mid‑ to high‑end residential units

to total real estate loans to finance residential units was at 61.2 percent and has been

above the 61.0 percent mark since December 2012 when the banks started to adopt

the expanded report on real estate exposures (Memorandum No. M‑2012‑057 dated

18 December 2012).

3.0%

7.0%

0.8%4.4%

7.1%3.9%

Figure 21Philippine Banking SystemGross Loans and Receivables by Resident Counterparty(In Percent Share to Total)As of End-December 2014

57.6%

6.5%

9.7%

Non-ResidentResident Private CorporationsResident Individuals for Housing PurposesResident Individuals for ConsumptionResident Agrarian reform/Other Agricultural LoansResident MicroenterpriseGovernmentResident Small and Medium Enterprise

No. of Firms

Real Estate Activities 40 Manufacturing 32 Financial and Insurance Activities 31 Electricity and Gas Supply 26 Trade 22 Telecommunications 9

24.5%

12.0%

7.6%

5.2%

3.6%0.9%

1.7%

Figure 22Exposure of Banks to Top 12 Conglomerates (with firms classified to business lines)As of End-September 2014

Telecommunications 9 Transportation 8 Water Supply 4 Others 27

TOTAL 199

* Share to Total Exposure of Banks to Top 12 ConglomeratesSource: Quarterly Report on Credit Exposures (CREDEX)

23.1%21.4%

12.0%

12

Sta

tu

s R

ep

ort o

n t

he

Ph

ilip

pin

e F

ina

nc

ial

Sy

ste

m

was able to cater to the needs of agri‑agra as well as MSME borrowers that may be underserved by larger banks.

Loan quality was maintained amid total loan

portfolio growth

The industry maintained its loan quality amid the continued expansion in lending. Gross non‑performing loans (NPLs) remained low at 2.3 percent of the total loan portfolio, better than last year’s 2.8 percent. This improvement came about as the level of gross NPLs was relatively unchanged at P134.7 billion from last year’s P134.6 billion despite the 19.5 percent growth of the total loan portfolio (TLP) of P5,827.1 billion (Figure 23).

Across banking groups, universal, commercial and thrift banks, as well as rural banks, were able to keep their NPL levels low in spite of growth in total loans. On the other hand, the loan portfolio of the cooperative banking industry is deteriorating as the industry’s NPL levels are increasing while its total loan levels are maintained at almost the same levels. The cooperative banking industry’s loan portfolio of P10.1 billion, however, represented a mere 0.2 percent of the banking system’s total loan portfolio.

Aside from keeping the gross NPL ratio low, the banking system continued to set aside loan loss reserves larger than gross NPLs. In particular, the NPL coverage ratio stood at 119.8 percent as loan loss reserves slightly increased to P161.4 billion from P160.3 billion.The NPL coverage ratio exclusive of general loan loss provision declined to 74.2 percent (from 79.0 percent) consistent with the decline in non‑performing loans.

Real and other properties acquired (ROPA) declined to P121.1 billion from last year’s P128.6 billion, resulting to a lower non‑performing asset (NPA) level of P255.8 billion from last year’s P263.3 billion as a beneficial consequence of banks’ continued asset clean up. Accordingly, asset quality improved as the NPA ratio eased to 2.3 percent, lower than last year’s 2.6 percent. Furthermore, the NPA coverage ratio strengthened to 77.0 percent due to the increase in NPA reserves to P197.0 billion.

The distressed assets ratio, as a broader measure of asset quality, likewise improved to 4.6 percent from last year’s 5.6 percent ratio. This came as distressed assets went down to P276.1 billion from last year’s P282.2 billion.

Meanwhile, NPL16 ratios generally slowed down across all industries except for agriculture, hunting, forestry and fishing (AFF) which inched up to 7.1 percent from 6.0 percent in the same period last year. An increase of P2.4 billion in NPL level was noted in AFF (Figure 25).

Comparative loan and asset quality by industry is summarized below:

Cooperative banks exhibited the highest NPL ratio at 17.6 percent, albeit the subgroup has minimal impact on the overall industry ratio as its NPLs represent only 1.3 percent of the system’s total NPLs and 0.03 percent of the total loan portfolio.__________________16 Figures are computed in accordance with the NPL definition under Circular No. 772

dated 16 October 2012 effective 01 January 2013.

5.0

6.0

7.0

8.0

9.0In Percent (%)

Figure 24

Non-Performing Loans RatioFor End-Periods Indicated

Loans to Individuals for Consumption Purposes

Agriculture, Hunting, Forestry & Fishing

0.0

1.0

2.0

3.0

4.0

5.0

2011 2012 2013 2014

Wholesale & Retail TradeRERBA

Others*Manufacturing

Transport, Storage & CommunicationFinancial IntermediationPublic Administration & DefenseElectricity, Gas & Water Supply

* Composed of: Mining and Quarrying; Construction; Hotels and Restaurants; Education; Health and Social Work; Other Community, Social and Personal Service Activities; Private Households with Employed Persons; and Loans to Non-ResidentsSource: FInancial Reporting Package (FRP)

Figure 23

GROSS NPLs and NPL COVERAGE RATIO NPAs and NPA COVERAGE RATIO DISTRESSED ASSETS RATIO

Philippine Banking SystemFor End-Periods Indicated

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014

In PercentIn P Billion

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

-

50.0

100.0

150.0

200.0

250.0

300.0

350.0



0.0

2.0

4.0

6.0

8.0

10.0

12.0

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0



Gross NPLs (RHS) LLRs

Gross NPL Ratio NPL Coverage Ratio

NPAs NPA Reserves

NPA Ratio NPA Coverage RatioNPAs RLs, Performing Distressed Assets Ratio

Figure 25Philippine Banking SystemComparative NPL, NPA & Coverage RatiosAs of End-December 2014In Percent

NPL NPA

All Banks p/ 2.3% 0.6% 2.3% 119.8% 77.0%

Universal and Commercial Banks 1.8% 0.3% 1.8% 142.4% 88.9%

Thrift Banks 4.4% 2.0% 5.0% 77.0% 52.1%

Rural Banks p/ 11.8% 6.0% 11.9% 56.9% 37.1%

Cooperative Banks p/ 17.6% 7.4% 16.1% 63.1% 48.2%

p/ Preliminary

Gross NPL Ratio

NPA RatioCoverage RatiosNet NPL

Ratio

13

Ba

nk

ing

Sy

ste

m

Bank holdings of Held-To-Maturity (HTM) financial assets more than doubled while Available-For-Sale

(AFS) contracted drastically at the onset of interest rate hike

Financial assets other than loans (net of accumulated market gains/losses and allowance for credit losses) are largely made up of government issued debt securities (P2,145.4 billion or a share of 95.1 percent) and the rest were shared by derivatives at P60.0 billion or 2.6 percent and equities at P50.2 billion or 2.2 percent. In terms of booking, AFS represented a share of 44.5 percent at P1,003.5 billion followed by HTM of 36.4 percent at P822.3 billion and Held‑For‑Trading (HFT) of 14.3 percent at P322.3 billion. Banks more than doubled their holdings of HTM (from a share of only 16.2 percent in 2013) and reduced AFS instruments (from 61.6 percent) to safeguard capital position and portfolio investments from mark‑to‑market (MTM) losses amid rising interest rates. Residents, specifically domestic universal banks and government banks, hold a substantial fraction of portfolio and direct equity investments of banks (Figure 26).

Growth in deposits, capital raising activities, and shift of placements in BSP’s SDA facility to alternative instruments supported asset expansion

The banking systems total deposit liabilities stood at P8,520.9 billion, 12.1 percent higher than last year’s level on continued confidence in the banking system and banks’ efforts to market innovative deposit products that enter to the clients’ evolving needs such as products with facilities to link with investment variants. The growth though is subdued compared to prior years.

Growth in banking system’s assets is mostly funded by peso deposit liabilities at 83.2 percent share to total deposits and is mostly from residents representing 98.8 percent. Peso deposit rose by P643.4 billion or 10.0 percent to P7,087 billion.

Furthermore, deposits were primarily held in savings at 47.1 percent share amounting to P4,014.6 billion, followed by time of P2,644.1 billion at 31.0 percent share, demand and NOW accounts of P1,756.0 billion at 20.6 percent, and Long‑Term Negotiable Certificate of Deposits (LTNCD) at 1.2 percent amounting to P106 billion (Figure 27).

61.6% 40.8%

16.2% 33.5%

1,000

1,500

2,000

2,500

3,000

Figure 26Philippine Banking System Financial Assets Other Than Loans As of End-Periods Indicated

Financial Assets Held for Trading (HFT)

Financial Assets DFVPL

Available-for-Sale (AFS) Financial Assets

Held-to-Maturity (HTM) Financial Assets

Unquoted Debt Securities Classified as Loans

Investments in Non-Marketable Equity Securities

BY BOOKING

94.5%95.1%

-

500

1,000

1,500

2,000

2,500 BY TYPE OF INSTRUMENT

8.0% 13.1%

61.6% 40.8%

-

500

As of End-December 2013 As of End-December 2014

Marketable Equity Securities

Equity Investments in Subsidiaries, Associates and Joint Ventures, net

-


Debt Equity Derivatives Others

64.8% 61.6%

20.4% 21.1%

0

500

1,000

1,500

2,000

2,500

As of End-December 2013 r/ As of End-December 2014

Private Domestic UBs Private Domestic KBsGovernment Banks Private Domestic Thrift BanksForeign UBs Foreign KBsForeign Subsidiary KBs Foreign-Controlled TBsOthers

BY INDUSTRY

66.7% 67.1%

12.8% 11.9%12.9% 15.0%

0

500

1,000

1,500

2,000

2,500


National Government LGUs GOCCsBSP Banks CorporationsIndividuals Non-residents Others

BY COUNTERPARTY

20.6%

47.1%

31.0%

1.2%

Demand and NOWSavingsTimeLTNCD

By Type of Deposits

Figure 27

Philippine Banking System Deposit Liabilities Profile(In Percent, As of End-December 2014)

10.7%2.4%By Type of Resident

3.4%

46.4%50.2%

Demand and NOWSavingsTimeLTNCD

By Type of Foreign Currency Deposits

1.5%Demand and NOWSavings

By Type of Peso Deposits

10.7%1.1%

32.9%45.6%

2.4%

GovernmentBanksPrivate CorporationsIndividualsTrust Department

By Type of Resident Counterparties 24.1%

47.3%

27.2%

1.5% SavingsTimeLTNCD

14

Sta

tu

s R

ep

ort o

n t

he

Ph

ilip

pin

e F

ina

nc

ial

Sy

ste

m

This profile, which remains to be retail‑based and domestically‑oriented, denotes a stable funding stream and partial insulation against foreign currency exchange rate fluctuations. It is also indicative of sustained depositor confidence in banks. Retail and domestic funding sources are normally less17 sensitive to sudden changes in the condition of bank’s operation and cheaper source of funds. The banking system also has a positive funding gap (difference between deposits and loans) of P2,693.8 billion as there is 1.5x more peso deposit for every one peso loan.

