The Philippine banking system must effectively deal with “new risks” while funding the country’s economic growth,
a global publishing, research and consultancy firm said.
Oxford Business Group (OBG), in “The Report: The Philippine 2014,” said that the country’s banking sector has strengthened significantly in recent years and most institutions are now in good shape.
“They are both profitable and sound, able not only to play a vital role in the growing economy but also to withstand volatility along the way,” it stated.
However, the firm noted that while the country and the banking system have done well, it also faces significant challenges that must be effectively dealt with.
One of the challenges the OBG report noted was the transition of the system to the Basel III framework that was designed to strengthen the banking sector’s capacity to absorb shocks; to enhance the management of risk; and to increase transparency.
The consultancy firm said that while the banking sector has generally welcomed the strengthening of the regulation, supervision and risk management that Basel III entails, lenders are aware that compliance will come at a cost.
“Bank chiefs have pointed out that the increased safety measures included in the upgraded guidelines, along with the additional monitoring units and technology, will mean a hike in expenses,” it added.
OBG also said that banks could also reduce their lending to meet the risk-weighted capital requirements under the framework.
The Bangko Sentral ng Pilipinas has ordered universal and commercial banks in the Philippines to comply with Basel III’s 10-percent capital adequacy ratio standards with Tier 1 common equity and Tier 1 capital ratios of 6 percent and 7.5 percent, respectively, and a capital conversion buffer of 2.5 percent by January 1, 2014.
Furthermore, OBG noted that another challenge the system must face is the few number of consolidated banks.
“While consolidation of banks has occurred, relatively little has taken place, and the country has far more banks than other countries in the Asean [Association of Southeast Asian Nations] nations,” it stated.
In connection, the consultancy firm cited a BSP circular in 1998 that offers incentives for banks to combine and form larger, more stable institutions.
It said that despite the trend toward consolidation, the number of branches in the country has been rising steadily, noting that as of June 2013, there were 9,543 operating banking units in the country.
“This is partly the natural result of a push decades ago to establish rural banks. But the great number of banks is also the consequence of the relative lack of mergers,” it stated.
However, the consultancy firm’s report said that the combination of large banks have been proven difficult, because of the way the Philippines operates.
“The archipelagic landscape and economies of scale have made industry consolidation and financial access, particularly in remote, rural areas, a delicate balancing act for regulators,” it stated.