The Bankers Association of the Philippines (BAP), the umbrella organization of the country’s largest banks, said its members are neither poised to relax their investment standards nor will they engage in high risk lending activities just because historically low interest rates are squeezing profit margins.
Cesar Virtusio, executive director of the BAP, said speculation that banks will engage in excessive risk taking to compensate for low interest rates is unfounded.
He pointed out that the lesson learned from the 1997 East Asian financial crisis—that loose investment standards could cause bank failures—is still very much alive in the minds of Philippine banks.
“There is temptation to do that [excessive risk taking], but banks have learned their lessons from the past,” Virtusio told the Inquirer.
He said universal and commercial banks in the country will continue to adhere to prudent investment standards and maintain proper risk management even if interest rates are at record lows.
Aurelio Montinola III, president of Bank of the Philippines Islands, echoed the Virtusio’s statement. He said local banks have good risk management standards, as evidenced by their very low exposure to bad debts, and are inclined to keep those standards in place.
The non-performing loan ratio of most universal and commercial banks in the country are hovering in the 2-percent territory.
“People in the industry have learned so much from the past. They know they must be careful in making investments,” Montinola also told the Inquirer.
Montinola, who was last year’s BAP president, said banks also cannot complain so much about the prevailing low interest rate regime, noting that other countries are experiencing the same phenomenon.
He said banks can counter the effects of low interest rates on profit margins by working on capturing more clients and, thus, raising their volume of transactions.
“There is margin pressure everywhere in the world. Banks have to face reality and simply look for additional customers and transactions,” he said.
While low interest rates may squeeze profits on a per-transaction basis, Montinola said these help encourage more people to secure bank loans. Banks may thus earn more from the higher demand for loans, he said.
In the late 1990s, banks in the Philippines and neighboring countries suffered from failures partly due to excessive risk-taking, which resulted in loose credit standards. Regulators and banks then reformed their practices.
Regulators and private sector players believe the reforms implemented after the crisis are the reason the banking system is now strong and stable. Michelle V. Remo