• A new banking regime emerges in PH

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    BSP20151011As liberalization ushers in foreign competition, sluggards are bound to shape up

    “Liberalization is net positive for the industry, as it compels local banks to shape up under such competitive business climate.”

    OPENING up the banking industry has begun ushering foreign lenders into the country, and the competition is expected to compel local banks to shape up and survive the competition from stronger and, understandably, well-funded players.

    As foreign banks slowly penetrate the Philippine market, the central bank noted it is still too early to assess the impact of a more liberalized industry with a degree of accuracy.

    “Since the implementation of RA 10641 is in its early stages, determining a quantifiable impact of the liberalization will still be premature,” said Deputy Governor Nestor Espenilla Jr., who leads the Bangko Sentral ng Pilipinas’ Supervision and Examination Sector.

    President Benigno Aquino 3rd signed Republic Act 10641 or “An Act Allowing the Full Entry of Foreign Banks in the Philippines, Amending for the Purpose R.A. 7721” into law on July 22, 2014. The law removed the 60 percent limit on foreign equity and allowed foreign banks to acquire 100 percent of the voting stock of a domestic bank and operate in the Philippines as a branch or as a wholly owned subsidiary.

    In his interaction with local banks, however, Espenilla noted the most anticipated consequences of the liberalization would be on information and communications technology (ICT) and new products and services ̶ which means the potential for change in these areas is ripe.

    “This is perhaps evident in the recent actions of some commercial and universal banks to raise further capital, among others. Even for our rural banks, there is active discussion on what the market landscape may be moving forward,” he pointed out.

    In the eyes of industry people, a new banking regime has arrived.

    “Liberalizing the banking industry could increase competition among banks and thus, limit local players’ ability to raise domestic interest rates even as global rates normalize,” said Diana del Rosario, economist at Deutsche Bank.

    “This is a possible scenario as more foreign banks enter the country in the coming years: as the country’s financial sector deepens, the BSP will need to ensure strong regulation to support the stability of the banking sector,” she said.

    Indeed a regime of stiff competition has arrived and Nicholas Antonio Mapa, associate economist at Bank of the Philippine Islands, sees local players benefiting from this.

    Competition has always brought out the best in market players and the banking industry will be no different. The industry will probably witness best practices that the foreign players will be bringing in and the local stalwarts will need to adjust to the game,” he said.

    An awareness of the situation has prompted the BSP to inject the industry with policy guidelines and amendments in corporate governance, Espenilla said. These include enhanced credit risk management, higher capital requirements and quality of capital, and financial inclusion initiatives.

    “Various programs have also been crafted for rural banks interested in further consolidation or enhancing their market position,” he said.

    BMI Research has no doubt Philippine lenders can withstand external headwinds.

    “Further informing our constructive stance for the banking sector is its robust balance sheet that will help buffer banks against shocks to the economy. Indeed, the capital adequacy ratio of the Philippine banking sector stands at around 15.0 percent, which far exceeds the Basel III standards that the BSP has adopted since the start of 2014,” the think tank unit of the Fitch Group said.

    “In addition, despite rapid loan growth in the country, non-performing loans as a share of the total have remained tepid, coming in at just 1.9 percent in July 2015, reflecting prudence in lending practices by domestic banks,” BMI added.

    Since the Monetary Board released the implementing rules and regulations (IRR) on November 14, 2014, six foreign lenders have been given the green light to set up a branch in the country.

    The first foreign bank approved by the BSP’s policy-setting board was Japan’s Sumitomo Mitsui Banking Corp.

    South Korea’s Shinhan Bank followed in March 2015, and later, Cathay United Bank of Taiwan in April. The Industrial Bank of Korea was next in line in May and Yuanta Commercial Bank Co. in July.

    The 6th lender was approved last September, but the BSP has not officially disclosed its name.

    “The close supervision of the banking system by the Philippine central bank will also help to further strengthen the quality of bank balance sheets, according to BMI.

    It noted that in October 2014, the central bank raised the minimum capital requirement for the banking sector. Commercial banks with more than 10 branches have to maintain a capital base ranging from P4 billion to P10 billion, up from P2 billion previously.

    The central bank also implemented several measures to ensure that domestic banks maintain a sustainable real estate loan portfolio in their books. Notably, loans to the property market as a share of the total will be capped at 20.0 percent.

    With that limit breached in June 2015, with real estate loans as a share of the total coming in at 20.5 percent, BMI sees “… tighter tighter rules to curb lending to the property market could well be on the cards over the coming quarters.”

    When the central bank endorsed the amendments to RA 7721early last year, it was part of the preparations for the Asean Economic Community as the Association of Southeast Asian Nations was fast approaching the move toward integration starting 2015.

    In particular the endorsement was in line with the Asean Banking Integration Framework (ABIF). Within the framework, the so-called Qualified Asean Banks (QABs) can operate within the region on equal footing as domestic banks of that particular national jurisdiction subject to prudential and governance standards.

    According to RA 10641, “Only established, reputable and financially sound foreign banks shall be allowed entry in accordance with Section 2 of this Act. The foreign bank applicant must be widely-owned and publicly-listed in its country of origin, unless the foreign bank applicant is owned and controlled by the government of its country of origin.”

    Within the context of the law, Espenilla said the central bank must continue working in a pragmatic and balanced frame of mind to encourage banks to be creative in addressing the needs of their clients. The BSP must also recognize the inherent needs of prudential oversight.

    “Yet amid the more fluid market conditions, we continue to believe that the banking industry still remains to be in a position of strength. There are many indicators supporting this view,” the deputy governor noted.

    “However, perhaps the more telling of these is the continued positive outlook of rating agencies and multilateral institutions on the banking system even in due consideration of the more recent market-moving developments,” he added.

    For EastWest Bank, the presence of foreign lenders in the domestic market is good for the banking public.

    “Competition will give customers more choices, hasten banking penetration as banks seek new market segments and new geographical areas to explore and push further improvement in customer service and product offerings,” said Rene de Borja, senior vice president CFO of EastWest Bank.

    BMI said Philippine banks have been given an improved business environment.

    “We expect the Philippine banking sector to remain on a strong growth trajectory over the coming years, supported by sustained loan growth amid an improving business environment and the potential for further consolidation of the sector as a result of greater competition arising from an influx of foreign banks into the country.”

    Liberalization is net positive for the industry, as it compels local banks to shape up under such competitive business climate.

    “There is, therefore, the potential for domestic banks to consolidate in order to grow in size and financial clout so as to be able to compete with larger foreign banks,” BMI said.

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