Philippine Banking Systembanking system’s physical landscape during the semester in review include...

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Philippine Banking SystemOverviewFavorable macroeconomic environment and positive investor sentiments buoyed by investment grade from two of the triumvirate (Fitch, Moody’s and Standard & Poor’s) international credit rating agencies augured well for the performance of the Philippine banking system for the first half of 2013. Key performance indicators showed steady growth in assets, loans, deposit liabilities and capital accounts. Soundness and stability indicators of asset quality and solvency remained strong as NPL/NPA ratios reached historic lows while capital adequacy ratio (CAR) remained above regulatory and international standards. Cost efficiencies and wider customer reach through maximization of technologically enabled service delivery channels led to a healthy bottom line and positive returns to shareholders.

Overall Landscape Leaner But Wider Client ReachLandscape remained streamlined on account of continued industry consolidations, acquisitions, and bank closures

The banking system landscape remained streamlined as a result of continued industry consolidations and acquisitions and bank closures. There was a noted decline in the number of head offices but this was outdone by the number of newly established regular branches as well as so-called “light branches” or other banking offices (OBOs)/microbanking offices (MBOs) that served as vital access points for the delivery of financial products and services.

As of end-June 2013, there were 9,543 operating banking units (up from 9,207 at end-June 2012) consisting of 683 head offices (712 head offices in end-June 2012) and 8,860 branches and other offices (8,495 branches/other offices in end-June 2012). Of these branches/other offices, 35 (up from 34 banking offices at end-June 2012) are domiciled offshore. Overall, branch network was further augmented with the addition of 365 banking offices. Meanwhile, the number of head offices declined by 29 units year-on-year due to ongoing industry consolidation, acquisitions and a number of bank closures. Consequently, this resulted to a more

streamlined banking landscape as the current number of operating banks was 313 banks less than their peak of 996 banks at the start of the rationalization of merger and consolidation incentives of the BSP in 1998 (Figure 1).

Banks accounted for 34.8 percent (from 34.5 percent at end-June 2012) of all financial institutions being supervised by the BSP. Apart from banks, the BSP also supervises non-banks with quasi-banking functions and/or trust license, financial allied subsidiaries/affiliates of banks and quasi-banks, non-stock savings and loan associations, pawnshops and other financial institutions which under special laws are subject to BSP supervision. As of end-June 2013, the total number of financial institutions under the effective supervision of the BSP reached 27,395 (up by 724 institutions from year ago’s 26,671). Of these financial institutions, the 17,514 pawnshops cornered the lion’s share at 63.9 percent (down from 64.2 percent or 17,128 pawnshops a year ago).

Other notable developments that shaped the banking system’s physical landscape during the semester in review include the two cases of mergers, as follows: (1) merger between Philippine National Bank (PNB) and Allied Banking Corporation with PNB as the surviving entity effective 9 February 2013, and (2) merger between One Network Bank, Inc. (A Rural Bank) and Rural Bank of San Enrique (Iloilo), Inc. with One Network Bank as the surviving entity effective 16 May 2013. The consolidation of First Community Cooperative Bank of Misamis Occidental (Mis. Occ. Coop Bank), Cooperative Bank of Davao del Sur (CBDS) and Cooperative Bank of Surigao del Sur into Consolidated Cooperative Bank became effective on 02 January 2013. Lastly, there were eight rural banks and one cooperative bank that closed during the semester.

996976

947929 912 899 893 879 862 847

900

950

1,000

8,000

8,500

9,000

No. of Head Offices (RHS)No. of Head Offices (RHS)

Figure 1

Philippine Banking SystemTotal Banking UnitsFor End-Periods Indicated

862 847818

785758

726696 712

683

650

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1998* 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Jun-12 Jun-13

Head Offices (RHS) Branches (LHS)

5

Banking System

Universal/commercial banks still had the largest branch network while rural banks had the most number of operating banks

The distribution of banking offices barely changed across categories during the review period (Figures 2 and 3). Rural and cooperative banks (R/CBs) continued to hold a bigger slice of the banking system landscape in terms of operating head offices with a share of 84.5 percent (slightly down from 85.1 percent) as of end-June 2013. On the other hand, universal and commercial banks (U/KBs), though fewer in number of head offices, still had the most extensive network of branches at 58.7 percent (slightly up from year ago’s 58.0 percent). Notwithstanding physical breadth however, each of these banking categories plays a unique role in intermediating funds and allocating resources and investments that support economic development. The continuing challenge for these

banks is to scale up growth and increase efficiency to be able to deliver financial services to a broader market base.

The specific composition of banking offices by major banking groups is summarized in Figure 4 and in Schedule 1.

Figure 2

End-June 2012

Philippine Banking SystemPhysical Composition: Share to Total Banking OfficesFor End-Periods Indicated

End-June 2013

Total Head Office Branches/Other Offices

Total Head Office

Branches/Other Offices

All Banks 9,543 683 8,860 9,207 712 8,495 Universal and Commercial Banks 5,234 36 5,198 4,965 37 4,928 Thrift Banks 1,662 70 1,592 1,522 69 1,453 Rural and Cooperative Banks 2,647 577 2,070 2,720 606 2,114

End-June 2012Bank Category

End-June 2013

Figure 4Philippine Banking SystemPhysical Composition: Distribution of Physical NetworkAs of End-June 2013

Number % Share Number % Share Number % ShareAll Banks 9,543.0 100.0 683.0 100.0 8,860.0 100.0 All Domestic Banks 9,405.0 98.6 663.0 97.1 8,742.0 98.7 Universal Banks 4,217.0 44.2 11.0 1.6 4,206.0 47.5 Commercial Banks 443.0 4.6 6.0 0.9 437.0 4.9 Thrift Banks 1,634.0 17.1 66.0 9.7 1,568.0 17.7 Rural Banks* 2,500.0 26.2 541.0 79.2 1,959.0 22.1 Cooperative Banks 147.0 1.5 36.0 5.3 111.0 1.3 Government Banks 464.0 4.9 3.0 0.4 461.0 5.2 All Foreign Bank Branches and Subsidiaries 138.0 1.4 20.0 2.9 118.0 1.3 Universal Banks 17.0 0.2 6.0 0.9 11.0 0.1 Commercial Banks 93.0 1.0 10.0 1.5 83.0 0.9 Thrift Banks 28.0 0.3 4.0 0.6 24.0 0.3

* Inclusive of microfinance-oriented rural banks

Branch/Other OfficeBank Category

Total Head Office

`

Figure 3

Philippine Banking SystemPhysical Composition: Share to Total Banking OfficesFor End-Periods Indicated

In Percent (LHS)

Head Office In Percent (LHS)

Branches/Other Offices

5.3% 5.2% 10.2% 9.7%

84.5% 85.1%

-10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0

End-June 2013 End-June 2012

(LHS)

Universal and Commercial Banks

Thrift Banks

Rural and Cooperative Banks

58.7% 58.0%

18.0% 17.1% 23.4%

24.9%

-10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0

100.0


(LHS)

Universal and Commercial Banks

Thrift Banks

Rural and Cooperative Banks

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Other bank categories with less than five percent share of the overall physical network of the banking system were government banks at 4.9 percent (unchanged from year ago) and foreign bank branches and subsidiaries at 1.4 percent (down from 1.5 percent a year ago).