However, there was an observed slower increase not only in the amount (up by only 12.1 percent as of end‑December 2014 to P8,520.9 billion from 36.7 percent to P7,603.5 billion as of end‑December 2013) of deposits but also in the number of accounts and depositors particularly, in savings deposits (number of accounts grew by only 5.0 percent as of end‑2014 to 42.6 billion from 685.3 percent to 40.6 billion as of end‑December 2013; number of depositors increased by only 6.8 percent to 35.1 billion from 1,176.8 percent to 32.9 billion as of end‑December 2013). The number of savings deposit accounts with a size of P5,000.01 to P10,000 posted substantial decline of 8.0 percent (down from a growth of 13.4 percent to P3.0 billion) to P2.7 billion year‑on‑year (YoY). The relatively constant median savings deposit interest rate of universal and commercial banks (U/KBs) at 0.250 percent, thrift banks (TBs) at 0.500 percent, and rural and cooperative banks(R/CBs) at 1.000 percent remain constant from previous year’s level amid rising yield of other investment instruments, which kept depositors to stay in the sidelines and patiently watch for better return opportunities given that the financial market that is still faced with greater volatility.

Apart from deposits, total capital accounts funded 12.2 percent of total assets. Following the implementation of Basel III and revised minimum capital requirements in 2014, banks shored up capital to meet the required capital standards and further strengthen their operations for regional competition.

In particular, the other source of funds for banks’ operations such as capital stock of P610.0 billion (hike of P68.4 billion, or 12.6 percent YoY), retained earnings of P517.8 billion (up by P77.3, or 17.6 percent), and Other Comprehensive Income of P3.8 billion (increase of P15.9 billion, or 131.1 percent) further reinforced asset expansion. The positive mark posted by OCI was brought by the surge in unrealized gains from AFS financial assets which rose by P19.5 billion to P9.4 billion (192.1 percent YoY). Banks’ moderated appetite for SDAs, following the issuance of BSP Memorandum No. M‑2013‑021 dated 17 May 2013 restricting access of trust departments/entities to the SDA facility (also down by P499.7 billion to P487.4 billion, or 11.6 percent), led to reduced Cash

and Due from BSP/Other Banks by P77.1 billion or 3.0 percent decline YoY to P2.5 trillion. Nevertheless, the reduced placements in BSP’s SDA facility further pushed up liquidity in the banking system which subsequently found its way to alternative investment instruments such as financial assets and loans.

The current funding structure of the industry suggets that banks’ balance sheet have negative gaps recorded in the short‑term at time buckets of ‘up to 3 months’ based on the residual maturity profile of net performing assets and liabilities (Figure 28). Although it broodly indicates that there are more liabilities repricing faster than assets of up to 3 months, the existence of such maturity mismatches should not necessarily denote high liquidity risk exposure because risk management practices18 such as contingency funding/liquidity plan and limits on the nature and amount of risk have been set up to control risk19.

Banks maintained ample liquidity in 2014 as liquid assets‑to‑deposits ratio eased to 55.6 percent, albeit lower than last year’s level of 59.5 percent. Similarly, cash and due from banks‑to‑deposit ratio declined to 29.0 percent from 33.5 percent. The softening of overall liquidity was attributed to banks’ extension of credit to productive activities as loans‑to‑deposit ratio rose to 68.4 percent from 64.3 percent last year.

Banks’ capital level can ride out asset quality stress

Universal and commercial banks capital buffer was at 16.2 percent on a consolidated basis and 15.2 percent on a solo basis (Figure 29). This remains above the BSP regulatory requirement of 10 percent and the Bank for International Settlements (BIS) standard of 8 percent. Philippines’ CAR is among the highest in ASEAN‑520.

__________________17 Bank for International Settlements.Liquidity Risk – An Introduction. www.fsiconnect.

org18 As cited in the Manual of Regulations for Banks 19 Source: Manual of Regulations for Banks Volume No. 2 Appendix 4.20 As of end‑December 2014, Indonesia’s CAR is at 18.7 percent, Singapore at 15.9

percent, and Malaysia at 15.4 percent. Thailand is at 16.9 percent as of end‑September

2014. Source: IMF Financial Soundness Indicator.

3,000

4,000

5,000

6,000

Figure 28

Philippine Banking SystemResidual Maturity of Performing Financial Assets and Liabilities*(In Billion Pesos, As of End-December 2014)

Short Term Medium Term Long Term

Other AssetsFinancial Assets Other Than LoansLoans and Receivables Under Repurchase Agreements

0

1,000

2,000

3,000

Up to 1 mo. Over 1 mo. to 3 mos.

Over 3 mos. to 12 mos.

Over 1 Yr. to 3 Yrs.

Over 3 Yrs. to 5 Yrs.

Over 5 Yrs. to 15 Yrs.

Over 15 Yrs.

* Peso, Foreign Regular and Foreign Offices Accounts. Loans and receivables represents 53.9 percent of totalassets, Due from BSP/Other Banks at 23.8 percent, and Financial Assets Other than Loans at 16.4 percent whiledeposit liabilities accounts for 91.7 percent of total liabilities.

Loans and Receivables Under Repurchase AgreementsLoans and ReceivablesDue from BSP/Other BanksBills PayableOther LiabilitiesDue to H.O./Branches/Agencies Abroad - (Phils.)Deposit Liabilities

15

Ba

nk

ing

Sy

ste

m

02468101214161820

0100200300400500600700800900

1000

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14

Figure 29Universal and Commercial BanksCapitalization Trends: Consolidated basis*(Ratio in percent, levels in billion pesos, as of end-periods indicated)

Tier 1 Capital (LHS) Tier 1 Ratio (RHS)Total Conso CAR (RHS) BSP minimum required CAR (RHS)

(RHS)As of end-December 2014CAR = 16.2%CET1 = 13. 6%

(LHS)

*U/KBs' regulatory capital prior to end-March 2014 is

based on Basel II framework.

02468101214161820

0100200300400500600700800900

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Sep-14 Dec-14

Capitalization Trends: Solo basis*(Ratio in percent, levels in billion pesos, as of end-periods indicated)

Tier 1 Capital (LHS) Tier 1 Ratio (RHS)Total Solo CAR (RHS) BSP minimum required CAR (RHS)

(RHS)As of end-December 2014CAR = 15.2% CET1 = 12.5%

(LHS)

*U/KBs' regulatory capital prior to end-March 2014 is

based on Basel II framework.

Common Equity Tier 1 (CET1) on consolidated and solo bases of 13.6 percent and 12.5 percent correspondingly were also higher than the BSP threshold of 6 percent and BIS standard of 4.5 percent while the 2.5 percent capital conservation buffer (CCB) was surpassed at 7.6 percent and 6.5 percent on consolidated and solo bases, respectively.

Compared to last year’s ratio, this year’s CAR is lower despite higher total qualifying capital (TQC)21 of P1,098.3 billion was mainly driven by capital raising activities (issuances of common shares) and unrealized gains in Available‑for‑Sale (AFS) debt securities. Increased lending activities raised risk‑weighted assets22 to P6,784.1 billion from P5,839.5 billion at end‑2013 and pulled down industry CAR ratios.

The full implementation of Basel III capital standards on 01 January 2014 have translated to relatively lower capital levels but it strengthened the system’s capital base particularly its CET1 ratio which represents the highest quality of bank capital and thereby, enabling banks to withstand unexpected losses in times of market stress. It also improved the economic viability and competitiveness of

domestic banks in anticipation of ASEAN banking integration which is seen to usher the entry of new foreign banks whose capital may be bigger than those of local banks. Off-Balance Sheet Activities Expanded

Higher trade‑related accounts and bank guarantees transactions pushed up off‑balance sheet activities of banks.

Off-balance sheet assets of banks posted positive year-on-year growth

The banking system’s total contingent accounts (off‑balance sheet) stood at P6,292.3 billion, 10.7 percent higher than year ago’s level of P5,681.6 billion (Figure 30). Selected off balance sheet assets of banks consisted of derivatives instruments (42.4 percent), trust department accounts (40.2 percent), commitments (12.2 percent), bank guarantees (3.4 percent) and trade related accounts (1.8 percent). Trust department accounts will be discussed separately in a stand‑alone section of the report.

The expansion was driven mainly by the increased derivatives activities and trust related transactions of banks which both reported a year‑on‑year expansions of 17.4 percent and 1.9 percent, respectively.

Strong global demand for locally produced goods

resulted in positive outturn in trade-related contingent accounts

The banking system’s total trade‑related contingent accounts stood at P110.7 billion, 24.8 percent higher than last year’s level of P88.7 billion on account of strong global demand for locally produced goods.

__________________

21 Total qualifying capital was P1,030.8 billion as of end‑December 2013 on a consolidated basis. On a solo basis, at P928.7 million as of end‑December 2014 and P865.3

billion as of end‑December 2013.

22 On a consolidated basis. P6,099.1 billion as of end‑December 2014 and P5,244.9 as of end‑December 2013 on a solo basis.

Figure 30Philippine Banking System: Comparative AssetsFor End-Periods Indicated, In Billion Pesos

2014 2013 YOY Change (%)

On Balance Sheet 11,158.6 9,961.6 12.0Off Balance Sheet* 6,292.3 5,681.6 10.7

*Includes trust assets of bank (P2,529.5 billion) but discussed separately in a stand-alone section.

End-December

16

Sta

tu

s R

ep

ort o

n t

he

Ph

ilip

pin

e F

ina

nc

ial

Sy

ste

m

Trade‑in goods was at a deficit amounting to US$2.1 billion due to level fluctuations of both merchandise exports and imports (Figure 31).

As to Philippine exports performance by country in 2014, Japan (including Okinawa) accounts for 22.5 percent to total exports. It remained as the country’s top destination of exports with revenue amounting to $13.919 billion or 10.8 percent of total export earnings, followed by the United States of America (including Alaska and Hawaii) at $8.722 billion or 15.5 percent and People’s Republic of China at $8.034 billion or 4.8 percent.

