PH banks strong but regulatory compliance pushing up costs, BSP finds

The Philippine banking system remained strong, stable and resilient against volatile external markets, but stricter regulations have led to a slight uptick in borrowing costs for the local economy, the Bangko Sentral ng Pilipinas (BSP) said.

According to the central bank’s “Report on the Philippine Financial System” for the second semester of 2018, banks’ positive performance “was evident across banking groups which posted sustained growth in assets, loans, deposits and capital.”

“The universal and commercial bank industry primarily financed the growth of the major economic sectors such as real estate, wholesale and retail trade and manufacturing,” the regulator said.

“Meanwhile, the thrift bank and rural and cooperative bank industries supported the retail lending segment, particularly in providing loans to consumers, the micro, small and medium enterprises and the agri-agra sector,” it added.

Nonetheless, the BSP noted lending rates charged by banks have “marginally risen” following the adoption of bank regulations and prudential reforms.

“Such [an] increase is a necessary adjustment to maintain stability of the banking system,” the BSP said, referring to its policies of encouraging banks to raise their capital and loan loss buffers to protect against market shocks.

This study found that banks’ lending rates increase by 0.2 percent and 0.04 percent from a 1-percent increase in capital adequacy ratio and a 5-percent increase in the loan coverage ratio.

The central bank said the industry’s financial soundness indicators affirmed the banking system was stable and resilient despite global uncertainties.

“Capital, mainly comprised of common equity and retained earnings, remained well above domestic and global benchmarks; credit quality was satisfactory notwithstanding double-digit loan growth; profits generated primarily from core income were at record high; and the banks’ high quality liquid assets were sufficient to absorb shocks while adequately providing the financing needs of the growing economy,” it said.

The report also highlighted the central bank’s “principle of proportionality” in the regulation and supervision of the banking system, which gives financial institutions the regulatory space to explore innovative products and services while maintaining prudential risk standards.

“As a whole, the strong fundamentals of the financial system provided a solid foundation for its sustained positive performance,” the central bank said.