Domestic banks by far outnumbered foreign banks

Domestic banks captured the largest share of physical landscape at 98.6 percent compared to foreign banks’ 1.4 percent.

Local banks are predominantly rural banks at 87.0 percent while foreign banks are mostly universal and commercial banks at 80.0 percent (Figure 5).

OBOs and MBOs provide additional financial access points to banking clients nationwide

The BSP’s branch liberalization initiative has enabled banks to expand their physical network even in remote or hard-to-reach areas. As of end-June 2013, there are 422 OBOs and 391 MBOs that supplement banks’ branching activity and readily provide additional financial access points to banking clients nationwide5.

Of the total OBOs, around 35.8 percent are located in Luzon, 32.9 percent in Mindanao, 19.7 percent in Visayas and 11.6 percent in NCR. Meanwhile, MBOs are clustered in the Luzon area (Figure 6).

2.6%10.0%

87.0%

0.4%

Domestic Banks

80.0%

20.0%

Foreign Bank Branches and Subsidiaries

Figure 5Philippine Banking System

Comparative Share to Physical Network: Domestic vs. Foreign BanksAs of End-June 2013

87.0%

Universal and Commercial Banks Thrift Banks

Rural and Cooperative Banks Government Banks

663 Head Offices


20 Head Offices

53.1%

17.9%

23.7%

5.3%


Rural and Cooperative Banks Government Banks

8,742 Branches/Other Offices

Domestic Banks

79.7%

20.3%


Foreign Bank Branches and Subsidiaries

118 Branches/Other Offices


Additional Financial Access PointsAs of End-June 2013

NCR5.1%

Luzon62.9%

Visayas15.4%

Mindanao16.6%

391 MBOs

NCR11.6%

Luzon35.8%

Visayas19.7%

Mindanao32.9%

422 OBOs

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5OBOs refer to any permanent office or place of business in the Philippines other

than the head office, branch or extension office, which engages in non-transactional

banking-related activities such as: marketing of loans, deposits and other bank

products and services; hosting of on-site ATMs; and performing customer care

services. OBOs may also be “microfinance-oriented”. A microfinance-oriented OBO

(MF-OBO or MBO) refers to an OBO that primarily caters to the banking needs and

services of microfinance clients and overseas Filipinos and their beneficiaries.

7

Banking System

Banking presence remained concentrated in highly urbanized areas

In terms of regional distribution, banking presence remained concentrated in highly urbanized areas of the country, i.e., National Capital Region (NCR), CALABARZON (Region IV-A), Central Luzon (Region III), Central Visayas (Region VII) and Western Visayas (Region VI). Using geospatial analysis (Figure 7) of cities and municipalities with banking offices in these regions, the broader picture would further indicate the following: NCR has 100.0 percent coverage, followed by CALABARZON with 94.0 percent, Central Luzon with 92.0 percent, Davao Region with 80.0 percent and Western Visayas with 79.0 percent. These regions are densely populated and mostly urbanized, making them viable hubs for business and other industries. These economic considerations made these regions prime locations for banking to thrive.

On the other side of the spectrum, the Autonomous Region of Muslim Mindanao (ARMM) remained in the red with around only 8.0 percent of the region’s cities and municipalities having banking offices. Other cities and municipalities with low bank coverage were found in Eastern Visayas (Region VIII) with 28.0 percent, Cordillera Autonomous Region (CAR) with 34.0 percent, and the Zamboanga Peninsula (Region 9) with 38.0 percent. Establishing bank branches in these parts of the country remains an ongoing challenge due to the generally low population density, inaccessibility, as well as the prevailing geo-political and socio-economic situations facing some of these locales.

Bank coverage in most parts of the country’s cities and municipalities range between 60.0 to 79.0 percent as of end-June 2013. In terms of access through alternative service delivery channels, coverage is close to 90.0 percent (Figure 7). Regional distribution of banking offices is also detailed in Table 4.

Overseas bank branches are generally located in the Asia-Pacific region

For overseas bank branches, bank distribution hardly changed year-on-year with more than half of these located in the Asia-Pacific region at 60.0 percent or 21 banking offices (up from 58.8 percent or 20 banking offices a year ago), while branches in North America and Europe which were tied at 14.3 percent apiece or five banking offices (vs. year ago’s share of 14.7 percent each for North America and Europe), and Middle East at 11.4 percent (from 11.8 percent a year ago) or four banking offices (Figure 8).

Bank density ratio remained unchanged at six banks per city/municipality

As of end-June 2013, the country’s bank density ratio remained unchanged from a year ago at six banks per city/municipality. Customer ratio improved measly by 0.6 percent to 10,433 persons served per banking office from 10,494 persons per each banking office same period in 2012. Banks’ density ratio trended closely with bank dispersion as banks remained similarly concentrated in highly populous, urbanized and higher income areas of the archipelago.


Geospatial Maps of Bank Coverage and Financial Access PointsAs of End-June 2013

Source: OSPD staff estimates and 2011 IFAS report

11.4%Middle East


Distribution of Offshore Banking OfficesAs of End-June 2013

60.0%

14.3%

14.3%

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0

Asia-Pacific

Europe

North America

% to Total Overseas Banking Network

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Banks responded well to market innovations with the growth in ATM network and electronic banking platforms

Banks have been responding well to market innovations for greater banking convenience. In recent years, electronic banking (e-banking) platforms have widely evolved from automated teller machine (ATM) networks, internet banking, mobile phone banking to the more sophisticated use of electronic money (e-money) instruments such as cash/remittance cards and electronic wallet which are accessible via mobile phones or other portable/smart devices such as tablets and mobile data packets. To keep pace with changing market dynamics, banks have capitalized on the use of e-banking technology to provide fast, efficient and reliable services to a broader customer base.

As of end-June 2013, banks with ATM network reached 74 (from 67 banks a year ago). These banks were composed of 69 domestic banks and five foreign bank branches and subsidiaries. In terms of year-on-year growth, off-site ATMs or stand-alone ATM units outpaced the growth of on-site ATMs. As of end-June 2013, off-site ATMs grew by 20.5 percent to 5,405 units compared to on-site ATM’s growth of 12.9 percent to 7,724 units (Figure 9). This

broadly indicated the growing usage of mobile ATMs as additional financial access points that cater to various clientele.