The bulk of the total trade‑related contingent accounts of the banking system was accounted for by foreign commercial letters of credit (LC) outstanding at P84.5 billion or 76.4 percent from P69.6 billion or 78.5 percent last year. These were foreign LCs of universal and commercial banks which held 99.6 percent of the banking system’s total foreign LCs. The rest, in descending order, went to export LCs at P11.7 billion or 10.6 percent, shipside bonds and airway bills at P11.3 billion or 10.2 percent, and domestic commercial LCs confirmed at P3.2 billion or 2.8 percent.

Stand-by letters of credit held the lion’s share of bank guarantees

Bank guarantees stood at P216.8 billion, 24.2 percent higher than year ago’s level of P174.5 billion. Bank guarantees are either stand‑by LCs or outstanding guarantees issued. Stand‑by LCs made up 91.4 percent of total bank guarantees. Most of bank guarantees were accounted for by universal and commercial banks which continued to hold the lion’s share of bank guarantees at P216.1 billion or 99.7 percent

Credit card lines represent a large portion of total bank commitments

Total commitments rise at P769.3 billion or 15.7 percent year‑on‑year and were mostly issued by

universal and commercial banks. Total commitments rise at P769.3 billion or 15.7 percent growth year‑on‑year and were mostly issued by universal and commercial banks. The increased credit extended to households for family and other personal expenditures which expanded to P469.3 billion or 6.4 percent from P440.9 billion last year contributed to the huge increase in accounts under the item “others”. Credit card lines accounted for 61.0 percent of total commitments.

Notional value of derivatives rose on the back of improved market sentiment on positive macroeconomic and banking data

Total notional value of derivatives transactions recorded at P2,666.0 billion or 17.4 percent higher P2,270.5 billion last year on the back of relative weakening of the local currency against the US dollar. On trend, the more sophisticated and bigger universal and commercial banks captured the lion’s share of the local derivatives market.

Foreign exchange contracts still had the largest share of the local derivatives market at P1,746.6 billion or 65.5 percent. Year‑on‑year, foreign exchange contracts improved by 17.8 percent. Other derivatives in the Top 3 were interest rate contracts at P914.3 billion or 34.3 percent and credit derivatives at P5.1 billion or 0.2 percent.

Meanwhile, reforms on the over‑the‑counter (OTC) derivatives market have been equated to that of establishing the identified infrastructures – exchanges, trading platforms, central counterparty and trade repositories – as the minimum standard. Thus, the agenda may be seen as enhancing the process and governance of their use so that the regulator can address the issues of risk management, transparency and contagion.

The Philippines, however, is “less active” in OTC derivatives market but nonetheless value the benefits that this product line can provide. In these “less active” jurisdictions, the market volume is relatively limited and the array of available OTC derivatives are the more basic ones. The challenge faced by the “less active” jurisdictions is the difficulty of establishing the desired infrastructure in the face of limited opportunities to tap existing scale (i.e., market depth and turnover) and scope (i.e., breadth of available instruments) economies.

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

-5000

-4000

-3000

-2000

-1000

0

1000

2000

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

Jan-

14

Apr

-14

Jul-1

4

Oct

-14

Figure 31Merchandise Exports and Imports, and Balance of TradeFor End-Periods Indicated

Balance of Trade (US$ million, lhs) Merchandise Exports (y-o-y growth, rhs)Merchandise Imports (y-o-y growth, rhs)

In US$ Millions (LHS) In Percent (RHS)

Source of Data: National Statistics Office (NSO)

17

Tru

st a

nd

Oth

er F

idu

cia

ry

Se

rv

ice

s

Trust and Other Fiduciary ServicesOverview

For the trust industry, the second half of 2014 was characterized by greater liquidity (62.5 percent YoY growth) and resource recovery (5.8 percent YoY growth). On the asset side, support came mostly from financial assets, particularly equities while pre‑need and employee benefit trust accounts buoyed the accountabilities side. The growth in resources was however marred by a marginal decrease in profitability as expenses grew faster than fees and commissions while the latter reported as slight decline during the review period.

Financial Institutions with Trust Licenses Stable

Total number of financial institutions with trust licenses remained at 42 with the 17 universal banks with trust licenses accounting for a lion’s share of the total trust assets at 84.1 percent (P2,297.3 billion). A distant second were the nine commercial banks with 9.9 percent (P271.9 billion) of the total trust resources; at third were the six investment houses, which accounted for 4.9 percent (P133.7 billion); and lastly, the 10 thrift banks (TBs) with trust licenses, which held 1.1 percent (P30.1 billion).

However, when it came to handling these resources, there were two opposing approaches applied by the universal and commercial banks (U/KBs) as well as the non‑bank financial institutions on one hand and the TBs on the other. U/KBs and non‑bank financial institutions increased their exposure in financial assets while they simultaneously reduced

their deposits in banks. In contrast, TBs took a more conservative stance by doing the exact opposite, that is, they pulled back on financial assets and increased deposits in banks and special deposit accounts (SDAs).

A slight reduction in net income is posted at year end

Despite the growth in trust assets, net income from trust slid lower to P4.6 billion, 14.7 percent (P0.8 billion) less than last year as expenses grew to P4.9 billion or by 13.1 percent (P0.6 billion) during the same period. In particular, allocated indirect expenses went up to P1.2 billion (50.0 percent) from last year. Meanwhile, fees and commissions went down to P9.5 billion from P9.7 billion or by

Figure 32Trust Assets per Type of InstitutionAs of End-December 2014

84.1%

9.9%

1.1%

4.9%

UNIVERSAL BANKS COMMERCIAL BANKSTHRIFT BANKS INVESTMENT HOUSES

Figure 33Asset Mix by Financial InstitutionFor End-Periods Indicated

Dec-14 Dec-13 Dec-14 Dec-13 Dec-14 Dec-1314.2 15.0 18.1 14.5 0.8 1.4

19.2 20.9 19.1 14.2 2.6 3.0

52.0 49.1 52.1 67.2 77.7 75.9

1.8 1.9 2.1 2.2 18.4 19.4

2.8 3.0 0.7 1.1 0.0 0.1

. . . . . . . . . . . . . . . . . .

9.9 10.1 7.9 0.9 0.4 0.1

. . . Less than 0.05 percent

UKBs TBs NBFIs

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec-14 Dec-13 Dec-14 Dec-13 Dec-14 Dec-13

Cash and Due from banksDeposits in BanksFinancial Assets, netROPA (net)Equity Investments (net)Other assetsLoans, net

Universal and Commercial Banks

Thrift Banks NBFIs

18

Sta

tu

s R

ep

ort o

n t

he

Ph

ilip

pin

e F

ina

nc

ial

Sy

ste

m

2.6 percent (P0.3 billion) due to a reduction in the fees being collected in the effort to regain interest in trust accounts. This then resulted to lower fees and commissions generated per trust asset at 0.3 percent compared to 2013 when the same ratio stood at 0.4 percent.

Financial assets spur asset growth

At end‑2014, trust industry resources was at P2,733.0, higher by P150.8 billion (5.8 percent) from last year, a complete reversal of 2013’s P578.4 billion decline. This came following renewed interest in equities, indicating less risk aversion and greater preference for higher yield as the stable macroeconomic environment and generally low interest rates lent themselves to such behavior. Moreover, the strong performance of the stock market owing to favorable corporate earnings, investment grade status of the Philippines and easing inflationary pressures fueled preference for equities. In fact, equities’ share of net financial assets rose to 42.3 percent (P616.0 billion) compared to only 33.0 percent (429.1 billion) in 2013.In the trust industry balance sheet, this translated to a major contribution to the accumulated market gains of financial assets, which stood at P119.5 billion by year‑end, a P35.6 billion (42.5 percent) increase over last year’s P83.9 billion and a complete reversal of the P44.6 billion decline of the same in 2013 when there were concerns regarding the US economy, particularly on the uncertainty over the potential slowdown in the US Fed’s stimulus program and partial shutdown of the US government.

In the end, financial assets hit P1,455.8 billion, an improvement of P155.3 billion (11.9 percent) over last year. On the other hand, the trust industry’s deposits in banks slid to P502.2 billion, 3.3 percent (P16.9 billion) lower than P519.1 billion in 2013 as funds migrated to investments with higher returns like the aforementioned equities.

Pre-need and employee benefit trust accounts gain favor from investors

On the accountabilities side, as mentioned, pre‑need and employee benefit trust accounts led the growth. However, while trust accounts were this year’s main drivers, its growth rate has slowed down to 10.6 percent from 40.9 percent in 2013 as the influx of funds to trust accounts, particularly, unit investment trust funds tapered off after Memorandum No. M‑2013‑021 that limited the access to SDAs already took effect beginning 1 January 2014. It is also worth noting that in contrast to last year when 52.8 percent (P820.1 billion) of agency accounts emigrated to other types of accounts (P367.8 billion to UITFs), some even outside of the trust industry, agency accounts increased to P768.7 billion or by 5.0 percent (P36.5 billion), indicating the return of some of the funds to the trust industry.

Meanwhile, despite the implementation of the Foreign Account Tax Compliance Act (FATCA), which imposed additional operational requirements on foreign custodian banks, custody business in the trust industry remained relatively stable at P224.6 billion, up by 1.5 percent (P3.2 billion) from last year.

Figure 34Trust SystemAsset MixFor End-Periods Indicated

Dec 201458.8%20.3%15.0%2.9%2.9%0.0%

10.4%

Dec 201355.7%22.3%16.0%3.2%2.8%0.0%

10.7%

Financial Assets, netDeposits in banksCash and due from banksEquity investment, netLoansROPAOther Assets

Dec 2013P2,582.2 billion

Dec 2014P2,733.0 billion

19

Tru

st a

nd

Oth

er F

idu

cia

ry

Se

rv

ice

s

Trust and agency accounts are channeled to financial assets

The breakdown of asset mix by total managed fund, assets held for trust and agency accounts were mostly in financial assets at 53.2 percent and 74.7 percent, respectively. In comparison, assets in other fiduciary were mostly in other assets while special purpose funds were mostly in loans due to the nature of these institutions. All in all, while there have been changes in the proportion of assets that were held, there were no drastic shifts in preferences.

