Philippine banks are riding the tide of one of the fastest-moving economic upswings among emerging-market economies, but they will “need scale” to deal with more intense competition ahead of the Association of Southeast Asian Nations (Asean) Economic Integration in 2015, debt watcher Standard & Poor’s (S&P) Ratings Services said.
“Philippine banks are well positioned to meet the new Basel III requirements, with capital ratios that are comfortably above the regulatory minimum,” said S&P credit analyst Ivan Tan said in a commentary.
Basel III is a framework designed to strengthen the banking sector’s capacity to absorb shocks, enhance the management of risk, and increase transparency. The central bank 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.
“Philippine banks also benefit from healthy funding positions and maintain a sizable amount of liquid assets, the bulk of which is in the form of cash and domestic government bonds,” the analyst added.
But while local banks are sufficiently capitalized and there is ample liquidity, there are structural weaknesses that must be addressed if these banks are to compete against potentially bigger and stronger new entrants from other Asean countries.
For example, S&P noted that consolidation in the Philippines’ overcrowded banking system has been an uphill task because of its closely held family ownership structure.
It said bank lending is heavily skewed toward corporates, particularly to large local conglomerates, to the extent that banks face significant concentration risks to the same handful of conglomerates which follow broadly similar business models.
S&P’s Tan added that a narrow revenue profile and high operating costs constrain the profitability of Philippine banks.
“Philippine banks depend heavily on interest income from domestic corporate lending, with little diversification in terms of geography and business lines such as bank assurance and wealth management,” he said.
According to S&P, it remains to be seen whether Philippine banks can emerge as regional champions ahead of the Asean integration as member countries have gradually started to progressively liberalize restrictions in the region’s still-protected banking sector.
“Philippine banks will need scale to deal with more intense competition from potential new entrants,” it said.
Included in the principle of the Asean Economic Community integration in 2015 is the Asean Banking Integration Framework, which will determine qualified Asean banks (QABs). These banks can operate within Asean jurisdictions on equal terms as domestic banks of that jurisdiction, subject to certain prudential and governance standards.
The Bangko Sentral ng Pilipinas earlier said that the Asean integration opens up a bigger regional market for Philippine banks as it will have a base of some 600 million potential consumers.
It added that the prospects for banks in the country appear to be very strong, but the attractiveness of the prospect is also catching the attention of bigger banks and most banks in the Southeast Asian region.
The central bank said that the Philippine banking system as a whole is relatively small compared to the rest of Asean, and that is why there is a real need for the banking industry to scale up, expand, and increase the size of its institutions for it to benefit from the heightened competition coming out of the Asean financial integration.