By banking group, universal and commercial banks continued to hold the lion’s share of the entire ATM network at 86.0 percent (slightly down from 86.2 percent). The remaining shares went to thrift banks at 11.9 percent (unchanged from year ago) and rural and cooperative banks at 2.1 percent (up from 2.0 percent), respectively. The share of foreign banks stood at only 1.1 percent (down from 1.2 percent).

Aside from ATMs, banks have effectively utilized other e-banking platforms. As of end-June 2013, there were 62 banks (down from 63 banks a year ago) offering electronic wallet, 29 banks (down from 30 banks a year ago) with cash/remittance card products, 43 banks (up from 39 banks) with internet banking, 16 banks (unchanged) offering phone banking (computer-based, non-mobile), 30 banks (up from 24 banks) engaged in mobile banking, 13 banks (up from 12 banks) with proprietary services and 35 bank6 (unchanged) with hybrid mobile/internet via BancNet-MegaLink switch banking services.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Jun-13

On-site 6.7 -1.2 6.1 20.1 12.0 9.4 4.5 6.0 5.9 7.3 7.2 10.2 12.9

-5.00.05.0

10.015.020.025.030.035.040.045.050.0

Grow

th R

ate

(%)


Electronic Banking Platforms and ProvidersAs of End-Years Indicated

Off-site 16.2 45.0 4.5 18.1 17.9 13.4 3.5 13.8 17.1 18.1 26.4 22.0 20.5

Total 8.6 8.3 5.7 19.6 13.6 10.5 4.2 8.2 9.3 10.8 13.8 14.7 15.9

___________________________

6Inclusive of 18 universal/commercial banks, 14 thrift banks and 3 rural banks.

As of End-Years Indicated2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Jun-13

On-site 3,172.0 3,135.0 3,326.0 3,996.0 4,476.0 4,898.0 5,118.0 5,423.0 5,744.0 6,165.0 6,608.0 7,282.0 7,724.0 Off-site 823.0 1,193.0 1,247.0 1,473.0 1,736.0 1,969.0 2,037.0 2,318.0 2,714.0 3,205.0 4,051.0 4,943.0 5,405.0 Total 3,995.0 4,328.0 4,573.0 5,469.0 6,212.0 6,867.0 7,155.0 7,741.0 8,458.0 9,370.0 10,659.0 12,225.0 13,129.0

Banks capitalized on the use of

e-banking technology to

provide fast, efficient and

reliable services

9

Banking System

It is important to note that banks’ e-banking activities are constantly monitored and regulated by the BSP to ensure compliance with appropriate risk management and internal control measures and by doing so, safeguard the protection of consumers.

Profitability And Cost Efficiency Capitalized Amid Exuberant Economic EnvironmentGains in profits hinged on trading income and low interest-related expenses

Banks’ profitability registered hefty growth in end-June 2013 amid increased trading activities and falling interest-related expenses. In addition, profits from foreign currency deposits (FCDU) operations of banks accounted for 20.9 percent of net profit for period ended 30 June 2013. Internally exuberant macroeconomic environment7, augmented by renewed appetite for emerging economies’ financial markets, favoured bank earnings leading to a net profit of P97.7 billion for the period ended 30 June 2013, 60.6 percent higher than P60.8 billion posted in 2012 (Figure 10). The positive outturn in revenue position was supported by an efficient system as operating expenses expanded at a much lower rate of 9.4 percent despite the double-digit growth rate of 26.2 percent in total operating income.

Trading income corresponded to a sizeable contribution to growth in banks’ core earnings

Non-interest income, representing 48.5 percent (up from 38.1 percent or P72.9 billion) of the banking system’s total operating income, went up by 60.4 percent to P116.9 billion (Figure 11). And among

the non-interest income accounts, trading income and fees and commissions provided a significant boost to growth in banks’ earnings expanding by 98.3 percent and 11.9 percent, respectively, year-on-year at end-June 2013. This is a notable increase in the share of banks’ revenue streams that have been traditionally retail-oriented and sourced largely from interest-based earnings, signifying that banking institutions regarded trading activities as complementary source of profit. If this practice continues in the long-run and its systemic importance increases, it can pose formidable risks to the banking system as financial flows from said activities can be very unpredictable and positive returns can reverse quickly should market conditions abruptly vary.

Realized gains from FX transactions (year-on-year change of 9,552.0 percent) and sale/redemption of government securities (236.7 percent) as well as profit from foreign exchange (40.3 percent) and sale/redemption/derecognition of non-trading financial assets and liabilities (131.5 percent) lifted revenues from trading-related income. This outcome benefited from trading activities that capitalized on recent movements in foreign exchange and capital markets, thereby inducing treasury gains.

It can be noted that for the period January to June 2013 the peso-dollar exchange rate exhibited a depreciating stance that was moving along volatile tracks. The Philippine Peso tallied a coefficient of variation above 1.0 percent beginning May 2013 from only 0.3 percent in January 2013 (Figure 12).

___________________________

7Real Gross Domestic Product (GDP) grew year-on-year by 7.6 percent in the first six

months of 2013, significantly higher than the increase recorded in the same period

last year of 6.4 percent. Source of data: http://www.nscb.gov.ph/sna/2013/2nd2013/

tables/1Q2-Rev_Summary_93SNA.pdf

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Results of OperationsFor End-Periods Indicated

In P Billions (LHS) 2008 Global Financial Crisis

In Percent (RHS)

(40.0)

(20.0)

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-200.0

-100.0

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100.0

2005 2006 2007 2008 2009 2010 2011 2012 Jun 2012 Jun 2013Interest Income (LHS) Non-Interest Income (LHS)Non-Interest Expense (LHS) Income Tax Expense (LHS)Net Profit Growth (Year-on-Year, RHS)

50.0

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Non-Interest IncomeFor End-Periods Indicated

In P Billions (LHS) In Percent (RHS)

(30.0)

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Other (LHS) Fee-based (LHS)Dividend Income (LHS) Foreign Exchange Profit (LHS)Trading (LHS) Non-interest income Growth (Year-on-Year, RHS)

1

1.2

1.4

42.5

43

43.5

44

Figure 12

Philippine Peso Per US DollarFor Periods Indicated In Pesos (LHS) In Percent (RHS)

0

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PHP/USD Rate (LHS) Volatility (RHS)

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In addition, the sudden reversal in the yield on 10-year bond (Figure 13) of advanced economies like the United States (US), Germany, and Japan as well as the Philippines at the latter months of the semester mirrored widespread volatility in global capital markets as investors anticipate early scaling back of US Federal Reserve’s quantitative easing (QE) measures.

