AUDIT OF BANKS

July 8, 2022
Speaker: Aerol Paul B. Banal, CPA, CFA

1
 Business of Banking
Industry Overview, Types of Philippine Banks,
Products & Services, How Banks Earn

SESSION
OUTLINE
Assessment of Banks
Bank Ratings Systems, SAFr Components,

2
PROFORMA
BALANCE SHEET ASSETS LIAB + CAPITAL
Cash & other cash items Deposit liabilities
Due from BSP Demand
Due from other banks Savings
Investment securities Time

Gross loans Bills and Bonds payable

Less: Loan loss reserves Other liabilities
Net loans Capital
Equity investments Capital stock
Fixed assets Paid-in capital
Surplus

3
PROFORMA INCOME
STATEMENT
REVENUES EXPENSES
Interest income Operating expenses
Less: Interest expense Manpower costs
Net Interest income Taxes and licenses
Add: Fees Depreciation
Trading gains Insurance

Forex gains Misc. expenses

Other income Provisions for loan losses

Net Revenues Income Tax

NET INCOME

4
OVERVIEW
Industry Financial Accounts & Ratios as of March 2022

Assets Gross Non-performing Loans (NPL)

P 20.5Tn Up 7% year-on-year
4.2% Slightly lower than
Mar 2021’s 4.3%

Deposits Capital Adequacy Ratio (CAR)

P15.8 Tn Up 7% year-on-year
17.1% As of Dec 2021,
steady vs Dec 2020

Loans Liquidity Coverage Ratio (LCR)

P10.4Tn Up 6% year-on-year
196 % Higher than 100% minimum
requirement as of June 2021

*Industry = UKB + TB for Assets, Deposits, Loans & Gross NPL; Industry = UKB only for CAR & LCR

5
 TYPES OF PHILIPPINE BANKS
Industry Financial Accounts (March 2022) & Non-financials (April 2022)

RURAL & DIGITAL THRIFT COMMERCIAL UNIVERSAL

COOP (407) (3) (44) (25) (20)

Loans to farmers, Expanded KB license:

Features No physical branch; Teachers’ loans, Deal in forex, GS,
fishermen, small investment banking,
End-to-end digital SMEs, mortgage offer Trust services
business men; rural underwriting, KB
process finance (IMA)
development subsidiary

Minimum P10 Mn to At least P1 Bn P200 Mn to P2 Bn to P3 Bn to

Capital P200 Mn P2 Bn P15 Bn P20 Bn

3,402 0 2,567 583 6,638

Branches
26% - 19% 4% 50%

Assets 329 Bn n.a. 910 Bn 1.5 Tn 18.1 Tn

Loans 174 Bn n.a. 515 Bn 0.65 Tn 9.3 Tn

Deposits 245 Bn n.a. 705 Bn 1.1 Tn 14.1 Tn

6
TYPES OF PHILIPPINE BANKS
RURAL & DIGITAL THRIFT COMMERCIAL UNIVERSAL
COOP (407) (3) (44) (25) (20)

7
 PRODUCTS & CUSTOMERS
• Corporate (Top 1,000 corps,
SERVICES Multinationals, National Enterprises,

THE
• Deposits Conglomerates and FIs, GIs)
• Loan and Credit Facilities • Commercial (Top 1,001 and below,
• Treasury Services
• Trust Services
• Bancassurance
BASICS MSMEs)
• Consumer (Credit cards, Personal/
salary loans, Teachers’ Loans, Housing
& Auto loans, Multi-purpose)

PAYMENTS DISTRIBUTION
SYSTEMS CHANNELS
• Cash • Branches (Traditional branch, In-
• Check store branch, Banking kiosk)
• Electronic Payments (Credit card, • Alternative Channels (ATMs, Cash
Debit card, Stored value card, Acceptance Machines, Mobile/ Online
Electronic fund transfers) Banking)

8
HOW BANKS
EARN ASSETS LIAB + CAPITAL
Cash & other cash items Deposit liabilities
Due from BSP Demand
Due from other banks Savings
Investment securities Time

Gross loans Deposit substitutes

Less: Loan loss reserves Capital
Net loans Capital stock
Equity investments Paid-in capital
Fixed assets Surplus

