AN UPDATE ON THE PHILIPPINE BANKING INDUSTRY

 With the banking system at its core, the philippine financial system has exhibited
resilience amid evolving domestic and global environment.

 Moreover, the enactment of Republic Act (R.A.) No. 11211, which amends the
Charter of the Bangko Sentral ng Pilipinas, and R.A. No. 11127, which fosters
the efficiency of domestic financial transactions.

 The Philippine economic stayed firm, with real gross domestic product (GDP)
expanding by 6.3 percent in the fourth quarter of 2018, bringing full year 2018
GDP growth to 6.2 percent.

 Alongside the growing domestic economy , the financial system, with banks at its
core, expanded its resources in 2018 at a much faster rate of 9.3 percent year-
on-year.

 The banking system’s strong performance was backed by leaner and stronger
outreach as industry consolidation created stronger institutions while weaker
players were either closed or absorbed by healthier banks.

 Industry consolidation also resulted in the banking system becoming less

fragmented.

 Moreover, the expansions of banks geographical and digital footprints promotes

wider financial inclusion, with the goal of bringing the financial system closer to
all Filipinos, especially to the financially underserved and unserved.

 The expansi0n is deemed possible through the establishment of regular

branches, branch-lite units and digital access points.

Financial Soundness of the Philippine Banking Sector

  Since the global financial turmoil in 2008, assessing the strengths ad
weaknesses of a financial sector based on a set of financial indicators has
become increasingly important.

 The FSI (Financial Soundness Indicators) are a set of indicators used to

determine the current financial health and soundness of the financial institutions
in a country including their corporate and household counterparts.

The BSP Financial Soundness Indicators

 Based on the methodology introduced by the International Monetary Fund (IMF),

CAELS short for (1) capital adequacy, (2) asset quality, (3) earnings and (3)
profitability, liquidity, and sensitivity to market risk, is a framework used by the
banking supervisors to assess the soundness of individual institutions.

CAPITAL ADEQUACY RATIO

 Capital adequacy or availability ultimately determines the robustness of financial

institutions to withstand shocks to their balance sheets.

Indicators of improvement

 An important indicator on the capacity of capital to withstand losses from NPLs

(unsecured portion) is the ratio of NPLs net of provisions to average capital. This
ratio can help detect situations where banks may have delays in addressing
asset quality problems, which can become more serious over time.
(nonperforming loan)

 The Philippine Financial System continued to perform steadily in 2002 amid a

prolonged tough and uncertain environment. The banking system in particular
kept its focus on strengthening basic financial soundness. All indicators point to
 recovery taking hold: steady growth of deposits, increasing capitalization,
resumption of lending and decrease in non-performing loans.

 The capital-to-assets ratio is used to measure the extent to which assets are
funded by the banks' own funds. It is also an alternative measure of the capital
adequacy of the banking sector.

Covid-19 banking:
Perspective for Philippine banking industy

The Philippine banking industry is not spared from the adverse impact of this pandemic.

The Bangko Sentral ng Pilipinas (BSP) issued the implementing rules and regulation for
the Bayanihan Act RA No. 11469. The law requires all lenders under BSP supervision
to grant a 30-day grace period or extension for the payment of loans due within the
enhanced community quarantine (ECQ) period, without imposing additional interest,
penalties or charges on their borrowers.

Further, the BSP also relaxed the know-your-customer (KYC) requirements for both
over the counter and electronic or online transactions. This is to make sure that Filipinos
continue to have access to basic government and financial services amid the COVID-19
situation.

Benjamin E Diokno: Philippine banking

system - forging path towards
sustainable economic recovery
Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas
(BSP, the central bank of the Philippines), at IBC Business Webinar Series,
29 September 2020.

Distinguished officers and members of the IBC led by Mr. Juan Jose Zamora III,
esteemed guests and partners in the financial services industry, ladies and gentlemen,
ma-ayong hapon sa indo nga tanan!  
It is always a pleasure to engage with our stakeholders and partners, and discuss our
shared goals and development aspirations for our country.  

This coronavirus crisis is unlike any of the previous crises that we have experienced.

It did not originate from financial sector vulnerabilities like the 1980 Debt Crisis, the
1997 Asian Financial Crisis, or the 2007-2008 Global Financial Crisis.

But the effects are strongly felt nonetheless.