Abating domestic interest rates reigned on interest-based revenues

Nevertheless, net interest income continued to hold a sizeable share of total operating income at 58.0 percent (down from 61.9 percent same period in 2012). Across banking groups, interest-based earnings are still the foremost source of income (Figure 14). Net interest income rose modestly by 5.2 percent to P124.3 billion from P118.2 billion in end-June 2012 as the significant decline in interest-related expenses on savings and time deposits muted the modest expansion in interests earned from lending activities. In an environment where there is ample market liquidity8,9, and declining domestic interest rate (Figure 15), interests paid on deposit liabilities and lending activities are anticipated to fall. Hence, net interest margin narrowed by 30 bps to 3.5 percent from 3.8 percent same period last year.

The consequences of abating interest rate have also extended to declining earning asset yield and funding cost which was at 5.0 percent and 1.6 percent at end-June 2013 from 5.5 percent and 2.0 percent in the same period last year, respectively. Consequently, interest spread10 went down to 3.3 percent from 3.6 percent in the same period in 2012.

In terms of banking groups, private domestic universal and commercial banks as well as government banks demonstrated narrower net interest margin and interest spread compared to banks which offers

3.54.04.55.05.56.0

In Percent (%)

Figure 13

10-Year Bond Yield of Selected CountriesFor Periods Indicated

0.00.51.01.52.02.53.03.5

Jan

-12

Feb

-12

Ma

r-1

2

Ap

r-1

2

Ma

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3

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US GERMANY JAPAN PHILIPPINES

Source of data: Bloomberg

___________________________

8Money supply grew by 20.0 percent year-on-year in end-June 2013 to reach P5.7

trillion, faster than the 16.4 percent expansion recorded in the previous month.

9Nevertheless, in the Second Quarter 2013 Inflation Report of the Bangko Sentral ng

Pilipinas (BSP), real lending rate of the Philippines remained the sixth highest among

sample of 10 Asian countries. Reference: http://www.bsp.gov.ph/downloads/

Publications/2013/IR2qtr_2013.pdf, page 27.

10Difference of earning asset yield and funding cost.

6.0

8.0


Ratio of Sources of Revenue to Total AssetsFor the Period Ended 30 June 2013In Percent (%)

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All Banks UKBs TBs RCBs

Net Interest Income Non-Interest Income

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2005 2006 2007 2008 2009 2010 2011 2012 June 2013


Selected Ratios and Domestic Interest RatesFor End-Periods Indicated

Earning Asset Yield Funding Cost Net Interest Margin

In Percent (%)

For the Period Indicated

In Percent (%)

-

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2005 2006 2007 2008 2009 2010 2011 2012 Jan-May 2012

Jan-May 2013

Savings Deposit Rates Bank Average Lending T-bills (91-day)

In Percent (%)

11

Banking System

limited financial services such as thrift banks, and rural and cooperative banks. Figure 16 presents detailed comparative profitability indicators across banking groups.

Banks remained cost-efficient amid efforts to expand income streams

Cost-to-income (CTI) ratio improved to 58.7 percent from last year’s 64.6 percent (Figure 17) amid efforts

of banks to expand income streams by investing more in technology-related infrastructure to improve operations.

Non-interest expenses stood at P131.9 billion for the period 30 June 2013, higher by 9.4 percent from P120.6 billion posted same period last year pick up in customary expenditures on payment for taxes and licenses and compensation and fringe benefits grew by 25.8 percent (up from 4.9 percent) to P15.3 billion and 6.9 percent (down from 9.3 percent) to P45.0 billion, respectively, in the period (Figure 18).

Across banking categories, government banks emerged as the most cost-efficient institution as CTI ratio was recorded at 50.8 percent from last year’s 60.1 percent. Heavy trading gains11 contributed a significant percentage (42.4 percent share) to government banks’ total operating income consequently improving the subgroup’s ratio. On the other hand, cooperative

Figure 16

Philippine Banking System: Profitability Component Indicators

For End-June 2013

All Banks p/ 5.0% 1.6% 3.3% 3.5% 58.7%

Domestic Banks p/ 5.0% 1.7% 3.4% 3.5% 58.9%Private Domestic UBs 4.6% 1.5% 3.1% 3.2% 57.4%Private Domestic KBs 3.2% 1.5% 1.8% 1.9% 59.4%Government Banks 4.7% 1.5% 3.3% 3.3% 50.8%Thrift Banks 7.6% 2.8% 4.8% 5.0% 64.6%

Earning Asset Yield

Funding Cost

Interest Spread

Net Interest Margin

Cost-to-Income Ratio

Thrift Banks 7.6% 2.8% 4.8% 5.0% 64.6%

Rural Banks p/ 14.0% 4.2% 9.7% 10.4% 76.5%

Cooperative Banks p/ 11.8% 6.1% 5.7% 6.4% 154.5%Foreign Bank Branches/ Subsidiaries 4.4% 1.0% 3.4% 3.7% 57.6%

Foreign Bank Branches 5.1% 1.7% 3.4% 3.6% 60.9%Foreign Bank Subsidiaries 6.4% 1.5% 4.9% 5.1% 65.0%

p/ Preliminary

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400.0In P Billions (LHS) In Percent (RHS)2008 Global Financial Crisis


Cost-to-Income RatioFor End-Periods Indicated

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2005 2006 2007 2008 2009 2010 2011 2012 June 2012

June 2013

Operating Income (LHS) Non-Interest Expenses (LHS) Cost-to-Income (RHS)

Philippine Banking System: Cost-to-Income Ratios

2008 2009 2010 2011 r/ 2012 r/ 2012 2013 p/

All Banks p/ 74.0% 65.8% 63.6% 65.0% 63.5% 64.6% 58.7%

Domestic Banks p/ 75.2% 67.6% 63.8% 65.9% 63.8% 64.9% 58.9%Private Domestic UBs 74.2% 65.1% 60.4% 64.3% 61.7% 63.7% 57.4%Private Domestic KBs 93.9% 85.8% 69.5% 76.0% 69.7% 73.4% 59.4%Government Banks 65.8% 58.4% 61.8% 60.6% 58.7% 60.1% 50.8%Thrift Banks 84.5% 80.4% 73.5% 69.1% 69.5% 66.1% 64.6%

Rural Banks p/ 70.2% 72.2% 76.9% 74.0% 75.6% 72.7% 76.5%

Cooperative Banks p/ 71.2% 69.4% 82.2% 87.4% 145.4% 86.8% 154.5%Foreign Bank Branches/Subsidiaries 68.4% 55.8% 62.6% 59.9% 61.5% 62.3% 57.6%