Greater liquidity but with lesser share of cash and

due from banks

Trust and Other Fiduciary Services continued to exhibit liquidity strength with liquid assets‑to‑total accountabilities ratio inched to 62.5 percent from

61.6 percent propelled by the increase in liquid assets to P1,709.3 billion, 7.5 percent (P119.3 billion) more than last year, although there was a marginal decline in cash and due from banks owing to the limited accessibility of SDAs.

Trust deposits recover from last year as bank

deposits slow down

Even after trust deposits of banks with trust licenses once again started to pick up after posting a decline at end‑2013, the trust‑to‑deposit ratio of said banks for 2014, which stood at 38.5 percent remained to be lower than the 42.3 percent24 registered in 2013. This occurred as the growth in peso deposit of banks with trust licenses at 15.8 percent continued to outpace the growth in peso trust assets at 5.3 percent.

Figure 35 Asset Mix by Total Managed Fund For End-Periods Indicated

Dec-14 Dec-13 Dec-14 Dec-13 Dec-14 Dec-13 Dec-14 Dec-1323.9 26.6 0.0 0.0 2.1 1.7 - 0.2

19.2 15.0 17.4 28.0 17.7 23.1 0.3 0.1

53.2 54.2 74.7 65.8 16.8 16.1 0.2 0.2

0.8 1.3 6.9 5.5 0.1 0.1 77.6 84.3

0.5 0.5 0.1 0.1 14.5 14.2 - -

. . . . . . . . . . . . . . . . . . - -

2.3 2.4 1.0 0.7 48.7 44.9 21.8 15.3

. . . Less than 0.05 percent

Special PurposeTrust Agency Other Fiduciary

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec-14 Dec-13 Dec-14 Dec-13 Dec-14 Dec-13 Dec-14 Dec-13

TRUST AGENCY OTHER FIDUCIARY SPECIAL PURPOSE

Cash and Due from banksDeposits in BanksFinancial Assets, netLoans, netEquity Investments (net)ROPA (net)Other assets

__________________24 Revised.

Figure 36

(70.0)

(20.0)

30.0

80.0

130.0

180.0

230.0

- 500.0

1,000.0 1,500.0 2,000.0 2,500.0 3,000.0 3,500.0 4,000.0 4,500.0

2005 2006 2007 2008 2009 2010 2011 2012r 2013r 2014


Deposit Liabilities (LHS) Trust Assets (LHS)

% Growth Deposits (RHS) % Growth Trust (RHS)

Peso Domestic Deposit Liabilities (Net of Trust Deposits) of Banks with Trust Functions vs. Trust Assets

20

Sta

tu

s R

ep

ort o

n t

he

Ph

ilip

pin

e F

ina

nc

ial

Sy

ste

m Foreign Currency Deposit Units (FCDU)Overview

Banks authorized to engage in FCDU25 operations (“FCDU banks”) continued to register positive performance on improved market sentiment and strong macroeconomic fundamentals. The FCDU assets expanded by 17.8 percent year‑on‑year supported by double‑digit credit expansion as banks maximize potential returns through a more active FCDU loan window. FCDU net profit stayed in the positive territory at US$869.4 million with a modest year‑on‑year growth of 3.9 percent which benefited mostly from trading profits (US$115.9 million) and gains on financial assets designated at fair value through profit and loss (US$46.1 million).

Banks with FCDU authority declined due to industry consolidation

As of end‑2014, there were 77 banks, consisting of 36 universal and commercial banks (U/KBs), 29 thrift banks (TBs), and 12 rural and cooperative banks (RCBs) with FCDU authority. This is lower by two banks from end‑December 2013 due to the placement of the Rural Bank of Lingayen, Inc. under receivership and the merger of The Real Bank with Banco de Oro. During the same period, the latter acquired Citibank Savings Bank and renamed it as BDO Savings Bank. A total of 33 banks, all of which are UKBs, has an expanded FCDU authority26. Banks engaged in FCDU operations accounted for 11.9 percent of the 648 operating banks27 in the Philippines.

FCDU system sustained positive bottom line

The operations of FCDU banks remained profitable. Net profit stood at US$869.4 million, 3.9 percent (US$32.7 million) higher over last year’s due to the robust 15.1 percent growth in non‑interest income (Figure 37). The substantial increment in particular was attributed to the US$41.2 million trading gains which was a 155.9 percent turnaround from the US$74.7 million trading loss incurred same period in 2013. By revenue streams though, net interest income still accounted for 62.3 percent (US$683.0 million) of total operating income while non‑interest income represented the remaining 37.7 percent (US$412.8 million).

Meanwhile, the FCDU system’s net interest income of US$683.0 million was slightly lower by 0.9 percent (US$5.8 million) from last year’s level mainly due to the 10.8 percent increase in interest expense. Further analysis of the FCDU system‑wide balance sheet indicate that FCDU banks’ increased interest expense may be traced to higher interest payments as FCDU deposit liabilities similarly rose by 22.7 percent to US$31.8 billion on the back of strong inflows of remittances from Overseas Filipinos (OFs) while potential earnings from FCDU assets were somewhat tempered as cash and due from banks posted a substantial growth of 22.7 percent (US$1.7 billion) to US$5.8 billion. Accordingly, net interest margin (NIM) softened to 1.8 percent from 2.6 percent as average savings deposit rate and lending rate both declined

-16.4%

-34.8%

18.5%

66.2%

14.3%14.4%

1.9%-2.9%

3.0%

15.1%

-5.5%

-27.0%

-5.1%

9.5%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

June2008

Dec2008

June2009

Dec2009

June2010

Dec2010

June2011

Dec2011

June2012

Dec2012

June2013

Dec2013

June2014

Dec2014

In PercentIn US$ Millions

Figure 37FCDU Net Profit/(Loss) TrendFor End-Periods Indicated

Net Profit or Loss S-O-S Trend Net Profit or Loss

-80.0%

-40.0%

0.0%

40.0%

80.0%

120.0%

160.0%

-

200.000

400.000

600.000

800.000

1,000.000

June2008

Dec2008

June2009

Dec2009

June2010

Dec2010

June2011

Dec2011

June2012

Dec2012

June2013

Dec2013

June2014

Dec2014

FCDU Net-Interest Income and Non-Interest IncomeFor end-periods indicated

In US$ millions

Net-Interest Income Non-Interest IncomeS-O-S Trend Net-Interest Income S-O-S Trend Non-Interest Income

__________________25 Prepared in compliance with Foreign Currency Deposit Act (Republic Act No. 6426).26 Banks, which on account of net worth, resources, past performance and other pertinent criteria, have been given an expanded FCDU authority are exempted from the

15 percent optional deposit requirement with the BSP. They may also extend foreign currency loans to any domestic enterprise without limitations regarding maturity and

marketability. Said loans are likewise eligible for purposes of 100 percent asset cover requirement.27 Refers to head office only. Inclusive of branches, the Philippine banking system has 10,361 banking units.

21

FCDU

to 0.6 percent and 5.5 percent from 0.8 percent and 5.8 percent, respectively. Return on assets (ROA) ratio eased to 2.3 percent from last year’s 3.3 percent. This broadly indicates that FCDU banks preferred higher liquidity over profitability during the review period.

On the other hand, non‑interest expense of US$183.7 million grew by 5.0 percent from last year largely due to the increases in compensation/fringe benefits (15.7 percent) and taxes and licenses (12.9 percent).

All in all, FCDU operations became more efficient with improved cost‑to‑income (CTI) ratio of 16.8 percent from last year’s 17.1 percent.

Asset expansion continued on the back of steady credit growth

Total assets stood at US$41.7 billion, 17.8 percent higher than last year’s level of US$35.4 billion. On average, FCDU assets expanded annually by 9.9 percent since the 2008 Global Financial Crisis. Despite the fluctuations in levels, its long‑term28 trend also showed a general uptrend. FCDU assets accounted for 16.6 percent of total assets of the banking system. Meanwhile, FCDU assets of trust entities only

accounted for 8.3 percent (up from 7.9 percent in 2013) of total assets of all trust entities. These resources were channeled mostly to portfolio investments (44.3 percent) and loans (39.7 percent).

Other components of asset mix were cash and due from banks at 14.0 percent (larger than last year’s 11.7 percent) and other assets at 2.0 percent (lower than last year’s 3.0 percent) (Figure 39).

On a per bank basis, BDO was still the largest of the FCDU banks in terms of asset size with a 19.4 percent (US$8.1 billion) share, trailed by Bank of the Philippine Islands and Metrobank, respectively, with at almost the same share of 9.1 percent (US$3.8 billion), Citibank, NA with 7.5 percent (US$3.1 billion), and RCBC with a share of 6.4 percent (US$2.7 billion) rounded up the Top 5. These banks represented 51.5 percent (US$21.5 billion) of the total FCDU system’s assets.

By banking group, universal and commercial banks (U/KBs) held the largest FCDU share at 97.5 percent (with the top 5 U/KBs holding 51.5 percent), followed by thrift banks (TBs) at 2.5 percent and rural and cooperative banks (R/CBs) at almost nil percent share.

Total FCDU portfolio investments stood at US$18.4 billion and 7.2 percent higher than last year’s level. For the specific portfolio investments of FCDU banks, these were mostly extended to residents at 61.4 percent while the remaining 38.6 percent were exposures of banks to non‑residents that include multilateral agencies. The specific composition of investments in debt securities which accounted for 63.7 percent (US$11.7 billion) of total portfolio investments were in debt papers issued by domestic counterparties such as: (1) National Government at 48.7 percent (US$8.9 billion), (2) Philippine non‑bank corporates at 13.7 percent (US$2.5 billion), and (3) Philippine banks at 1.3 percent (US$0.2 billion). The remaining 36.3 percent (US$6.7 billion) were in securities issued by non‑residents.