My presentation this afternoon will focus on key developments and updates on how the
banking system is faring during the pandemic, the crucial role of banks as catalysts of
economic recovery, and the BSP's strategies and relief measures to cushion the
adverse effects of COVID-19 pandemic on the economy particularly on individuals and
businesses.

Let me stress this: The Philippine economy is fundamentally strong. This is the result of
over two decades of implementation of critical structural reforms.

We have a sound fiscal position, with manageable fiscal deficit and low levels of
government indebtedness. 

We have low interest rates, manageable inflation, healthy external accounts-with

record-high gross international reserves (GIR) and stable peso. 

In a sea of downgrades, rating agencies maintain the country's investment grade status.

 S&P, Moody's and Fitch affirmed our investment grade sovereign rating
 Japan Credit Rating Agency upgrade the Philippines to an 'A' status, the same with R&I
which upgraded the Philippines to BBB+

Also, The Economist ranks the Philippines 6th among 66 emerging market economies,
and the first in Asia.

The Philippine banking system is sound. Banks are well-capitalized with high capital
adequacy ratio above the BSP minimum regulatory requirement and the BIS
international standard. 

Asset quality remained manageable during the pandemic as BSP survey revealed a low
NPL ratio of 2.4 percent as of end-July 2020 and projection of 4.6 percent by end-
December 2020. 

This is manageable by any standards and unlikely to grow to the levels we have seen
during the 1997 Asian Financial Crisis.
In particular, total deposit liabilities reached P14.2 billion as of end-June 2020, 10.8
percent higher than year ago's level.  And here's a silver lining: the COVID-19 pandemic
has become the unexpected catalyst for the accelerated digital transformation of the
banking system.

During the lockdowns, over 4 million digital accounts were opened and digital financial
transactions grew exponentially.

As of end-August 2020, total PESONet transactions reached 2.7 million with total value
of P252.9 billion.

This represents a growth of about 120 percent in volume and 70 percent in value,
respectively from the baseline end-March 2020 level. 

Meanwhile, InstaPay-related transactions reached 29.5 million with total value of P141.2
billion as of end-August 2020.

This represents huge respective growths of 312.2 percent in volume and 206 percent in
value compared to the end-March 2020 level. 

Total assets of the banking system reached P18.6 trillion as of end-June 2020 with an
average growth rate of 11.5 percent in the last 10 years.

The banking system's credit support for the financing requirements of individuals and
businesses also continued during the pandemic.

Total loan portfolio (TLP) stood at P10.8 trillion as of end-June 2020. This represents a
13.2 percent average growth rate in the last decade.

Bank loans comprised 58.2 percent of the banking system's total assets and 57.4
percent of the country's nominal gross domestic product (GDP).

Amid the pandemic, loan quality remained satisfactory as the banking system's non-
performing loan (NPL) ratio was at 2.5 percent as of end-June 2020.

Given the inherent resilience and positive correlation of financial sector development
with economic growth, how can banks help in economic recovery?

As the surge of COVID-19 cases around the world continues, business activities have
been disrupted. 

The International Monetary Fund (IMF) expects the global economy to contract by 4.9
percent this year. 

The Philippines is not spared. 

The local economy declined by 9.0 percent in the first half of 2020. The great fall was
not because the economy was weak. It was because there is a need to shut it down to
buy time, to delay the spread of the virus while building the country's health capacity.

Amid this challenge, the domestic banking system can be harnessed to support
economic recovery. Specifically, they provide cash flow support to individual clients and
micro, small and medium enterprises.

Banks are also our conduits in the accelerated promotion of digital banking and
electronic payments transactions of our countrymen during the pandemic.

On this note, our strategy of combatting the COVID-19 pandemic with the help of the
banking system is focused on four critical areas. 

First, to provide sufficient liquidity to support Government's efforts of saving lives and
livelihoods.  Second, to maintain the stability of the financial system. Third, to ensure
the continued delivery of financial services to the public. Lastly, to shore up confidence
and cushion economic activity.

In fact, the BSP has injected a total of P1.5 trillion to the financial system, equivalent to
about 7.6 percent of gross domestic product (GDP), as part of its liquidity-easing
measures to address the impact of COVID-19 pandemic.

At this juncture, allow me to briefly discuss our various regulatory and operational relief
measures to assist the BSP supervised financial institutions endure the health crisis as
well as to support households and business firms.