Foreign Bank Branches 65.0% 53.5% 61.5% 59.5% 60.9% 62.1% 56.4%Foreign Bank Subsidiaries 94.6% 71.2% 69.3% 62.9% 64.5% 63.7% 65.0%

r/ Revisedp/ Preliminary

End-December End-June

8.0

10.0

12.0

80.0

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120.0

Figure 18

Philippine Banking SystemNon-Interest Expense StructureFor End-Periods IndicatedIn P Billions (LHS) In Percent (RHS)

-

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2005 2006 2007 2008 2009 2010 2011 2012 Jun-12 Jun-13Compensation & Fringe Benefits (LHS) Taxes and Licenses (LHS)Depreciation & Amortization (LHS) Other Administrative Expenses (LHS)Fees & Commissions Expenses (LHS) Provisions (LHS)Non-Interest Expense Growth (Year-on-Year, RHS)

___________________________

11For instance, Landbank reported that it exceeded its mid-year target for the first

half of 2013 due to sustained revenues from investments and loans particularly,

trading activities. Source: https://www.landbank.com/newsdetails.asp?id=541

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banks remained to be the least cost-efficient as CTI ratio was at 154.5 percent, remarkably worse from 86.8 percent recorded same period last year.

With strong overall profit growth, Philippine banks provided positive returns to shareholders

On account of strong overall profit growth, shareholders received higher returns in their investments in the period. Annualized return on assets (ROA) stood at 2.0 percent from 1.6 percent same period last year. Similarly, annualized return on equity (ROE) inched up to 15.4 percent from 12.7 percent a year ago (Figure 19 and 20). Compared to other ASEAN economies, the Philippines had one of the most profitable banking industry in the region in end-March 2013 (Figure 21).

By subgroup, universal banks led all banks in registering the highest ROA and ROE ratio of 2.1 percent and 17.2 percent, respectively. Commercial banks with an ROA and ROE of 1.4 percent and 8.4 percent provided the lowest returns to shareholders.

Banking System Exhibited Ample Liquidity And Domestically Oriented Funding Mix Banking system exhibited steady asset expansion

The total resources of the banking system as of end-June 2013 stood at P8,613.1 billion, or 16.2 percent higher than last year’s P7,410.1 billion (Figure 22). The build-up in assets was fuelled by growths in all three asset components: cash and due from banks (Figure 23) specifically, placements on special deposit accounts (SDAs), which grew by 259.6 percent (a reversal from last year’s -49.9 percent), and loans12 of 10.5 percent (down from 11.2 percent

Figure 21

ASEAN 5 ROA and ROEAs of End-March 2013

ROA ROEIndonesia 2.6% 20.2%Indonesia 2.6% 20.2%Malaysia 1.4% 15.5%Philippines 2.0% 15.4%Singapore 1.4% 15.5%Average 1.8% 16.6%* Data for Thailand not available.

Source of data: IMF Financial Soundness Indicators

1.5

2.5


Return on Assets (ROA)For End-Periods Indicated

In Percent

All Banks = 2.0%UBs = 2.1%KBs = 1.4%TBs = 1.7%

RBs (end-March 2013) = 1.9%

-0.5

0.5

2005 2006 2007 2008 2009 2010 2011 2012 June 2012 June 2013

ALL BANKS Universal Banks (UBs) Commercial Banks (KBs) Thrift Banks (TBs) Rural Banks (RBs)

9.511.513.515.517.5


Return on Equity (ROE)For End-Periods Indicated

In Percent

All Banks = 15.4%UBs = 17.2%KBs = 8.4%

TBs = 14.1%RBs (end-March 2013)= 10.4%

-0.51.53.55.57.59.5

2005 2006 2007 2008 2009 2010 2011 2012 June 2012 June 2013

ALL BANKS Universal Banks (UBs) Commercial Banks (KBs) Thrift Banks (TBs) Rural Banks (RBs)

0.0

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2005 2006 2007 2008 2009 2010 2011 2012 Jun-12 Jun-13

Philippine Banking System

Asset GrowthFor End-Periods Indicated

Total Assets (LHS) GDP, nominal (LHS)Asset Growth Rate (RHS) Assets/GDP (RHS)

In Percent (RHS)In P Billions (LHS)

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Total Assets and Gross Domestic ProductFor End-Periods Indicated

Total Assets (LHS) GDP, nominal (LHS)Asset Growth Rate (RHS) Assets/GDP (RHS)

In Percent (RHS)In P Billions (LHS)

___________________________

12Total gross loan portfolio

13

Banking System

in the previous year) and portfolio investments of 9.0 percent (up from 0.8 percent same period last year). It is also worth noting that financial assets other than loans particularly, those Available-for-Sale (AFS) grew year-on-year by 33.2 percent (up from last year’s 14.5 percent) in end-June 2013. This asset profile underpins banks’ liquid position as liquid assets – mainly cash and due from banks and financial assets other than loans – accounted for 42.8 percent of total assets (up from 39.4 percent a year ago) at end-June 2013. On the other hand, bank’s total loans outstanding (inclusive of IBL) corresponded to 50.6 percent of the system’s total assets and inclusive of interbank loans, total loan portfolio (TLP) was at 45.6 percent. Portfolio investments (net of amortization) held a share of 21.9 percent at end-June 2013

Resources were mostly funneled to real estate, renting and business activities and financial Intermediation activities

As of end-June 2013, core lending (TLP, net of IBL and RRP with BSP and other banks) expanded by 12.3 percent to P3,927.3 billion from P3,504.8 billion a year ago. The relatively robust growth may be attributed to improved macroeconomic conditions such as low interest rates and school opening in June that fuel loan demand.

Industries engaged in real estate, renting and business activities in end-June 2013 overtook financial intermediation (inclusive of interbank loans and RRP transactions) in terms of share in TLP of the banking system (Figure 24). Real estate, renting and business activities had the largest loan intake at 18.4 percent (up from year ago’s 16.8 percent) while financial intermediation had 16.9 percent (down from 19.0 percent). Credit activity in real estate, renting and business activities is reflected not only in residential

real estate loans (RELs) but also in commercial RELs which expanded to P458.0 billion from year ago’s P302.0 billion. With the robust growth in both residential and commercial real estate loans, total RELs rose to P752.2 billion from year ago’s P546.5 billion. The emerging risk from a financial stability perspective is that high concentration of bank lending to real estate, renting and business activities, rising property prices, and banking crises are intertwined.

The other economic activities with double-digit percent shares were manufacturing at 13.5 percent (down from 13.8 percent) followed by wholesale and retail trade at 12.5 percent (up from 11.8 percent).