FinancialAssets, net

44.3%Loans, net

39.7%

Cash and Due from Banks

14.0%

OtherAssets 2.0%

Figure 39FCDU Asset MixFor End-Periods Indicated

December 2014US$41.7 billion

FinancialAssets, net

47.1%Loans, net38.2%

Cash and Due from Banks

11.7%

OtherAssets 3.0%


__________________28 Estimated using a Hodrick‑Prescott filter to smoothen the growth series.

-8.0%

-4.0%

0.0%

4.0%

8.0%

12.0%

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

June2008

Dec2008

June2009

Dec2009

June2010

Dec2010

June2011

Dec2011

June2012

Dec2012

June2013

Dec2013

June2014

Dec2014

Figure 38FCDU System Assets and LiabilitiesFor end-periods indicatedIn US$ millions

ASSETS LIABILITIES

S-O-S Trend Assets S-O-S Trend Liabilities

22

Sta

tu

s R

ep

ort o

n t

he

Ph

ilip

pin

e F

ina

nc

ial

Sy

ste

m

Meanwhile, FCDU loans reached US$12.5 billion, higher by 19.3 percent from last year’s level of US$10.5 billion. Per economic industry, manufacturing (25.5 percent), electricity, gas and water (16.5 percent), financial and insurance activities/financial intermediation (11.2 percent), real estate activities (4.8 percent) and information and communication (4.2 percent) continued to be the major FCDU loans beneficiaries (Figure 40).

By borrower, merchandize exporters had the highest FCDU loan intake at 22.0 percent (US$2.7 billion) of total FCDU loans. Other big ticket borrowers in the Top 3 include public utilities at 14.2 percent (US$1.7 billion), and producers/manufacturers at 6.4 percent (US$784.9 million).

In terms of asset quality, the non‑performing loan and non‑performing asset (NPL/NPA) ratios of the FCDU system remained ideal at 0.2 percent and 0.1 percent, respectively. Loan loss provisioning was still strong as NPL/NPA coverage ratios settled at 492.7 percent and 485.2 percent, respectively.

In terms of funding and liquidity, deposit liabilities still funded the majority of total FCDU resources at 76.3 percent (higher than last year’s 73.2 percent), followed by bills payable at 11.3 percent (lower than last year’s 12.8 percent), due to banks at 4.7 percent (lower than last year’s 7.1 percent), bonds payable, net at 3.8 percent (lower than last year’s 4.0 percent), capital accounts at 2.7 percent (higher than last year’s 1.8 percent) and other liabilities at 1.7 percent (higher than last year’s 1.1 percent) (Figure 41). Resident depositors accounted for the 97.5 percent share of total deposit liabilities while the remaining 2.5 percent share was sourced from non‑resident depositors.

Liquid assets‑to‑deposits ratio (inclusive of ROPs) narrowed at 76.4 percent from 80.4 percent last year. Meanwhile, liquid assets‑to‑deposits (exclusive of ROPs) slightly increased at 54.9 percent from 52.2 percent last year. Loans‑to‑deposits ratio remained almost the same at 52.4 from last year’s 52.6 percent. Overall, the compliance rate of banks with 100 percent FCDU asset cover requirement and the 30 percent FCDU liquidity cover requirement was well satisfactory at 68.8 percent and 75.3 percent, respectively.

Figure 40FCDU Loan Portfolio Structureby Economic Sector

Other Sectors13.9% Manufacturing

25.5%

Electricity, Gas, Water Supply

16.5%

Financial Intermediation

11.2%

Real Estate Activities

4.8%

Information and Communication

4.2%

Others23.9%


Figure 41FCDU Liability MixFor End-Periods Indicated


Bills Payable11.3%

Bonds Payable3.4%

Due to HO4.7%

Capital Accounts

2.7%

OtherLiabilities

1.6%


Deposit Liabilities76.3%

Deposit Liabilities73.2%

Bills Payable12.8%

Bonds Payable4.0%

Due to HO7.1%

Capital Accounts

1.8%Other

Liabilities1.1%

23

Fo

re

ign

Ba

nk

Bra

nc

he

s a

nd

Su

bsid

iarie

s

Overview

Foreign Bank Branches (FBBs) and subsidiaries (total of 1929) continued to perform well in 2014. Total resources grew on the back of funds generated from due to head office/branches/agencies‑abroad of foreign bank branches as well as capital accounts and continued growth in deposit liabilities.

Parallel to these, FBBs and subsidiaries stayed profitable as net profit posted a positive level of P6.8 billion on account of increases in net interest income. This was lower than last year’s level due to the acquisition of Citibank Savings Bank by BDO Unibank, Inc. Funding came mostly from deposit liabilities at 78.6 percent of the total liabilities to P638.6 billion of FBBs and subsidiaries and were mostly in peso (61.9 percent). These banks also experienced good asset quality and sustained build‑up of capitalization.

Under the implementing rules and regulations (IRR) of R.A. No. 10641 (An Act Allowing the Full Entry of Foreign Banks in the Philippines, Amending for the Purpose Republic Act No. 7721), additional foreign banks can now apply in the Philippines either as a branch or as a wholly‑owned subsidiary. It also allows foreign banks to acquire up to 100 percent30

of the voting stock of an existing domestic bank. In addition, it allows foreign banks to control up to a combined 40 percent31 of the total assets of the banking system.

Most FBBs and subsidiaries originated from the

Asia-Pacific Region

There were 19 FBBs and subsidiaries composed of the four FBBs originally granted access into the country prior to the 1994 liberalization, the 10 FBBs under R.A. No. 7721, and the five foreign subsidiaries that entered via R.A. No. 7721 (Figure 42).

By bank category, 14 FBBs and two subsidiaries are with universal / commercial banking license while the remaining three subsidiaries are with thrift banking license.

Meanwhile, the number of branches and other offices slightly went down to 133 from 137 last year due to reduction in the number of branches and other offices of foreign bank subsidiaries.

Most FBBs and subsidiaries in the Philippines are banks from the Asia‑Pacific region with 57.9 percent share (11 out of 19 banks). FBBs and subsidiaries from Europe came second with 26.3 percent (five banks) and from America with 15.8 percent (three banks). As of November 2014, there are 10 global systemically important banks (G‑SIBs) FBBs and subsidiaries out of the 30 G‑SIBs that are operating in the Philippines (Source: Financial Stability Board).

In addition, three banks were acquired by foreign entity/individual investor/s in 2014 and these are: Palawan Bank (Palawan DB), Inc. with 24.6 common shares and 100 preferred shares (acquired by Duclos SDN, BHD – Malaysian); Malasiqui Progressive SLB with 27.7 common shares (acquired by Messrs. Eleazar B. Sagun and Rizal C. Suelen – Americans); and Sugbuanon Rural Bank, Inc. with 40.0 common shares (acquired by Bridge Philippines Investments – Incorporated in Singapore).

Foreign Bank Branches and Subsidiaries

Figure 42Foreign Bank Branches and Foreign Bank SubsidiariesAs of End-December 2014Composition

By Bank Category Foreign Bank Branch Subsidiary

Universal and Commercial Bank 14 2

Thrift Bank 3*

By Entry Mode R.A. 337 R.A. 7721

1. Foreign Bank Branches 4 10

2. Foreign Bank Subsidiaries* ----- 5

*This excludes Citibank Savings Bank (acquired by BDO Unibank, Inc. and renamed Banco De Oro Savings Bank, Inc. on 31 July 2014. Meanwhile, Tong Yang Savings Bank was included in the list. However, including mBank Philippines (A Thrift Bank) Inc., and Microfinance Maximum Savings Bank, Inc., total will be 21 FBBs and subsidiaries.

Figure 43

Foreign Bank Branches and Foreign Bank Subsidiaries

Country of Origin

America 15.8%

3 banks

Europe26.3%

5 banks

Asia-Pacific57.9%

11 banks

19 FBBs and subsidiariesDecember 2014

_____________________________________________________29This excludes Citibank Savings Bank (acquired by BDO Unibank, Inc. and renamed Banco De Oro Savings Bank, Inc. on 31 July 2014. Meanwhile, Tong Yang Savings Bank was included in the list. However, including mBank Philippines (A Thrift Bank) Inc., and Microfinance Maximum Savings Bank, Inc., total will be 21 FBBs and subsidiaries.

30 This is an increase from the 60 percent cap under the previous law (R.A. No. 7721).

31 This is 10 percentage points higher than the previous 30 percent limit.

24

Sta

tu

s R

ep

ort o

n t

he

Ph

ilip

pin

e F

ina

nc

ial

Sy

ste

m

Net profits of FBBs and subsidiaries stayed profitable due to increases in net interest income

The operations of FBBs and subsidiaries stayed profitable due to increases in net interest income by P1.0 billion or 3.2 percent to P31.6 billion. However, non‑interest income went down (due to decrease in trading income) by P6.2 billion or 24.2 percent to P19.4 billion from last year’s P25.6 billion. Trading income was pulled down by marked declines from realized gains arising from foreign exchange transactions amounting to P1.9 billion (81.7 percent) and unrealized gains of marked‑to‑market financial instruments amounting to P4.6 billion (95.9 percent).

These movements are significant considering financial assets accounted for 21.3 percent of total assets at end‑2014 and non‑interest income represented 38.1 percent of total operating income. The marginal expansion in net interest income of 3.2 percent also failed to boost profit growth during the review period.

Lower operating income and rise in non-interest expenses led to higher cost efficiency ratio

The combined effect of the 9.3 percent decline in total operating income and the 4.1 percent growth in non‑interest expenses contributed to the increase in operational efficiency ratio of FBBs and subsidiaries. The cost‑to‑income ratio rose to 69.0 percent from 60.1 percent.

Domestic banks bested their foreign counterparts in terms of providing better returns to shareholders as indicated by softened ROA/ROE ratios. In particular, the FBBs and subsidiaries’ ROA ratio is 0.7 percent (as against the 1.3 percent for both domestic banks and total banking system) while ROE registered at 3.7 percent (as compared with the domestic banks’ 12.0 percent and total banking system’s 10.8 percent).