REVENUES EXPENSES

INCOME
9
BALANCE SHEET
ASSETS March 31, 2022 Dec 31, 2021
Cash and Other Cash Items 13,779 16,025
Due from Bangko Sentral ng Pilipinas 85,386 124,283
Due from Other banks 9,851 10,694
Interbank Loans Receivable and SPURA 44,445 36,559
Financial Assets at FVTPL 8,492 7,210
Financial Assets at FVOCI 28,937 28,672
Investment Securities at AC 279,469 242,354
Loans and Receivables - net 615,681 609,007
Other Assets 40,623 37,516
1,126,663 1,112,320
LIABILITIES
Checking and Savings Deposits 564,003 555,210
Time Deposits 315,276 307,650
Bills and Bonds Payable 97,805 108,280
Other Liabilities 24,229 22,057
1,001,313 993,197

EQUITY 125,351 119,123

LIABILITIES AND EQUITY 1,126,663 1,112,320

10
 INCOME STATEMENTS
March 31, 2022 March 31, 2021 March 31, 2022 March 31, 2021

INTEREST INCOME OPERATING EXPENSES

Loans and receivables 9,150 8,275 Compensation and fringe benefits 1,861 1,931
Investment securities at amortized cost and at FVOCI 3,066 2,371 Occupancy cost 471 490
Financial Assets at FVPL 131 217 Taxes and licenses 849 1,051
Due from BSP and other banks and SPURA 287 497 Insurance 544 520
12,634 11,360 Depreciation and amortization 425 455
INTEREST EXPENSES Provision for impairment and credit losses 780 2,218
Deposit liabilities 1,240 1,452 Transportation and traveling 77 66
Bills payable and other borrowings 588 522 Professional fees, marketing and other related services 137 134
Lease Payable 44 52 Entertainment, amusement and recreation 71 79
1,871 2,026 Stationery, supplies and postage 54 59
NET INTEREST INCOME 10,762 9,334 Repairs and maintenance 34 34
Miscellaneous 1,188 1,375
OTHER INCOME 6,489 8,412
Service charges, fees and commissions 690 584
Trading and securities gain - net 338 2,187 INCOME BEFORE INCOME TAX 5,986 4,328
Gain on sale of investment properties 127 20 PROVISION FOR INCOME TAX 1,091 749
Foreign exchange gain - net 88 199 NET INCOME 4,895 3,579
Trust fee income 112 92
Gain on asset foreclosure and dacion transactions 16 38
Miscellaneous 341 286
1,712 3,405

TOTAL OPERATING INCOME 12,474 12,739

11
HOW BANKS EARN

Maximize income Exercise prudent Minimize non-

from core spending earning assets
businesses
Interest income from CAPEX - Branch Prudent lending standards
lending & investing premises, tech & comm
infra, branch equipment Disposal of non-
Low-cost funding and vehicles, etc. performing assets
Service fees, trading and OPEX - Human resource , Adequate provisions
forex gains occupancy costs, taxes &
licenses, deposit
insurance, messengerial &
security costs, etc.

12
 Business of Banking
Industry Overview, Roles of Banks, Types of
Philippine Banks, Products & Services, How

SESSION Banks Earn

OUTLINE
Assessment of Banks
Bank Ratings Systems, SAFr Components,

13
 AUDIT OF BANKS
Internal Compliance External Tax
Regulatory Audit
Audit Audit Audit Audit
Assess Bank’s
Provide assurance
compliance with
that the Bank's risk Provide opinion
supervisory
management, Review the Bank’s on the fairness Assess the
requirements and
governance, and adherence to and accuracy of accuracy of the
Purpose whether they can
internal control regulatory the Bank’s Bank’s filed tax
continue to adhere
processes are guidelines. financial returns.
to these
operating effectively. statements.
requirements for the
foreseeable future.
Bureau of
Internal Audit Compliance SGV, KPMG, Bangko Sentral ng
Auditor Internal Audit
Department Department PWC, etc. Pilipinas (BSP)
(BIR)

14
 BANK RATING SYSTEMS

SAFr
Jan 1, 2021 (Replaced CAMELS & ROCA)

WHAT IT
Supervisory Assessment Framework
MEANS

ELEMENTS Impact on system, risk profile & supervisory intensity

APPROACH Business model-based, forward-looking

COVERAGE All BSP-supervised institutions

REVIEW Institution-specific, as needed; onsite and/or offsite

FREQUENCY

RATING 4-pt scale that clearly delineates between satisfactory and

SCALE unsatisfactory

15
 SAFr Supervisory intensity will be proportionately focused on

Design FIs with greater systemic importance and higher risk.

