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Gearing up versus the goliaths

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By Melissa Luz T. Lopez,
Senior Reporter

PHILIPPINE BANKS may be easily dwarfed by other Southeast Asian lenders in size.

But what they lack in scale, they make up for in the inherent strength of the local banking system, with regulators fortifying these lenders amid growing competition from within the Association of Southeast Asian Nations (ASEAN).

Chuchi G. Fonacier, Deputy Governor of the Bangko Sentral ng Pilipinas (BSP), said regulations which have been rolled out over the past few years sought to boost bank buffers by imposing standards on capital, liquidity, and transparency, which would ensure that these lenders would not crumble at the first sign of trouble.

The same set of rules also provide muscle for local banks to slug it out with bigger contenders from across the region, with the ASEAN Banking Integration Framework (ABIF) underway.

“We go for strengthening as well as quality because in that sense, that will define the Philippine banking system itself. Although it’s small, it’s well-governed,” Ms. Fonacier, who heads the BSP’s supervision and examination sector, said in an interview with BusinessWorld.

The BSP has adopted a set of international regulatory standards under the international Basel 3 regime, which include higher capital buffers, liquidity guidelines, and similar risk management measures aimed at keeping banks on solid footing despite episodes of a funding crunch.

In fact, the central bank even imposed stricter rules on universal and commercial banks by pegging the capital adequacy ratio at 10%, well above the 8% global standard. Still, these banks exceeded expectations with capital buffers equal to 15.31% of risk-weighted assets as of end-June, preliminary central bank data showed.

Signed in 2014, Republic Act 10641 lifted the previous limit on the number of foreign banks which can operate in the country, paving the way for the Philippines to fully participate in cross-border banking arrangements.

The ABIF seeks to allow qualified banks to operate freely across member-economies in the region, with central banks expected to forge at least one cross-border banking deal with its neighbors by 2020. So far, the Philippines has an agreement with Malaysia in place, while negotiations with Indonesia and Thailand are ongoing.

S&P credit analyst Ivan Tan said in a Nov. 1 webcast that he expects the banking integration to proceed at a “cautious and slow” pace, constrained by foreign ownership limits and threatened by the scale of offshore banks.

To illustrate, assets held by the largest bank in Singapore is bigger than the value of the entire Philippine banking system itself.

Eleven foreign banks have set up shop in Manila over the last two years, with authorities seeing more global players, particularly ASEAN lenders, coming to the country as they look to ride on the rapid economic growth which the Philippines has been enjoying thus far.

TOUGH ENOUGH
Relatively small but strong domestic players give confidence to the BSP that they can stay resilient despite the entry of bigger lenders.

“I think they are well-positioned when it comes to competition, but what’s critical is for domestic banks as well to embrace digital transformation because that’s where the future is leading us when it comes to banking,” the central bank official said, noting that local players continue to enjoy the comparative advantage in knowing the domestic market very well.

Philippine banks have also made strides in terms of online platforms and products, guided by a push from the central bank to embrace the digital era via electronic payment systems.

Ms. Fonacier expressed confidence that the ASEAN integration will not suffer the same fate as the European Union (EU), which has faced hiccups in terms of “uneven” opportunities following their financial integration.

“A key lesson which the ASEAN can learn from the EU experience is the need to have strong regional arrangements right away to manage the risks faced by the region as a whole,” she said, noting that the ABIF’s “principles-based” rules and surveillance mechanisms keep regulators on the same page across economies.

The banking integration model could likewise “hasten” the development of Islamic banking in the Philippines, Ms. Fonacier said, although such discussions remain on the drawing board without a legal framework in place.

Bills seeking to allow local banks to open Islamic banking windows have been proposed to Congress, but lawmakers have yet to pick up these measures for discussions.

For now, Southeast Asian regulators draw comfort in knowing that shared cultural values will keep the integration plan afloat despite a protectionist trend among developed nations elsewhere, and in the process attract increased trade and investments within the region, Ms. Fonacier said.

The ASEAN is the sixth largest economy in the world with total trade at $2.2 trillion and $96 billion in foreign direct investment flows recorded in 2016, according to regional data.

“We’re setting the stage for a scenario wherein local conditions would somehow be ready for global developments. Reforms will continue in governance and transparency,” Ms. Fonacier added.

Moody’s Investors Service kept its “stable” outlook for the Philippine banking system during its mid-year update for Asia and the Pacific, noting that domestic economic conditions are likely to support bank profits and keep asset quality steady over the next 12-18 months.

Philippine banks may appear Lilliputian, but it stands on solid ground.

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