Banks supervision needs to keep up with new normal, says central bank

THE BANKING SYSTEM remains resilient amid the pandemic, but the Bangko Sentral ng Pilipinas (BSP) said there may be a need to reassess current banking regulations to adapt to the new normal.

The BSP’s report on the Philippine financial system for the second semester of 2020 showed that banks were able to weather the crisis so far, as evidenced by their net profits and capital.

“The Philippine financial system is projected to withstand the legacy risks and challenges of the COVID-19 (coronavirus disease 2019) pandemic by calibrated programs to ensure a sustainable and resilient economic system with an efficient and innovative financial system,” the central bank said.

“It also implies that consequential risks from lending should be monitored, including emerging risks from inflation expectations and potential second-round effects from higher prices and increase of nonperforming accounts that could exert more pressure on the banking system,” it added.

While banks remain well-guarded and amply capitalized, the central bank warned the industry will continue to face a pile up of nonperforming loans (NPL) but “will remain within manageable levels.”

BSP Deputy Governor Chuchi G. Fonacier has said they expect the NPL ratio to be a little above 5% by end-2021. Republic Act 11523 or Financial Institutions Strategic Transfer Law is expected to bring down the NPL ratio by about 0.63 to 0.71 percentage point as it will allow banks to clean their balance sheets by selling their nonperforming assets to FIST corporations.

“The FIST Act is expected to assist the financial system perform its role of efficiently mobilizing savings and investments for the country’s economic recovery and sustained growth and development,” the BSP said.

The BSP noted the credit growth slump was “manageable” and “expected” as the country continues to struggle with the crisis.

“The decelerated credit growth is expected as the pandemic-induced recession in the real sector caught up and weighed on the financial sector in 2020,” it added.

This credit slump was seen despite record low interest rates. The BSP last slashed its rate by 200 basis points last year to support the economy, bringing the overnight reverse repurchase, lending, and deposit rates to record lows of 2%, 2.5%, and 1.5%, respectively.

Based on the BSP report, overall mean weighted average interest rates among big big banks declined to 5.5% as of end-December from 8.2% in March 2020 and the 7% as of end-June last year. The median also dropped to 4.8% as of end-December last year against the 5.8% as of end March 2020 and the 5.4% as of end-June 2020.

“Unemployment, weak cash flows, temporary shutdown of businesses and economic uncertainty have dampened demand for loans and have even led creditors to tighten lending standards creating downside pull for credit growth,” the BSP said.

Preliminary data from the central bank showed outstanding loans by big banks declined for the third straight month in February by 2.7%. A BSP survey showed banks expect to further tighten credit standards in the second quarter.

The BSP noted banks’ net profits last year, albeit lower, was a testament to the industry’s resilience.

“Lower net profit for the year 2020 was primarily due to the increase in banks’ provision for credit losses on loans and other financial assets. Nonetheless, the positive bottom line mainly resulted from net interest income earned from lending activities,” it said.

The banking industry’s net income stood at P155.218 billion in 2020, dropping by nearly a third (32.7%) from the P230.67 billion in 2019.

“Banks are expected to continue to manage risks prudently amid challenges to improve margins. They also need to comprehensively assess and monitor the quality of the loan to ensure that escalating asset quality issues are promptly addressed and allowance for credit losses are adequately recognized,” the central bank said.

The BSP said the pandemic should serve as a catalyst to reassess the industry and the regulations currently in place.

“Moving forward, there is also merit in better understanding how the pandemic is shaping the future banking landscape under the new economy as it will definitely define the emerging regulatory architecture and BSP’s supervisory approach,” the BSP said. “On the whole, intense supervisory engagement with banks should supplement the close monitoring and surveillance activities.” — L.W.T.Noble

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