Residential real estate loans also made up the largest share of the consumer loan portfolio

The level of consumer loans stood at P680.4 billion, higher than year ago’s P587.0 billion (Figure 25). All components of consumer loans, i.e., auto loans, credit card receivables, residential real estate loans and other consumer loans, posted year-on-year growth. RELs still took the largest share of the consumer loan portfolio at 43.2 percent, followed by auto loans and

6,000.0 7,000.0 8,000.0 9,000.0

10,000.0


Asset MixFor End-Periods Indicated

In P Billion

-1,000.0 2,000.0 3,000.0 4,000.0 5,000.0


CASH AND DUE FROM BANKSFINANCIAL ASSETS, NET (Portfolio Investments)TLP (INCLUSIVE OF IBL AND RRP WITH BSP AND OTHER BANKS) , NET EQUITY INVESTMENTSROPA, NETOTHER ASSETS

P 7,410.1 Billion P 8,613 01Billion

48.8% growth


Loan Portfolio Structure by Economic SectorFor End-Periods Indicated

In Percent

JUNE 2013P4,359.2 Billion

JUNE 2012P3,944.8 Billion

June 2012 June 2013

16.8% 18.4%

19.0% 16.9%

13.8% 13.5%

11.8% 12.5%

8.8% 9.1%

7.0% 7.2%

6.0% 5.9%

5.6% 4.6%

2.3% 2.5%

8.8% 9.5%

Real Estate, Renting & Business ActivitiesFinancial Intermediation (including IBL & RRP)ManufacturingWholesale & Retail TradeLoans to Individuals for Consumption PurposesElectricity, Gas & Water SupplyTransport, Storage and CommunicationsAgriculture, Fishery, Hunting and ForestryPublic Admin & Defense; Compulsory Social SecurityOthers


Composition of Consumer LoansLevels in PhP Billions, Ratios in PercentAs of End-June 2013

Level % Share NPL Ratio Level % Share NPL Ratio

Consumer Loans 680.4 100.0 6.1 587.0 100.0 6.7Auto Loans 176.2 25.9 4.5 150.3 25.6 4.4Credit Card Receivables 150.4 22.1 11.2 136.6 23.3 11.0Residential Real Estate Loans 294.2 43.2 3.1 244.4 41.6 4.0Other Consumer Loans 59.5 8.8 12.5 55.7 9.5 14.1

June 2012June 2013

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credit card receivables at 25.9 percent and 22.1 percent, respectively. Likewise, residential real estate loans posted the highest annual growth rate among the different types of consumer loans at 20.4 percent.

Across banking groups, universal and commercial banks accounted for 66.1 percent of total consumer loans while thrift banks held the remaining 33.9 percent.

Banks continue lending to MSMEs, with rural and cooperative banks’ compliance ratios far above the minimum

Banks continuously provide credit accommodations to micro, small and medium enterprises (MSMEs) under R.A. No. 6977 (as amended by R.A. Nos. 8289 and 9501) as total funds allocated to MSMEs totalled P380.2 billion, lower than year ago’s P396.2 billion. Rural and cooperative banks far exceeded the statutory floor for loans granted to micro and small enterprises (MSEs) at 25.6 percent and 16.4 percent, respectively. On the whole, the banking system was generally compliant with the 8.0 percent required credit allocation for micro, small and medium enterprises (MSMEs), as the overall compliance ratio of 12.1 percent is well above the required minimum.

Banks’ Investments Benefited From Improved Macroeconomic Fundamentals Although its share of total assets has been declining year-on-year as the share of cash and due from banks led by special deposit accounts (SDAs) continued to advance, the Philippine banking system’s investments in financial assets other than loans net of accumulated market gains/losses and allowance for credit losses, grew by 9.2 percent (P184.8 billion) to P1,884.8 billion from year ago’s P1,729.3 billion. In particular, government issued securities booked as Available-for-Sale (AFS) financial assets which made up 64.2 percent (P1,217.2 billion) of portfolio investments spearheaded the increase as it rose by 33.2 percent (P303.1 billion), more than double the 14.5 percent (P116.1 billion) increase it exhibited a year ago.

Interest in government issues was spurred mostly by the country’s credit rating upgrade to investment grade as granted by Fitch and Standard & Poor’s last


Financial Assets Other Than LoansAs of End-June 2013

-200

-100

0

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400

JUNE 2011 (RCBs Mar 2011) JUNE 2012 (RCBs March 2012)

BY BOOKING

Financial Assets Held for Trading (HFT)Financial Assets DFVPLAvailable-for-Sale (AFS) Financial AssetsHeld-to-Maturity (HTM) Financial Assets

0

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end-June 2012 end-June 2013

BY TYPE OF INSTRUMENT

Held-to-Maturity (HTM) Financial AssetsUnquoted Debt Securities Classified as LoansInvestments in Non-Marketable Equity SecuritiesEquity Investment in Subsidiaries/Associates/Joint Ventures, net (Direct Investments)

-50

Debt Equity Derivatives Others

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0

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BY INDUSTRY

Private Domestic UBs Private Domestic KBs Government Banks

Private Domestic Thrift Banks Foreign UBs Foreign KBs

Foreign Subsidiary KBs Foreign-Controlled TBs Others

-50

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BY COUNTERPARTY

National Government LGUs GOCCs BSP Banks Corporations Individuals Non-Residents Others

15

Banking System

23 March 2013 and 02 May 2013, respectively. It was supported further by ample liquidity in the market following interest rate cuts in the SDAs and the generally declining trend in domestic interest rates.

Similarly, equity investments grew during the same period by 18.4 percent (P29.2 billion) driven by the generally bullish outlook of investors as the Philippines displayed strong economic performance, ending the second quarter with a 7.5 percent growth.

By counterparty, residents (government and the private companies) continued to hold the substantial share of portfolio and direct equity investments of up to 85.3 percent from 84.1 percent a year ago. Meanwhile, the remaining 14.7 percent were held by non-residents and multilateral agencies.

By subgroup, growth drivers were domestic universal banks and government banks that comprise the bulk of portfolio and direct equity investment holdings.

Banking system displayed ample liquidity reinforced by resident customer deposits

Liquidity in the banking system was further reinforced by the domestic orientation of the industry’s funding profile as deposit liabilities, which comprised the bulk of total liabilities at 84.7 percent (from 83.0 percent) (Figure 27), was largely funded by residents with a share of 98.9 percent while non-residents comprised the remaining 1.1 percent. This reduces their propensity to tap wholesale funding market and thus, safeguards resources stream from market volatility. The system is also partially insulated against currency exchange rate fluctuations as 81.5 percent (80.8 percent and 0.7 percent by residents and non-residents, respectively) of deposit liabilities held in savings, demand and NOW and time accounts were peso denominated. While 17.1 percent in foreign

currency deposit accounts (FCDA) by residents were split almost evenly between time deposit at 49.4 percent and savings accounts at 46.6 percent. The remaining 0.4 percent in FCDA by non-residents were primarily held in savings (42.6 percent), followed by time (30.1 percent) and demand and NOW (27.3 percent) accounts.

