Philippines: High Bank Density and Bigger Profits
Manila, Philippines, January, 31 2011 -
The Philippines appears to be one of the most "over-banked" countries in the world. A study made for the Bangko Sentral by Dr. Johnny Noe E. Ravalo shows that there are five banking offices in every municipality or city.
There are 8.6 banks per 1,000 square kilometers. The customer ratio is 10,744 persons per banking office. There are 207 banks in the micro finance network.
None of these figures remotely suggest that the country is over-banked. On the contrary, there are fewer banks today than there were 15 or so years ago.
It is the number of banking offices or branches that has remarkably increased.
Dr. Ravalo concludes that the banking industry is strong and will even be stronger in the years to come because of "continuing industry consolidation (that) led to a more streamlined yet inclusive financial system."
There are indicators that prove Dr. Ravalo’s assessment is correct. On regional distribution basis, the national capital region has the biggest number with 32.4 percent.
Banks are present in the rest of the regions but the Autonomous Region in Muslim Mindanao has the smallest share of .3 percent. The region is obviously slow in development of business aggravated by peace and order problems.
The analysis of Dr. Ravalo certifies that the Philippine banking system is in step with technology development and application.
For example, he cites the 56 automatic teller machines of Philippine-owned banks while the foreign banks have seven; 55 electronic wallets, plus one owned by foreign bank. There are 23 Filipino banks in the internet system there are 14 foreign.
In phone/PC-based operations local banks have 15, foreign-owned have three; 16 Filipino banks are in cell phone/laptop operations, there are five foreign in the business. There are eight proprietary e-banking services of foreign banks. Philippine banks have only two.
There are 20 Filipino banks in mobile/internet transactions. There are three foreign in the same business.
The continued consolidation and open and stiff competition among banks made the system even stronger. This is proven by the fact that as of last year, total assets of the system was expected to be at P6.296 trillion.
There was a slight decline in loans to deposit ratio. It was 69.7 per cent in 2002 but stood at 65.9 as of end June last year. The decline does not appear strange to Dr. Ravalo. The banks have developed other products or shifted to consumer finance.
For example, there is stiff competition in the area of private banking to such an extent that some banks commit in writing that they will not collect a fee higher than the yield of the investor’s money.
Dr. Ravalo did not so say but bankers are one in the belief that the lessons learned from the financial collapse in the United States, largely caused by sub prime lending to home buyers, have forced banks and investors to a flight to safety.
That may well be the reason for the declining yields on sovereign debts in the face of high demand. The high level of liquidity and the preference for low-risk but safe sovereign liabilities have practically left the government dictating the rate on its borrowings in spite of persistent and pernicious annual budget deficits.
The relatively smaller demand for commercial-industrial loans has its own beneficial effects on the banks.
First, the non-performing loan ratio to total portfolio has declined to 4 per cent where it stood at more than 10 per cent in the late nineties and early twenties as a result of the Asian contagion that started early in Bangkok and hit the Philippines in the middle of 1997.
The banks are heavy in consumer finance. The market has grown big because the rates are at their lowest levels. The effect is spreading the risks that in turn means no bank gets hurt that bad even if a few accounts default.
The most telling part of the strength of the banking system, according to the study of Dr. Ravalo, is what the bottom line like looks like. In 1999 when the banking system was reeling under the Asian crisis, return on equity stood at slightly higher than 2 percent.
As of the end of June last year, the ROE jumped about five times to 10.9 percent after dipping to lower than 6 percent in 2008, again as a result of the collapse of the financial system in the United States beginning that year.
Percentage-wise, the income of the banking system rose from 53.6 per cent in 2003 to 66.4 per cent or P69.5 billion by the end of 2009.
The next question, after seeing the success brought about by lessons from the financial collapse in the US and continued consolidation, is "where do we go from here?"
Ravalo answers his own question. Without giving details, he drew up a priority list on top of which is the "implementation of other innovative mode of asset clean up; implementation of a time-bound prompt corrective action (PCA) framework; and harmonization of corporate governance standards with other financial regulators."