FBBs and subsidiaries sustained good performance

in 2014

Total resources posted at P1,033.8 billion (‑0.4 percent) from previous year’s P1,037.7 billion due to declines both on funding and asset side. On the funding side, peso deposits and bills payable posted Y‑o‑Y growth declines of 1.0 percent and 19.3 percent,

Figure 47Foreign Bank Branches and Foreign Bank SubsidiariesCost-to-Income Ratio

0.0

20.0

40.0

60.0

80.0

100.0

2007 2008 2009 2010 2011 2012 2013 2014

In Percent

FOREIGN BANKS AND SUBSIDIARIESDOMESTIC U/KBSPre-R.A. 7721Post-R.A. 7721FX Subsidiaries

Figure 46Foreign Bank Branches and Foreign Bank Subsidiaries

Composition of Operating IncomeFor End of Year Indicated

0

10

20

30

40

50

602013 2014

Total

2013 2014

Foreign Bank Branches

2013 2014

Foreign Subsidiaries

Net Interest Income Non-Interest Income

Figure 48


Comparative Return on Assets and Return on Equity

2013 2014 2013 2014

FBBs and Subsidiaries 1.2 0.7 8.6 3.7 FBBs 1.3 0.7 9.1 3.8 Subsidiaries 0.8 0.4 5.1 2.8Domestic Banks 1.7 1.3 14.0 12.0

End-December

Return on Assets Return on Equity

(in %) (in %)

Figure 45Foreign Bank Branches and Foreign Bank SubsidiariesComposition of Non-Interest IncomeAs of End of Periods Indicated

0%

20%

40%

60%

80%

100%

2007 2008 2009 2010 2011 2012 2013 2014

Fee-based income Trading Income Other income

In Percent

Figure 44Foreign Bank Branches and Foreign Bank SubsidiariesComparative Net Profit

-1.5

0.5

2.5

4.5

6.5

8.5

10.5

12.5

14.5

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

In Php Billions

Foreign Bank Branches Foreign Bank Subsidiaries

Figure 49


Comparative Market Share and Asset Growth Rate

2013 2014 2013 2014 2013 2014

Foreign Bank Branches 895.1 900.4 86.3 87.1 6.3 0.6

Foreign Bank Subsidiaries 142.6 133.4 13.7 12.9 29.9 -6.5

Total 1,037.7 1,033.8 100.0 100.0 9.0 -0.4

Growth Rate

End-DecemberTotal Assets Market Share

(in Php Billion) (in %) (in %)

25

Fo

re

ign

Ba

nk

Bra

nc

he

s a

nd

Su

bsid

iarie

s

respectively. Furthermore, on the asset side, loans and cash and due from banks also recorded Y‑o‑Y growth declines of 11.6 percent and 8.7 percent, respectively.

Meanwhile, asset expansion was led by existing foreign bank branches, which shot up by P11.1 billion (2.0 percent). Bank entrants under R.A. No. 7721 were negative in growths Y‑o‑Y.

Despite being composed only of four banks, existing FBBs maintained their control over the group’s assets, accounting for 55.6 percent (P574.8 billion) of the total. The 10 FBBs grabbed 31.5 percent (P325.6 billion) share and foreign bank subsidiaries held the remaining 12.9 percent (P133.4 billion).

Under R.A. No. 10641, it allows foreign banks to control up to a combined 40 percent of the total assets of the banking system. This is 10 percentage points higher than the previous 30 percent limit. The share of FBBs and subsidiaries to the assets of the Philippine banking system went down to 9.3 percent from 10.4 percent, which is below of the 40 percent (under R.A. No. 10641) ceiling prescribed under Section 3 of R.A. No. 7721 for foreign banks.

Assets mostly channelled to loans

Total assets of FBBs and subsidiaries posted at P1,033.8 billion or 9.3 percent of the banking system’s total assets of P11,158.6 billion. Operating funds were largely channelled to loans32 at 44.4 percent of total assets (down by 11.6 percent or P60.1 billion to P459.0 billion) and financial assets, gross, (other than loans) at 21.3 percent of total assets (up by 63.7 percent or P85.8 billion to P220.4 billion).

Meanwhile, FBBs and subsidiaries’ total loan portfolio (TLP) represented 7.9 percent of TLP of the banking system from 10.6 percent at end‑2013. Lending showed moderate concentration to the financial intermediation sector

TLP went down by P60.1 billion (11.6 percent) to P459.0 billion from P519.2 billion year‑on‑year. Loan portfolio of FBBs and subsidiaries is 7.9 percent of the system TLP.

By economic activity, most of the loans released went to financial intermediation (inclusive of IBL), cornering 33.5 percent (P153.6 billion). The concentration of

this activity was less than last year’s 40.1 percent (P208.1 billion). Manufacturing ranked a far second with 19.1 percent (P87.5 billion) followed by loans to individuals for consumption purposes (i.e., credit card receivables, auto loans, salary loans, other consumer loans) at third with 17.9 percent (P82.0 billion). Manufacturing ranked a far second with 19.1 percent (P87.5 billion) followed by loans to individuals for consumption purposes (i.e., credit card receivables, auto loans, salary loans, other consumer loans) at third with 17.9 percent (P82.0 billion).

Meanwhile, the year‑on‑year growth in consumer loans of FBBs and subsidiaries was mostly on account of the 41.0 percent (P4.4 billion) hike in auto loans to P15.0 billion and 4.1 percent (P0.5 billion) increase in residential real estate loans to P12.6 billion. Credit card receivables and Other consumer loans posted decreases of 2.8 percent (P1.5 billion) to P52.2 billion and 37.0 percent (P6.0 billion) to P10.1 billion, respectively.

Figure 50


Share in the Total Assets of the Philippine Banking System

Domestic Universal

and Commercial

Banks80.3%

Foreign Banks10.4%

Thrift Banks7.3%

Rural and Coop Banks1.9%

Domestic Universal

and Commercial

Banks81.2%

Foreign Banks9.3%

Thrift Banks7.6%

Rural and Coop Banks1.9%

December 2013P9,961.6 Billion

December 2014P11,158.6 Billion

_____________________________________________________32 Refers to total loan portfolio, gross.

For End-Periods Indicated

Dec 2013 Dec 201440.1% 33.5%14.8% 19.1%15.5% 17.9%6.8% 8.4%6.3% 8.2%1.9% 2.4%1.9% 2.4%4.3% 1.9%0.0% 0.0%8.3% 6.4%

Figure 51Foreign Bank Branches and Foreign Bank SubsidiariesLoan Portfolio Structure by Industry Sector

Financial Intermediation (including IBL & RRP)ManufacturingLoans to Individuals for Consumption PurposesReal Estate, Renting & Business ActivitiesWholesale & Retail TradeElectricity, Gas & Water SupplyTransport, Storage and CommunicationsAgriculture, Hunting, Forestry and FishingPublic Admin & Defense; Compulsory Social SecurityOthers

DEC 2014P459.0 Billion

DEC 2013P519.2 Billion

Figure 52Foreign Bank Branches and Foreign Bank SubsidiariesComponents of Consumer LoansAs of End-December 2014

- 40.0 80.0 120.0 160.0 200.0 240.0 280.0 320.0 360.0 400.0 440.0

Domestic U/KBs and TBs Foreign Bank Branches and Subsidiaries

Residental Real Estate Loans

Credit Card Receivables

Others

Salary Loans*

Auto Loans

* Salary loans was formerly included under Other consumer loans. Latest reporting of old format was until 31 March 2014.

26

Sta

tu

s R

ep

ort o

n t

he

Ph

ilip

pin

e F

ina

nc

ial

Sy

ste

m

Portfolio investments held the lion’s share of total investments

Total investments (financial assets, net of portfolio and direct investments) accounted for 21.5 percent of FBBs and subsidiaries’ total assets. Year‑on‑year, it rose by P85.7 billion or 62.8 percent to P222.3 billion from last year’s P136.6 billion due to accumulated market profit. Portfolio investments substantially held 99.0 percent or P220.1 billion (from 98.4 percent or P134.6 billion) of total investments. Meanwhile, the remaining 1.0 percent share went to direct equity investments in subsidiaries, associates and joint ventures.

FBBs and subsidiaries registered lower liquidity ratios but still at manageable levels

The cash and due from banks‑to‑deposits ratio fell to 52.2 percent from 56.6 percent year‑on‑year on account of recorded decline in due to HO/branches/agencies‑abroad of FBBs of 58.0 percent. Nevertheless, the increase in growth in financial assets expanded the liquid assets‑to‑deposits ratio to 86.6 percent from 77.4 percent. Both indicators reflect ample liquidity maintained by foreign banks given the capability of branches of foreign banks to generate funds from their due to head office/branches/agencies‑abroad account.

Funding principally came from deposit liabilities

Funding came mostly from deposit liabilities at 61.8 percent of total assets (down by one percent or P6.5 billion to P638.6 billion) and other liabilities at 13.9 percent of total assets (down by 33.0 percent or P71.1 billion to P144.0 billion). Deposit liabilities account for 78.6 percent of the total liabilities of FBBs and subsidiaries and were mostly in peso (61.9 percent).

Strength was mostly drawn from peso demand and NOW deposits as it provided a combined boost of P12.7 billion (6.8 percent).

For FBBs and subsidiaries, another source of funding other than deposit liabilities came from their due

to head office/branches/agencies‑abroad which is included in other liabilities. This amounted to P50.8 billion at end‑year 2014, albeit lower than last year’s P120.9 billion by 58.0 percent and accounted for 14.9 percent (up from 13.5 percent last year) of total liabilities.

FBBs and subsidiaries sustained build-up of capital

The capital accounts of FBBs and subsidiaries expanded by 52.9 percent (P76.6 billion) to P221.5 billion from P144.9 billion last year. The build‑up largely came from FBBs’ assigned capital which went up by 121.4 percent to P60.3 billion and 46.9 percent to P140.0 billion, respectively.

On 1 January 2014, the Philippines implemented the Basel III capital framework on all universal and commercial banks (U/KBs) and their subsidiary banks/quasi‑banks. Since FBBs are established either as a UB or KB, the Basel III framework was then enforced upon these banks as well. FBBs and subsidiaries remained solvent with a capital adequacy ratio (CAR) of 17.45 percent on a solo basis as of end‑December 201433. This ratio is almost twice the BSP’s minimum requirement of 10 percent and the international benchmark of 8 percent. Both the Common Equity Tier1 (CET1) and Tier1 capital ratios posted at 16.77 percent which is more than twice the minimum requirement of 6.0 percent and 7.5 percent, respectively.

