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Financial Inclusion February 27, 2017

PHL banking system to remain strong – BMI

THE PHILIPPINE banking system is expected to remain strong over the near term, BMI Research said in a recent report, with mergers to remain a likely trend as big banks absorb smaller lenders in order to beef up their presence as they brace for the entry of new players.

“The outlook for the Philippine banking sector as a whole remains fairly constructive as a robust macroeconomic environment, low degree of NPLs (non-performing loans), and healthy capitalization and liquidity structures will help it to weather heightened global uncertainty,” the unit of Fitch Ratings said in an Oct. 7 report.

The banking industry is poised to ride on the country’s strong growth momentum, BMI said. Economic growth, which averaged 6.9% during the first semester, is expected to propel further expansion in the coming quarters with additional foreign direct investments, steady remittances, increased public spending, and a booming services sector. “This should help to power strong credit uptake over the coming quarters as both businesses and households assume leverage against a backdrop of profitable opportunities and positive sentiment.”

As a result, loan growth is expected to come in at 18% this year and 15% in 2017, coming from an 11.8% rise in 2015, BMI Research said.

High asset quality — seen in the improving share of soured loans in banks’ lending portfolios and sufficient capital buffers — also lend resilience to the sector, allowing it to weather any market volatility or episodes of a funding crunch. Prudent regulation by the Bangko Sentral ng Pilipinas (BSP) is also seen as a source of strength.

“The banking sector’s loan-to-deposit ratio is also among the lowest in Asia, suggesting that Philippine banks have financed loans largely by using deposits rather than through wholesale borrowing,” BMI said, noting that the country’s declining debt stock also trimmed refinancing risks amid uncertainties in the global financial system.

However, the Fitch unit flagged concerns about the viability of smaller banks, which are more exposed to risks than universal and commercial lenders. Specifically, thrift and rural lenders hand out more loans to individual consumers, micro-, small, and medium-scale enterprises, and to the farming sector, which have a higher probability of default.

BMI Research expects more consolidations among banks looking ahead as banks find ways to beef up their asset base while also expanding their reach.

“We believe that small pockets of weaknesses among Philippine banks, coupled with increasing competition from foreign banks will likely sustain the current wave of consolidation seen in the country over the past year,” the report read, referring to a 2014 law that allowed the entry of more foreign players in the local banking sector.

The BSP has so far approved the entry of nine Asian banks into the Philippines over the last two years.

Together with the Philippine Deposit Insurance Corp., the central bank also introduced a consolidation program for rural banks in order to improve their financial standing. Three groups of lenders are currently in the works, but regulators are set to complete the process by 2017 the earliest. International credit raters have cited the local banking sector as a pillar of strength for the economy, standing well-equipped to finance domestic activities while keeping its sound footing. — Melissa Luz T. Lopez

Source: http://www.bworldonline.com/content.php?section=Finance&title=phl-banking-system-to-remain-strong—-bmi&id=135124