PH banks not ready for Asean integration

Standard & Poor’s said it believed that banks in the Philippines were not yet prepared for the tougher competition that would result from the integration of Southeast Asian economies.

In one of its latest publications, S&P said banks in the country, although profitable and stable, have a much smaller business scale compared with their counterparts in the region.

The credit-rating firm said that Philippine banks might find it difficult to preserve market share with the free entry of foreign competition that would follow the regional integration.

“We believe banks [in the Philippines] will have to walk a thin line to preserve market share while pursuing profitable expansion as Asean 2015 draws closer,” S&P said in the report titled “The Philippines’ Banking System: The Good, the Bad and the Ambivalent.”

The 10 members of the Association of Southeast Asian Nations (Asean) have agreed to integrate their economies with the aim of boosting economic activities, job creation and incomes.

The target is to realize the integration by 2015, although policymakers in the region have agreed that the process could be extended through 2020.

S&P said that even the biggest banks in the Philippines were small compared with the likes of CIMB and Maybank of Malaysia or DBS and United Overseas Bank of Singapore.

One of the challenges facing Philippine banks is overcrowding, according to S&P. Since there were too many players in the country’s banking sector, industry members could not scale up their businesses.

Although the number of banks in the country has been on a decline over the last few years, it remained big compared with regional standards.

“We believe greater scale is essential for banks to deal with the more intense incoming competition. Even the largest domestic banks are relatively small compared with banks in Singapore and Malaysia,” S&P said.

As of September 2013, there were 676 banks in the Philippines. Thirty-six were universal and commercial banks, 71 were thrift banks, and 569 were rural banks.

Another problem confronting Philippine banks was the heavy concentration of credit to the corporate sector. This makes the stability of banks highly dependent on the performance of their big borrowers.

S&P noted that as of the end of last year, 82.7 percent of loan portfolio of banks was accounted for by credit extended to corporate entities and that consumer loans accounted for a much smaller portion. Out of the loans to the corporate sector, a substantial chunk was accounted for by large conglomerates.

“The Philippine banking system is heavily skewed toward corporate lending. Systemic risks also are heightened because the conglomerates account for a sizable share of bank capital,” S&P said. It noted, nonetheless, that default by a conglomerate was highly unlikely at this point.

Meantime, S&P said that pending the Asean integration, banks in the Philippines were expected to continue reaping the benefits of a growing economy.