PHILIPPINE banks will remain robust going forward, given the improved business environment in the country and the entry of foreign banks in the industry, according to BMI Research.
“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,” it said.
The latest central bank data showed the sector’s net interest income rose by 5.9 percent year-on-year to P67 billion in the first quarter of 2015, while non-interest income grew by 55.8 percent to P4.3 billion, according to BMI Research, a part of financial information services provider Fitch Group.
Net profit expanded by 10.7 percent, while the quarterly return on equity rose to 11.1 percent from 11 percent, revealing a steady rebound from recent declines.
The numbers are signs of a strong banking sector, the researcher said.
“Efforts by the current administration have yielded positive outcomes for the economy. Public corruption has notably declined, as reflected by an improvement in the Philippines’ ranking in the Transparency International’s Corruption Perception Index over recent years,” BMI noted
Monetary and fiscal prudence has taken root in the country, leading to an improved overall economic health, it said.
These positive developments have culminated in the surge in foreign direct investment (FDI) inflows by 65.2 percent to an all-time high of $6.2 billion in 2014, the research firm said.
With the overall net interest margin stabilizing at about 3 percent in recent quarters, a healthy loan growth bodes well for domestic banks in terms of net interest income, it added.
“This should help to keep loan expansion strong over the coming years, and we therefore forecast loan growth to come in at 15.0 percent in 2015 and average 12 percent annually over the period from 2016 to 2019,” it said.
BMI is of the view that liberalization is a net positive for the banking industry, compelling local banks to shape up further to compete with foreign banks.
In July 2014, the Philippine Congress passed Republic Act (RA) 10641, or an Act Allowing the Full Entry of Foreign Banks in the Philippines.
The law allows foreign banks to acquire up to 100 percent of the voting stock of an existing domestic bank, removing the 60 percent limit on foreign equity.
Foreign banks were given the green light to operate in the Philippines as a branch or as a wholly owned subsidiary.
“The liberalization of the banking sector in July 2014 will also be a massive game changer for the industry,” BMI said.
Opening up the banking sector has revealed a growing interest by foreign banks looking to set up operations in the Philippines, according to the Bangko Sentral ng Pilipinas.
Among the foreign institutions that have secured central bank approval to set up shop in the Philippines are Japan’s Sumitomo Mitsui Banking Corp., Taiwan-based Cathay United Bank and Yuanta Commercial Bank, and South Korea’s Shinhan Bank and Industrial Bank of Korea.
While domestic banks face intense competition from foreign banks, BMI believes the relaxation of ownership limits is a net positive for the industry in the coming years.
“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,” it said.
BMI said the presence of an increasing number of foreign banks will provide funding support for foreign firms doing business in the Philippines.
“This should in turn encourage more foreign businesses to establish operations in the country, which will bode well for loan growth and the broader economy as a whole,” it added.