Meanwhile, the other source of funds for banks’ operations - owner’s capital rose by 17.9 percent (up from previous’ periods 12.1 percent) to P1,115.9 billion in end-June 2013 from P946.7 billion of the same period in 2012. Specific funding profile across bank categories is summarized in Figure 28.

Banks remained well capitalized with fresh infusion of capital contributions from shareholders

Capitalization strengthened as of end-June 2013 with the 17.9 percent (P169.2 billion) increase in total capital account from the same period last year due to fresh capital contributions from shareholders to P1,115.9 billion. The bank’s capital position was continuously boosted by the combined effects of increments in capital stock and retained earnings. Capital stock reached P529.3 billion, exhibiting a 27.1 percent (P112.9 billion) hike from same period last year. Meanwhile, retained earnings and undivided profit stood at P436.2 billion, higher by 12.6 percent (72.8 billion) a year ago. Notably, other equity instruments such as Hybrid Tier 1 capital and unsecured subordinated debt declined by 10.4 percent year-on-year in anticipation of higher quality capital requirements under Basel III by 2014. Classified by bank categories, all banking industries reported an increase in capital accounts and retained earnings as of the first half of 2013.

In terms of capital adequacy ratio (CAR), the system in end-June 2013 (preliminary data) stayed above the BSP’s minimum statutory requirement of 10.0 percent and international standard of 8.0 percent. CAR of universal and commercial banks stood at

6,000.0

7,000.0

8,000.0

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10,000.0


Funding MixFor End-Periods Indicated

In P Billion

-

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6,000.0


FINANCIAL LIABILITIES HFT FINANCIAL LIABILITIES DFVPLDEPOSIT LIABILITIES BILLS PAYABLEUNSECURED SUBORDINATED DEBT, NET BONDS PAYABLEREDEEMABLE PREFERRED SHARES OTHER LIABILITIESTOTAL CAPITAL ACCOUNTS

P7,410.1 Billion P8,613.1 Billion

18.3% growth

60.0%

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100.0%


Funding Profile by Bank CategoryAs of End-June 2013

0.0%

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60.0%

TOTAL BANKING SYSTEM DOMESTIC UNIVERSAL AND COMMERCIAL BANKS

FOREIGN BANKS DOMESTIC THRIFT BANKS RURAL AND COOPERATIVE BANKS

DEPOSIT LIABILITIES TOTAL CAPITAL ACCOUNTS BILLS PAYABLE OTHER LIABILITIESNET DUE TO UNSECURED SUBORDINATED DEBT, NET BONDS PAYABLE OTHER LIABILITIES BELOW P1.0 BILLION

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18.0 percent on a solo basis and 19.3 percent on a consolidated basis. Meanwhile, net Tier 1 ratio stood at 16.5 percent and 16.8 percent on solo and consolidated basis, respectively. The hike in CARs were mainly attributed to the hefty net profits and issuances of common stocks in the total qualifying capital as of the first semester of 2013. On the other hand, the Philippines’ CAR on solo basis in end-March 2013 is the second highest among economies in ASEAN (Figure 29).

On banks’ exposure to foreign exchange risks, the adjusted net foreign exchange (FX) position of universal and commercial banks amounted to negative US$101.8 million compared to US$106.1 million as of end June 2012. This transpired as total FX liabilities of the banking system exceeded its total assets arising from higher FX spot sales of US$322.4 million over FX spot purchases. Hence, the ratio of adjusted net FX position to unimpaired capital stood at negative 0.4 percent, which is a reversal from 0.6 percent a year ago.

Further stress test exercise was conducted on solo basis CAR of universal and commercial banks for the period ending March 2013 to determine the impact of a scenario where NPL will increase, interest rates rise, and peso depreciates. Results showed that CAR on solo basis will only be below the BSP’s minimum requirement when NPL is at 18.0 percent, interest rates goes up by 300 basis points, and peso-dollar exchange rate depreciates by 30.0 percent.

Asset quality was maintained amid rising total loan portfolio

The asset quality of the banking system was maintained amid the growth in lending. Gross NPLs remained low at 3.3 percent of its total loan portfolio (TLP), easing from 3.6 percent a year ago. Net NPLs, on the other hand, made up only 0.8 percent of TLP. Gross NPLs represent the actual level of NPLs while net NPLs are gross NPLs less specific allowance for credit losses on TLP.

The expansion in total loans more than offset the increase in gross NPLs to P146.0 billion from year ago’s P140.4 billion (Figure 30). While universal and commercial banks’ NPLs declined by P1.2 billion to P100.9 billion from P102.1 billion a year ago, there were increments in gross NPLs of thrift, rural and cooperative banks amounting to P3.5 billion, P1.3 billion and P2.0 billion, respectively.

Since end-June 2011, the gross NPL ratio of the banking system has been maintained below four percent while the net NPL ratio has been below one percent. The low NPL ratios, both on a gross or net basis, indicate the strength of the credit risk management standard of banks. Although vigilant monitoring of loan and asset quality is necessary considering these ratios were comparatively inferior against ASEAN-5.

Aside from keeping the gross NPL ratio low, banks continue to pro-actively set aside reserves for potential credit losses, as loan loss reserves went up to P161.8 billion from year ago’s P153.2 billion. The NPL coverage ratio thus strengthened to 110.8 percent from year ago’s 109.1 percent. With the NPL coverage ratio remaining above one hundred percent since end-June 2011, the banking system’s credit risk remains well-contained given that banks have effectively set aside a greater amount of funds than their outstanding NPLs.

Real and other properties acquired (ROPA) of P129.2 billion declined from year ago’s P138.3 billion. With

Figure 29

ASEAN 5 Capital Adequacy RatioAs of End-March 2013

CAR Net Tier 1 Indonesia 18.9% 17.3%Malaysia2/ 14.7% 13.4%Malaysia 14.7% 13.4%

Philippines1/ 17.8% 15.9%

Singapore2/ 16.9% 14.2%

Thailand2/ 15.9% 11.6%Average 16.8% 14.2%1/ Solo basis.

2/ Data for end-June 2013 not available.

Source of data: IMF Financial Soundness Indicators and Bloomberg

Figure 30

GROSS NPLs and NPL COVERAGE RATIO NPAs and NPA COVERAGE RATIO DISTRESSED ASSETS RATIO

Philippine Banking SystemFor End-Periods Indicated

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In PercentIn P Billion

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Gross NPLs LLRs

Gross NPL Ratio NPL Coverage Ratio

NPAs NPA Reserves

NPA Ratio NPA Coverage RatioNPAs RLs, Performing Distressed Assets Ratio

17

Banking System

the increase in gross assets, the ROPA-to-gross assets ratio went down to 1.5 percent from year ago’s 1.8 percent ratio.