First, we provided BSFIs with regulatory reliefs to enable them to grant equivalent
financial relief to their borrowers in the form of more flexible and favorable lending
terms, or restructure loan accounts.   

Second, they were given incentives for lending to assist the micro, small and medium
enterprises and large enterprises carry on with their business during the COVID-19
crisis, as well as hasten recovery and sustainability of their operations, during the post-
crisis period.

One of our more innovative incentives is that new loans to MSMEs, and certain large
enterprises that were critically impacted by the pandemic but not part of a conglomerate
will now be recognized as forms of alternative compliance with banks' reserve
requirements, which I'll discuss further in the next slide.

Third, is the promotion of continued access to financial services through key policies.
This includes the relaxation of Know-Your-Customer (KYC) requirements, temporary
suspension of all fees and charges covering online banking transactions, licensing and
fund transfers, operational relief for FX transactions and financial assistance in the form
of loans, advances or other credit accommodations granted to BSFIs.
Lastly, is support for Continued Financial Services Delivery. These include relaxed
reporting requirements, temporary suspension in the imposition of monetary penalties,
use of legal reserves for liquidity needs, accounting relief measures, and the deferred
adoption of the SAFr framework.

Based on the latest BSP data, loans to MSMEs amounted to P106.0 billion, in August
20, 2020 up from Php 9.3 billion in April 30, 2020, or by a whopping 1,039 percent.

Meanwhile, loans to enterprises reached P13.6 billion, growing by 17 times since we

started monitoring from the effectivity of BSP Memorandum No. M-2020-046 on 29 May
2020.

To address concerns about loan defaults, credit and debt collection, we have extended
for another 30 days grace period for loan payments the 30-day grace period under
Bayanihan 1.

Under Bayanihan 2, we will implement the mandatory one-time, non-extendable 60-day

grace period for loans on current status.

Apart from this, the BSP has extended regulatory relief to banks so they can extend
relief to their clients in the form of more flexible and favorable lending terms, or
restructuring/rediscounting of loan accounts, staggered booking of allowance for credit
losses and moratorium on the imposition of interest charges, fees and penalties on
loans during the grace period.

Lastly, on the impact of COVID-19 on Overseas Filipino Remittances.

Overseas Filipino remittances in 2019 was US$30.1 billion.

Original projection before coronavirus crisis is that OF remittances will increase by 5

percent.

Revised forecast as of June 2020, post Covid-19, was that Overseas Filipino
remittances will fall by 5 percent.

But year to date, or from January to July, OF remittances fell by just 2.4 percent; rose
by 7.7 percent and 7.8 percent in June and July after declines in March, April and May.

This is welcome news. This development is much better than the gloomy forecasts of
some international agencies that Overseas Filipino remittances will plunge by more than
20 percent. Filipinos abroad are truly altruistic.

That said, we have to learn to live with the virus. We can't - and we shouldn't - wait for
the vaccine before we act.
All of us have an individual and collective responsibility to win this war against the
coronavirus and move the country forward.

Individually, we have to observe the right health protocols - wear our masks, wash our
hands, and watch our distance.

Meanwhile, the National Government has to provide the leadership, set national
standards, and communicate clearly and consistently the overall strategy. 

LGU officials, on the other hand, should implement national rules and provide the
necessary personnel, supplies, and health facilities to control the spread of the virus.

Ladies and gentlemen, even as we are occupied by the present challenges, let us not
lose track of where we want to go as a nation. 

This is the best time to embrace structural reforms so that when the dust finally settles,
the Philippines will be a better, safer, more equal, and more competitive nation.

Thank you everyone and congratulations to the IBC on its 30th anniversary! Mabuhay!

Covid-19 banking:
Perspective for Philippine banking industy

 Commercial banks play an important role in the financial system and the economy. As a key
component of the financial system, banks allocate funds from savers to borrowers in an efficient
manner.

 The banking sector is an industry and a section of the economy devoted to the holding of
financial assets for others and investing those financial assets as a leveraged way to create more
wealth.

Imagine a World Without Banks

If there were no banks…

 Where would you go to borrow money?

 What would you do with your savings?

 Would you be able to borrow (save) as much as you need, when you need it, in a form that
would be convenient for you?

 What risks might you face as a saver (borrower)?