Impact Risk Supervisory

Assessment Assessment Intensity

Low Low

Moderate Moderate

Above Average Above Average

High High

16
 Impact
Assessment
Size

Inter-
Complexity Impact connectedness

Assesses systemic importance of

a BSFI in the event of:
• doubts about solvency
• prolonged business disruption
• major conduct of business
Substitutability problems

17
 Impact
Size

Complexity

18
 Risk Assesses safety and soundness of BSFI in the face of

Assessment
adverse business and economic conditions

COMPOSITE
RATING

Significant Quality of
Net Risk of SAs Institutional Level
Activities (SAs)
Support (ILS)
Retail Banking, Trading, Trust, Credit, Market, Operational, Earnings, Capital, Liquidity,
Subsidiaries, Asset-Liability Market Conduct, Liquidity, Governance
Management, Information IRBB, IT, ML/TP
Technology, Money Laundering/
Terrorist Financing
19
Composite Rating

20
 Risk Categories
Risk Type Particulars

Credit Risk Arises from a counterparty’s failure to meet the terms of any contract

Market Risk Arises from adverse movements in factors that affect the market value of portfolio

Arises from inadequate or failed internal processes, people and systems, or from
Operational Risk
external events
Arises from actions or activities that are unethical and detrimental to the welfare
Market Conduct Risk
customers

Liquidity Risk Arises from the Bank's inability to meet its obligations when they become due

Interest Rate Risk Arises from adverse movements in interest rates

Arises from adverse outcome, damage, loss, violation, failure or disruption

IT Risk
associated with the use of or reliance on IT platforms, network and systems
Money Laundering/ Terrorist Arises from failure to prevent from being used as a money laundering site and
Financing Risk conduit for the proceeds of unlawful activities as well as terrorist financing.
21
 Risk Categories
Credit risk Operational risk

Money Laundering risk

IT risk

22
Liquidity risk

Operational risk

Market risk

Interest rate risk

23
 Institutional Level Support (ILS)

Earnings ROA and ROE

Capital CET 1 Ratio and CAR

Liquidity LCR and NSFR

Governance Strategic response by the Board and Management

24
 Test Case
 ABC Bank is the largest bank in the country;

 ABC Bank’s NPL ratio is the lowest in the industry;

 There were some weaknesses in the Bank’s internal control system;

 Liquidity ratios are above industry average;

 ABC Bank is not involve in money laundering and terrorism financing;

 ABC Bank has effective Internal Audit and Compliance Units;

 ABC Bank is profitable, adequately capitalize and very liquid.

25
 ABC Bank Composite Rating
RISK ASSESSMENT
Credit Market ML/TF NET RISK
Op Risk MC Risk Liquidity IRR IT Risk
Risk Risk Risk
Low √
Moderate √ √ √ √ √
Above average √ √ √
High

NET RISK Overall Net

Compliance Internal Audit Risk
Low Strong √ Low
Moderate Acceptable √ Moderate √
Above average √ Inadequate Above average
High Weak High

26
 Composite Rating

Overall Net
Earnings Capital Liquidity Governance
Risk
Low Strong

4
√ √
Moderate √ Acceptable √ √
Above average Inadequate
High Weak

27
 Composite Rating
• The BSFI is ROBUST.

4
• Risks are WELL MANAGED across the organization.
• There are NO IMMINENT THREATS to its safety and soundness.
• It has AMPLE BUFFERS and can withstand most adverse events.

• The BSFI is STABLE.

3
• Risks are ADEQUATELY MANAGED across the organization.
• Supervisory concerns are WITHIN THE ABILITY of the board and management to address.
• The BSFI’s buffers will enable it to WITHSTAND most adverse events.

• The BSFI is VULNERABLE.

2 •
•
•
Risks are NOT WELL MANAGED in the organization.
Supervisory concerns are NOT IMMEDIATELY given attention.
The BSFI has MINIMAL BUFFERS and the occurrence of an adverse event is likely to pose a threat.

• The BSFI is DISTRESSED.

1 •
•
•
Risks are BEYOND THE CAPABILITY of the board and management to address.
The BSFI’s inherent risks POSE A THREATH to its safety and soundness.
It is NOT LIKELY TO WITHSTAND adverse events.

28
THANK YOU

29