With the reduction in both NPL and ROPA levels, asset quality got better as non-performing assets (NPAs) declined to P275.2 billion from year ago’s P278.7 billion. This resulted to an improvement in the NPA ratio to 3.1 percent from year ago’s 3.7 percent. Furthermore, with the increase in NPA reserves to P192.3 billion from P184.3 billion, the NPA coverage ratio widened to 69.9 percent from year ago’s 66.1 percent.

The distressed assets ratio, as a broader measure of asset quality, likewise reflected an improvement in the banking system’s asset quality, with the ratio of 6.5 percent, lower than year ago’s 7.3 percent ratio (Figure 30). This resulted from a contraction in the level of distressed assets to P293.2 billion from year ago’s P 300.0 billion.

Comparative loan and asset quality by industry are summarized in Figure 31.

Selected Off-Balance Sheet Activities Of Banks Slowed Down

Lower derivatives transactions pulled down off-balance sheet activities of banks

The banking system’s selected contingent13 accounts in end-June 2013, which represent off-balance sheet activities, stood at P6,830.2 billion and is 10.1 percent lower than year ago’s level of P7,600.6 billion (Figure 32). This is equivalent to 79.3 percent of the total

assets of the system. The contraction was driven mainly by the decline in derivatives transactions which similarly reported a year-on-year contraction of 12.0 percent.

Selected off balance sheet assets of banks consisted of derivatives instruments (44.4 percent), trust department accounts14 (43.5 percent), commitments (8.9 percent), bank guarantees (2.1 percent) and trade related accounts (1.0 percent).

Weak global demand resulted in negative outturn in trade-related contingent accounts

Total trade-related contingent accounts stood at P69.2 billion, 20.1 percent lower than year ago’s level of P86.6 billion on account of lingering weak global demand. For the first six months of 2013, trade-in goods was at a deficit amounting to US$4.0 billion due to level fluctuations of both merchandise exports and imports (Figure 33). Aggregate merchandise exports for the first six months of 2013 showed a decrease of 4.4 percent from $26.8 billion in 2012 to $25.6 billion in 2013. Similarly, aggregate merchandise imports for the first six months of 2013 amounting to $29.6 billion showed a 3.8 percent decline compared with $30.8 billion in the same six months of last year.

The bulk of the total trade-related contingent accounts of the banking system was accounted for by foreign commercial letters of credit (LC) outstanding at 76.4 percent or P52.9 billion from 72.2 percent or P62.5 billion last year. These were foreign LCs

Figure 31Philippine Banking SystemComparative NPL, NPA & Coverage RatiosAs of End-June 2013In Percent

NPL NPA

All Banks p/ 3.35% 0.80% 3.13% 110.84% 69.88%

Universal and Commercial Banks 2.68% 0.39% 2.58% 130.11% 77.98%

Thrift Banks 5.94% 2.63% 6.29% 72.28% 50.28%

Rural Banks p/ 11.83% 5.50% 12.04% 61.54% 40.67%

Cooperative Banks p/ 28.46% 13.67% 23.58% 55.63% 49.46%

p/ Preliminary

Gross NPL Ratio

NPA RatioCoverage RatiosNet NPL

Ratio

___________________________

13Excludes other contingent accounts14Discussed in a separate section of the report. Cf:Trust Operations

Figure 32

Philippine Banking System: Comparative AssetsFor End-Periods Indicated, In Billion Pesos

2013 2012 YOY Change (%)

On Balance Sheet 8,613.1 7,410.1 16.2Selected Off Balance Sheet* 6,830.2 7,600.6 -10.1

* Includes trust assets of banks but discussed separately in a stand-alone section.

End-June

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of universal and commercial banks which held 98.3 percent of the banking system’s total foreign LCs. The rest, in descending order, went to shipside bonds and airway bills at 12.6 percent or P8.7 billion, domestic commercial LCs at 7.1 percent or 4.9 billion and export LCs confirmed at 4.0 percent or P2.8 billion.

Market volatilities in global and domestic markets led to increased demand for risk protection

The inherent risks in many business transactions as well as the lingering uncertainties brought by the recent economic crisis caused the demand for risk protection instruments such as bank guarantees to rise. As of end-June 2013, the banking system’s guarantees posted a double-digit growth of 18.3 percent to P145.0 billion from last year’s P122.6 billion. Bank guarantees are either stand-by LCs or outstanding guarantees issued. LCs made up 88.9 percent or P128.9 billion of total bank guarantees. The balance was accounted for by outstanding guarantees issued at 11.1 percent or P16.1 billion. Most of bank guarantees were accounted for by universal and commercial banks which continued to hold the lion’s share of bank guarantees at 99.5 percent or P144.3 billion.

Credit card lines represent a large portion of total bank commitments

Total commitments declined year-on-year by 36.9 percent to P608.0 billion from P962.9 billion a year ago and were mostly issued by universal and

commercial banks. The increased credit extended to households for family and other personal expenditures which expanded by 3.5 percent to P421.0 billion from P406.8 billion last year failed to make up for the huge drop in accounts under the item “others”. Credit card lines accounted for 69.2 percent of total commitments at P421.0 billion from 42.2 percent a year ago.

Notional value of derivatives continue to drop on the back of modest treasury-related operations of banks

Total notional value of derivatives transactions contracted by 12.0 percent to P3,034.5 billion from P3,448.3 billion last year on the back of tempered treasury-related operations of banks and the general strengthening (for January to June 2013, peso-dollar exchange rate appreciated by 2.9 percent to P41.5/US$) of the peso against the US dollar which reduced the need for hedging instruments such as foreign exchange forwards. On trend, the more sophisticated and bigger universal and commercial banks captured the lion’s share of the local derivatives market.

Foreign exchange contracts still spearheaded the largest share of the local derivatives market at 74.3 percent or P2,255.9 billion. On an annual basis, foreign exchange contracts declined by 17.0 percent on improved perception of the peso against the US dollar. Other derivatives in the Top 3 were interest rate contracts at 25.2 percent or P763.3 billion and credit derivatives at 0.5 percent or P15.2 billion.

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1Ma

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2De

c-12

Jan-13

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3Ma

r-13

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3Ma

y-13

Jun-13

Figure 33

Merchandise Exports and Imports, and Balance of TradeFor Periods Indicated

In US$ Millions (LHS) In Percent (RHS)

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Balance of Trade (US$ million, lhs)Merchandise Exports (year-on-year growth, rhs)Merchandise Imports (year-on-year growth, rhs)

Source of Data: National Statistics Office (NSO)

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