DESPITE low interest rates, Philippine banks have remained liquid yet cautious in extending loans to consumers and businesses since the collapse of Lehman Brothers in September 2008, resulting in a gradual slowdown of credit growth the following year.
To ensure sufficient liquidity in the domestic financial system, the Bangko Sentral ng Pilipinas (BSP) cut the regular reserve requirement on bank deposits and deposit substitutes by two percentage points in November 2008.
The central bank also increased its budget for the peso rediscounting facility from P20 billion to P40 billion to allow more lenders to obtain loans from the BSP against eligible promissory notes for short-term liquidity needs.
With inflation easing from the record highs in 2008, the BSP reduced its key policy rates by 200 basis points from December to July 2009, to support economic growth. Its overnight borrowing and lending rates are now at record lows of 4 percent and 6 percent, respectively. The BSP said banks by December 2009 had trimmed their lending rates beyond the regulator’s own reduction in its policy rates.
These liquidity-enhancing measures were the BSP’s response to the failure of Lehman and other major financial institutions in the US, which is the Philippines’ major export market. This was despite the minimal exposure of local banks to failed American banks at P15 billion to P25 billion, or 0.3 percent to 0.4 percent of the domestic industry’s total assets.
“Our accommodative monetary policy stance also ensured that credit continued to flow to the productive sectors of the economy, which in turn allowed the economy to avoid a recession,” BSP Governor Amando Tetangco Jr. said.
The BSP also encouraged mergers and consolidation, while pushing regulation that enhanced corporate governance, strengthened risk management and improved disclosure, transparency and consumer protection.
Higher provisioning, tighter credit standards
Starting in the fourth quarter of 2008, universal and commercial banks with exposure to Lehman and other failed foreign financial institutions increased their loan-loss provisioning while tightening credit standards, thereby incurring lower earnings.
Banks’ net income nose-dived in 2008 also because of decreasing bond prices and trading income, which made up a considerable portion of their bottom line. Equity prices were also depressed, thus negatively impacting on banks’ or their treasury departments’ trading income, Carlos Ylagan, Bank of the Philippine Islands (BPI) senior economist, said.
Ylagan said the effect of the global credit crisis was reflected more on local banks’ trading losses on their fixed income and equity investments, rather than on the credit market. “The global financial crisis did not have much impact on credit in the Philippines as only a few of our local banks, primarily Banco de Oro [BDO], Metrobank, RCBC and UCPB, had an exposure to so-called toxic assets in the global financial system. Their exposures were very minimal and their capital base easily took care of covering for these liabilities,” he said.
Most of the major banks raised additional capital through the issuance of tier 2 notes since the fourth quarter of 2008—an exercise that attracted investors as total orders exceeded the size of the offers. Tier 2 capital pertains to debt instruments that qualify as capital under monetary regulations.
Since 2009 began, most local banks offered low auto and housing loan rates to boost lending growth and profits.
The global financial crisis created a low interest rate environment but bank credit demand grew at slower rate—dropping from a high of 22.5 percent in September 2008 to 4.7 percent in October 2009.
Loans extended to the productive sector grew slower at the single digits because of the decline in manufacturing loans, which traditionally accounted for a fourth of demand.
Banks benefit from bond market activity
However, banks started to recover in the first half of 2009, as they continued to extend loans and generate deposits.
otal deposits grew by 12.0 percent to P3.2 trillion at end-August. Total resources of the banking system rose by 8.5 percent to P6.0 trillion due mainly to the rise in holdings of debt securities. Universal and commercial lenders continued to account for almost 90 percent of the total resources of the banking system.
Even as lending activity eased, domestic money supply grew faster at 12.5 percent in October from 11.6 percent in September because of the robust remittance inflows.
Banks enjoyed higher fee-based income as big companies tapped the bond market for additional funds.
Corporate bond issuance grew faster in 2009, reaching P236.4 billion in the first nine months from P118 billion in the same period in 2008. Nonfinancial corporations accounted for the bulk of the bonds issued at P176.6 billion, or 74.7 percent of the total IOUs issued during the period.
Ylagan said local banks recorded strong gains in trading and interest income this year.
“Local banks’ trading portfolios were again positively affected due to trading gains on their fixed income and equity investments, which make up a substantial portion of their bottom lines. Also, commercial lending performance of banks in 2009 was a spillover of its performance in 2008,” he said.
Bad loan ratio on the rise
Notwithstanding its insulation from the US financial crisis, the domestic banking industry took a hit from the global economic slowdown.
The industry’s bad loan ratio rose to 3.37 percent in October from 3.25 percent in September.
In 2010, Philippine economic growth is expected to pick up, and along with it, bank lending, with credit demand seen to expand in the second half. Until then, investors are on a wait-and-see mode as the Philippines holds national elections in May.
The BSP, however, remains bullish. “I believe that our banking system is well-positioned to take advantage of opportunities and new trends as the global economic recovery takes a firmer footing. But even as they are well positioned, our banks would also be well advised to consider that we are operating in a ‘new normal,’” Tetangco said. –MARICEL E. BURGONIO SENIOR REPORTER, Manila Times