Figure 53


Balance Sheet StructureFor End-Periods Indicated

Major Accounts 2010 2011 2012 2013 2014

Total Assets 100.0% 100.0% 100.0% 100.0% 100.0%Cash and Due from Banks 24.0% 33.3% 29.5% 35.2% 32.2%Financial Assets, net (Other than Loans) 15.9% 15.3% 17.3% 13.0% 21.3%Interbank Loans Receivable (IBL) 8.6% 6.3% 6.9% 7.0% 5.6%Loans, net 46.9% 40.4% 42.8% 41.6% 37.4%Equity Investments, net 0.1% 0.1% 0.2% 0.2% 0.2%ROPA, net 0.1% 0.1% 0.1% 0.1% 0.1%Other Assets 4.3% 4.4% 3.2% 2.9% 3.2%

Total Liabilities and Capital 100.0% 100.0% 100.0% 100.1% 100.0%Financial Liabilities Held for Trading 4.0% 3.1% 3.3% 1.4% 1.4%Financial Liabilities Designated at Fair Valuethrough Profit or Loss 0.0% 0.0% 0.0%Deposits 56.6% 55.9% 50.6% 62.2% 61.8%Bills Payable 4.9% 4.5% 1.7% 1.8% 1.4%Other Liabilities 20.0% 21.7% 29.7% 20.8% 13.9%Capital Accounts 14.5% 14.8% 14.7% 13.9% 21.4%

_____________________________________________________33 Preliminary data.

Figure

FBBs and Subsidiaries Philippine Banking System

2010 21.3 16.0 2011 22.0 16.7 2012 22.2 17.3 2013 22.9 16.5

2014 p/ 17.3 15.4

Figure 54


Capital Adequacy Ratio (Solo)As of End of Periods Indicated

-

5.0

10.0

15.0

20.0

25.0

30.0

2010 2011 2012 2013 2014 p/

In Percent

FBBs and Subsidiaries Philippine Banking Systemp/ preliminary

27

Fo

re

ign

Ba

nk

Bra

nc

he

s a

nd

Su

bsid

iarie

s

FBBs and subsidiaries still had better asset quality compared to domestic counterparts

FBBs and subsidiaries still had better loan and asset quality than domestic banks. Their non‑performing loan (NPL) ratio stood at 2.1 percent, albeit up from last year’s 1.4 percent compared to domestic banks’ 1.8 percent (down from 2.0 percent) and non‑performing asset (NPA) ratio of 1.0 percent (up from 0.8 percent) vis‑à‑vis domestic banks’ 1.9 percent (down from 2.2 percent). NPL coverage ratio of foreign banks stood at 147.1 percent (down from last year’s 190.0 percent ratio) while that of domestic banks was at 141.5 percent. Meanwhile, the NPA coverage ratio of FBBs and subsidiaries stood at 139.8 percent (from 179.6 percent last year) while domestic banks was recorded at 85.8 percent.

Huge increase in derivatives transactions pulled-up FBBs and subsidiaries’ off-balance sheet activities

To augment revenues, FBBs and subsidiaries also engaged in off‑balance sheet transactions. Said transactions rose by P203.0 billion (14.8 percent) to P1,578.9 billion from P1,375.9 billion. Nevertheless, these contingent accounts were 152.7 percent (up from previous year’s 132.7 percent) of FBBs and subsidiaries’ total resources.

Derivative instruments, accounted for 73.3 percent of the total contingent accounts. Their notional amount rose by P157.5 billion (15.7 percent) to P1,158.2 billion. The volume of foreign exchange contracts, which accounted for 59.5 percent of total derivatives instruments of FBBs and subsidiaries, increased by 24.1 percent to P688.6 billion.

Commitments, which contributed 21.6 percent of total contingent accounts, climbed by P27.1 billion (8.6 percent) to P341.4 billion owing to the hike in credit card lines and other commitments by 6.9 percent to P204.7 billion and 11.3 percent to P136.7 billion, respectively.

Bank guarantees, which accounted for 4.3 percent (P67.1 billion) of total contingent accounts contributed a P15.1 billion increase, drawing roughly the whole amount from standby letters of credit even as outstanding guarantees slid by 0.5 percent.

The remaining balance of P12.2 billion (0.8 percent) came from trade‑related contingent accounts. This was higher by P38.8 billion from last year’s level due to increases in domestic and foreign commercial letters for credit outstanding. Export letters of credit and shipside bonds/airway bills increased by P3.3 billion and P0.6 billion, respectively.

Overall, the subgroup remained committed in their efforts to support the policy objectives provided

under Section 1 of R.A. No. 7721 (Appendix III), salient features of which include:

Attract foreign investments and serve as channels for the flow of funds and investments into the economy to promote industrialization

FBBs and subsidiaries sponsored/participated in various economic and trade activities where business potentials of the country were showcased and disseminated to attract additional investments as well as strengthen ties with other countries. They also initiated dialogues and meetings with the public and private sector both here and abroad.

Moreover, guidebooks on investment and business opportunities in the Philippines were published in print and online; these were and made available to a wide stratification of clients.

Encourage, promote and maintain a stable, competitive, efficient and dynamic banking and financial system

FBBs and subsidiaries continued to develop and implement banking/financial technology and support systems on both the front‑end and the back‑end to enhance service delivery and ensure customer satisfaction.

Contribute to the alleviation of unemployment in the country

As of end‑2014, the number of Filipino personnel employed by 19 FBBs and subsidiaries stood at 6,779 or 98.3 percent of the total workforce.

Filipino officers and employees of the 1934 FBBs and subsidiaries operating in the country attended a total of 1,675 courses/seminars/trainings. Of which, 1,629 were held in the country and were mostly conducted by local organizations. The remaining 46 courses/seminars/trainings were held abroad. Topics of these trainings were mostly about current trends/developments on banking operations and new banking services and products.

Provide a wider variety of financial services to Philippine enterprises, households and individuals

In 2014, FBBs and subsidiaries reported that they have financed loans amounting to USD 0.5 billion and have facilitated USD 1.8 billion loans to support the financing needs of local residents, companies and the Philippine government. The bulk of these loans benefitted major corporations in the country.

_____________________________________________________34 This excludes mBank Philippines (A Thrift Bank) Inc., Microfinance Maximum Savings Bank, Inc. and Citibank Savings Bank (acquired by BDO Unibank, Inc. and renamed Banco De Oro Savings Bank, Inc. on 31 July 2014. Meanwhile, Tong Yang Savings Bank was included in the list.

28

Sta

tu

s R

ep

ort o

n t

he

Ph

ilip

pin

e F

ina

nc

ial

Sy

ste

m Non-Bank Financial Institutions with Quasi-Banking Functions (NBQBs)Overview

NBQBs are non‑bank financial institutions (NBFIs)35

authorized by BSP to borrow funds from 20 or more lenders for their own account through issuances, endorsement or assignment with recourse or acceptance of deposit substitutes for purposes of re‑lending or purchasing receivables and other obligations. Only NBQBs and those without quasi‑banking function but are either subsidiaries or affiliates of banks are subject to BSP supervision.

NBQBs posted a lower net profit driven by the decline in non‑interest income. The year‑on year increase in loans, net and cash and due from banks contributed to the industry’s asset growth which is largely funded by bills payables. NBQBs remained adequately capitalized with the growth in capital stock and retained earnings.

NBQBs’ overall network remained constant

The total number of NBQBs’ remained the same from last year, with an overall network of 75 consisting of 12 head offices and 63 other offices or branches. The 12 operating NBQBs in the country comprised of five investment houses (IHs), six financing companies (FCs) and one other non‑bank with quasi‑banking function. This number represented only 0.2 percent of the total 5,989 NBFIs supervised/regulated by the BSP. Meanwhile, of the 12 operating NBQBs, eight are linked to universal and commercial banks (three IHs and five FCs).

NBQBs’ overall net profit declined due to softer non-interest revenues

The NBQB industry posted a net profit of P6.5 billion at end‑December 2014, which accounted for 24.3 percent of the NBFIs net profit. This is P9.8 billion (59.9 percent decline YoY) lower recorded from previous year driven by the P4.7 billion drop in non‑interest income, as trading income and other income fell by P3.2 billion and P2.2 billion, respectively. In particular, the P3.7 billion (84.8 percent YoY) losses from trading government securities resulted to lower trading income.

Operating expenses slightly increased to P11.5 billion from last year’s P11.4 billion, driven by the increase in provisions for probable losses. Accordingly, cost‑to‑income (CTI) ratio (Figure 55) rose to 40.1 percent, with the decline in total operating income by P2.8 billion (12.9 percent YoY). Meanwhile, NBQBs’ return on assets (ROA) and return on equity (ROE) stood at 3.6 percent and 14.9 percent, respectively.

Resources mainly channelled to loans and

investments

Total resources of NBQBs of P189.6 billion accounted for 35.8 percent of the P529.8 billion total assets of the NBFIs supervised by BSP. The NBFIs total assets represented only 3.7 percent of the P14,260.9 billion Philippine Financial System’s total resources. NBQBs total assets was higher by P12.3 billion (6.9 percent growth YoY) on account of P15.8 billion or 21.5 percent year‑on‑year increase in loans, net and P3.6 billion or 13.9 percent increase in cash and due from banks.

NBQB assets are mainly channelled to loans, net (P89.0 billion) and investments (P56.8 billion), respectively (Figure 56). The tempered trading activities of NBQBs resulted to the decline in investments, net, by 9.6 billion which was mainly driven by the decrease in investments of IHs with QB.

0.0

10.0

20.0

30.0

40.0

50.0

60.0

0.0

5.0

10.0

15.0

20.0

25.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Operating Income (LHS) Operating Expense (net of bad debts and provisions) (LHS) Cost-to-Income (RHS)

In Percent (RHS)

In P Billion (LHS)

Figure 55 Non-Bank Financial Institutions with Quasi-Banking Functions (NBQBs) Cost-to-Income Ratio For End-Periods Indicated

______________________

35 NBFIs are financial institutions that do not have a full banking license but facilitate bank‑related financial services such as investment, risk pooling, contractual savings and market brokering.

29

NBQBs

NBQBs loan and asset quality remained

manageable

The total loan portfolio (TLP) of NBQBs stood at P94.2 billion while non‑performing loans (NPL) of P4.5 billion was higher by P1.2 billion (35.0 percent growth YoY) from last year’s P3.3 billion. This accounted for 12.8 percent of NBFIs’ total NPLs. The year‑on‑year growth in NPLs and TLP resulted to slightly higher NPL ratio of 4.7 percent from year ago’s 4.4 percent (Figure 57). The NPL coverage ratio narrowed to 67.6 percent as the growth in NPLs surpassed the increase in LLRs.

NBQBs’ non‑performing assets (NPA) ratio of 2.8 percent went up from year ago’s 2.3 percent due

to the growth in NPAs and gross assets. The NPA coverage ratio improved to 58.5 percent from year’s 57.5 percent driven by the P0.7 billion increase in allowance for NPAs. Distressed assets ratio marginally increased by 0.2 percentage points to 5.9 percent from 5.7 percent last year. This is due to the denominator effect resulting from the increase in lending surpassing the increase in distressed assets.

Growth in bills payable and other liabilities supported asset expansion

The growth in NBQBs total assets was largely funded by bills payable, of which 74.8 percent are deposit substitutes. Bills payable remained as major source of funds of NBQBs with 60.1 percent share to total source of funds (Figure 58). The industry’s total

Cash and Due from Banks,

15.6%

Loans, net, 48.2%

Other Assets, 5.9%

ROPA, net, 0.4%

Equity Investments,

net, 29.9%

December 2014 P189.6 billion


14.7%

Loans, net, 41.4% Other Assets,

6.1%

ROPA, net, 0.4%

Equity Investments,

net, 37.4%


Figure 56 Non-Bank Financial Institutions with Quasi-Banking Functions (NBQBs) Asset Mix For End-Periods Indicated

Figure 57Non-Bank Financial Institutions with Quasi-Banking Functions (NBQBs)For End-Periods Indicated

NPLs and NPL COVERAGE RATIO NPAs and NPA COVERAGE RATIO DISTRESSED ASSETS RATIO

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0In Percent In P Billion

NPLs (LHS) LLRs (LHS)NPL Ratio (RHS) NPL Coverage Ratio (RHS)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

-

1.0

2.0

3.0

4.0

5.0


NPAs (LHS) NPA Reserves (LHS)NPA Ratio (RHS) NPA Coverage Ratio (RHS)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

In Percent In P Billion

NPAs (LHS) RLs, Performing (LHS)

Distressed Assets Ratio (RHS)

30

Sta

tu

s R

ep

ort o

n t

he

Ph

ilip

pin

e F

ina

nc

ial

Sy

ste

m

liabilities of P145.1 billion was higher by P10.8 billion on the account of year‑on‑year increase in bills payable by P7.6 billion and other liabilities by P3.1 billion.

Growth in other liabilities supported and bills payable asset expansion

The growth in NBQBs total assets was largely funded by bills payable, of which 74.8 percent are deposit substitutes. Bills payable remained as major source of funds of NBQBs with 60.1 percent share to total source of funds (Figure 58). The industry’s total liabilities of P145.1 billion was higher by P10.8 billion on the account of year‑on‑year increase in bills payable by P7.6 billion and other liabilities by P3.1 billion.

NBQBs maintained ample liquidity and adequate

capitalization

The NBQB industry maintained ample liquidity despite credit expansion, as gross loans‑to‑bills payable ratio rose to 82.6 percent from last year’s

71.0 percent while liquid assets‑to‑bills payable ratio declined to 69.3 percent from 79.7 percent. Most of FCs and IHs with QB are also linked to universal and commercial banks which can cushion the NBQB industry whenever liquidity problems arise but regulators should remain watchful of the industry’s increasing leverage.

The industry’s total capital accounts which comprised 23.5 percent of funding grew to P44.5 billion driven by the increase in capital stock (P1.0 billion) and retained earnings (P1.3 billion) of FCs with QB. NBQBs’ total capital accounts‑to‑total assets ratio of 23.5 percent was slightly lower vis‑à‑vis the previous year due to the increase in total assets surpassing the increase in total capital accounts.

Bills Payable,

60.1%

Other Liabilities,

16.4%

Capital Accounts,

23.5%


Bills Payable,

61.1%

Other Liabilities,

14.5%

Capital Accounts,

24.4%


Figure 58 Non-Bank Financial Institutions with Quasi-Banking (NBQBs) Funding Mix For End-Periods Indicated

31

NSSLAs

Overview

Non‑stock savings and loan associations (NSSLAs36)are non‑stock, non‑profit corporations engaged in the business of accumulating member’s savings for lending to households by providing long‑term financing for home building and/or development and for personal finance.

The industry’s asset expansion driven by higher loans was largely funded by increments in capital contributions from its members as well as growth in peso deposits. The increase in operating income driven by the growth in net interest income contributed to the industry’s higher net profit. Although, non‑performing loan (NPL) coverage ratio improved brought about by the increase in loan loss reserves, the industry must be able to overcome its loan quality deterioration as a result of increasing non‑performing loans.

NSSLAs overall network slightly increased

NSSLAs overall network stood at 199 with 71 head offices and 128 branches/other offices. The additional other office of NSSLAs contributed to an increase in the overall network of NSSLAs from 198 last year. The 71 operating NSSLAs accounted for only 1.2 percent of the total 5,989 operating NBFIs under the supervision/regulation of BSP.

NSSLAs posted higher earnings due to increase

in net interest income

The NSSLA industry posted a net profit of P14.1 billion, which account for 52.6 percent of the total NBFI’s profit of P26.9 billion. Operating income increased to P21.5 billion, which can be attributed with the 28.0 percent growth in net interest income. Meanwhile, the growth in net interest income was driven by the P4.1 billion surge in interest income.

Operating expenses stood at P6.1 billion, up by 53.2 percent driven by the increase in provisions for probable losses. The cost‑to‑income (CTI) ratio (Figure 59) declined to 15.7 percent due to the 22.7 percent increase of operating income. Meanwhile, the return on asset (ROA) and return on equity (ROE) stood at 7.1 percent and 9.2 percent, respectively.

NSSLA industry assets continued to expand

Total NSSLAs resources of P204.4 billion comprised 38.6 percent of the P529.8 billion total resources of BSP‑supervised NBFIs, which in turn, accounted for 3.7 percent of the Philippine Financial System’s total resources of P14,260.9 billion. This is higher compared to last year’s total assets of P130.0 billion (Figure 60).

The current asset mix of NSSLAs broadly indicates of the industry’s traditional business model. Loans37 (P151.2 billion) maintained the lion’s share of the industry’s assets with 74.0 percent share. Meantime,

Non-Stock Savings and Loan Associations (NSSLAs)

______________________

36 NSSLAs are among the non‑bank financial institutions being supervised by BSP pursuant to Republic Act No. 8367, otherwise known as the Non‑Stock Savings and Loan Association Act of 1997.37 Loan entry for NSSLAs are still based on CSOC reporting format

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

0.0

5.0

10.0

15.0

20.0

25.0

2010 2011 2012 2013 2014

Operating Income (LHS)Operating Expense (net of bad debts and provisions) (LHS)Cost-to-Income (RHS)

In Percent (RHS)

In P Billion (LHS)

Figure 59 Non Stock Savings and Loan Associations (NSSLAs) Cost-to-Income Ratio For End-Periods Indicated


11.3%

Loans, net, 74.0%

Other Assets, 5.5%

ROPA, net, 0.1%

Equity Investments,

net, 9.1%



11.0%

Loans, net, 73.4%

Other Assets, 5.8%

ROPA, net, 0.1%

Equity Investments,

net, 9.7%


Figure 60 Non-Stock Savings and Loan Associations (NSSLAs) Asset Mix For End-Periods Indicated

32

Sta

tu

s R

ep

ort o

n t

he

Ph

ilip

pin

e F

ina

nc

ial

Sy

ste

m

cash and due from banks, investments, net, real and other properties acquired and other assets accounted for 26.0 percent of NSSLAs’ total assets.

NSSLAs’ NPLs ratio dropped amid the increase in NPL levels

The industry’s gross NPLs increased by P3.1 billion (22.3 percent YoY) to P17.0 billion which represents 48.7 percent of the total NBFIs’ NPLs. Total loan portfolio (TLP) of P167.8 billion which accounted for 50.2 percent of the NBFIs total TLP also grew by P65.3 billion (63.7 percent YoY growth).

The year‑on‑year growth in total loan portfolio (TLP) which surpassed the growth in NPLs resulted to a lower NPL ratio of 10.1 percent (Figure 61). Meanwhile, the NPL coverage ratio widened to 97.9 percent from last year’s 50.8 percent with the growth in loan loss reserves (LLRs). ROPA‑to‑gross assets ratio slightly rose to 0.2 percent from last year’s 0.1 percent.

NSSLAs’ non‑performing assets (NPA) ratio dropped to 7.8 percent from last year’s 10.2 percent, driven by the 61.2 percent year‑on‑year increase in gross assets. The notable increase in NPA reserves resulted to NPA coverage ratio of 95.8 percent. NSSLAs’ distressed assets ratio fell to 10.3 percent from last year’s 13.6 percent resulting from the P3.3 billion increase in distressed assets.

Growth in capital and deposit liabilities supported asset expansion

The growth in NSSLAs total assets was mainly funded by capital accounts and deposit liabilities with 76.8 percent and 19.0 percent share to NSSLAs overall funding source (Figure 62), respectively. Total capital expanded to reach P156.9 billion influenced by the P44.2 billion increase in capital contributions from members and P13.9 billion growth in undistributed earnings. Moreover, peso deposit liabilities also grew to P38.8 billion (up by P15.5 billion) while other liabilities exhibited a 30.3 percent year‑on‑year growth.

NSSLAs maintained ample liquidity and adequate

capitalization

The industry’s liquid assets‑to‑deposits ratio remained high at 107.7 percent while cash and due from banks‑to‑deposits ratio stood at 59.7 percent. Total capital accounts‑to‑total assets ratio was slightly higher at 76.8 percent from year ago’s 76.0 percent. This ratio measures the extent of leveraging during the period and determines how much capital is needed to cushion against potential risks confronting the NSSLA industry. The ratio remains high as the industry’s funding source primarily comes from its members’ capital contribution and undistributed profit from operations.

NPLs and NPL COVERAGE RATIO NPAs and NPA COVERAGE RATIO DISTRESSED ASSETS RATIO

Figure 61Non-Stock Savings and Loan Associations (NSSLAs)For End-Periods Indicated

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0


NPLs (LHS) LLRs (LHS)NPL Ratio (RHS) NPL Coverage Ratio (RHS)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

- 2.0 4.0 6.0 8.0

10.0 12.0 14.0 16.0 18.0 20.0


NPAs (LHS) NPA Reserves (LHS)NPA Ratio (RHS) NPA Coverage Ratio (RHS)

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

0.02.04.06.08.0

10.012.014.016.018.020.0


NPAs (LHS) Distressed Assets Ratio (RHS)

Deposit Liabilities, 19.0%

Bills Payable, 1.3%

Other liabilities, 2.9%

Capital Accounts, 76.8%


Deposit Liabilities, 18.0%

Bills Payable, 2.5%

Other liabilities, 3.5%

Capital Accounts, 76.0%


Figure 62 Non-Stock Savings and Loan Associations (NSSLAs) Funding Mix For End-Periods Indicated

Status Report on the Philippine Financial System - · PDF fileStatus Report on the Philippine Financial System This semestral report is prepared pursuant to Secon 39(c), Arcle V of

Documents