Economic development enabling expansion of lending in the Philippines

The banking sector is in the midst of a strong growth phase as economic development and use of banking services has been extended to traditionally under-banked areas in the Philippines. Tight fiscal policy has led to lower inflation and growing willingness to hold savings in bank deposits, while the number of people with enough income to use banks is rapidly rising. The resulting abundance of liquidity is pushing banks to aggressively expand lending, resulting in high sector growth rates.

Ahead Of Schedule

The central bank, Bangko Sentral ng Pilipinas (BSP), is taking advantage of the favourable environment to direct some of the excess liquidity into strengthening banks’ reserves of capital. The Basel III agreement on minimum bank capital is being implemented well ahead of the internationally agreed schedule of 2019. The BSP began monitoring compliance with Basel III standards in January 2014, and sanctions for non-compliance are set to kick in from January 2017.

The tightening of capital standards was partly aimed at spurring consolidation ahead of planned integration of the ASEAN bloc’s banking market in 2020, when member countries have agreed they will grant full access to banks from all ASEAN countries. Although catching up, the largest Philippine banks are much smaller than those from Singapore, Malaysia, Thailand and Indonesia, partly because the Philippines’ banking market is fragmented among a large number of lenders. The rules on additional capital requirements for domestic systemically important banks will be implemented in phases between 2017 and 2019.

The government was aiming to prepare banks for international competition when they agreed in 2014 to lift most restrictions on foreign investment in the sector. So far, however, the pace of consolidation and foreign investment has been modest, with consolidation seen mainly among small rural banks, while new foreign investment is going mainly into opening small branch operations that serve large corporate clients from the parent bank’s home country. One reason foreign investment has not taken off may be that Philippine owners are as bullish as ever about their banks’ growth prospects, even though share prices have recently fallen as global markets have become more pessimistic about emerging markets. Thus most owners preferred to meet Basel III requirements without selling down or diluting their equity stakes. The constitutional restriction on foreign ownership of land is also an obstacle. Of the few mid-sized banks that have held talks with potential buyers in recent years, only two have made a deal.


As with the overall economy, the banking sector is enjoying a period of rapid growth after falling behind other major countries in the region. Until the 1990s the Philippines was a much poorer and less developed economy with a small banking sector. Annual consumer price inflation spiked as high as 50.8% in 1984, ravaging trust in the peso and bank deposits. Fiscal and monetary policy improved during the 1990s largely thanks to international investment in emerging markets. When the regional financial boom culminated in the Asian financial crisis of 1997-98, the Philippines was relatively unaffected. Its banks were still small and the domestic crisis of the 1980s had taught the BSP to keep a cautious eye on exposures. As inflation gradually moderated and became more predictable, trust in deposits rose and lending became profitable. That process creates a positive feedback loop for countries exiting chronic high inflation, as the latent demand to hold bank deposits absorbed expanding money supply, allowing rapid credit expansion and moderating inflation.

The number of deposit accounts at commercial banks per 1000 adults grew from 356 in 2004 to 538 in 2014, according to the IMF. The latter number is equivalent to about 15% of adults holding bank deposits, as the figures include company accounts and many people hold multiple personal accounts. By comparison, Indonesia had 904 deposit accounts per 1000 adults in 2014, Thailand had 1523 and Malaysia had 2448.

Deposit growth has moderated since the 1990s, but spiked recently in 2013 as the BSP ended an unorthodox policy of allowing non-banks to access central bank deposit rates. Until then, banks were allowed to offer pass-through accounts linked to special deposit accounts (SDA), which are interest-paying BSP cash deposit accounts offered to banks. The pass-through accounts had been used to absorb liquidity created by the BSP’s interventions in foreign exchange markets, which preserved competitiveness by limiting appreciation of the peso. The BSP was also building up its stockpile of foreign exchange reserves, which increased by $66bn in the 2006-12 period.

After pass-through accounts were banned, funds shifted to commercial bank deposits, which leapt from 42.2% of GDP at the end of 2012 to 52.4% of GDP at the end of 2013. The sudden surplus of liquidity happened to coincide with a phase in which the US gradually tightened its monetary policy and a strengthening trend of the dollar. Thus a group of important shifts happened together in 2013: banks became more flush with liquidity; the BSP’s long-standing resistance of continuous upward pressure on the peso’s foreign exchange value was replaced by a managed float within a mostly predictable range against the dollar; and the BSP’s foreign exchange reserves stopped growing.


Sector growth is moderating after surging in 2013-14 in the wake of the spike of liquidity moving out of SDA pass-through accounts. Deposit growth in 2015 came to 8.3%, according to the BSP, down from 12% in 2014 and 32% in 2013. To absorb some liquidity, the BSP raised its policy rates by 50 basis points in June-September 2014. These have remained unchanged since and are not expected to move soon, at 2.5% paid for SDA deposits and 4% charged for overnight borrowing.

Due to the strong dollar, deposit growth of foreign currency outpaced deposit growth in pesos in 2014, although this reversed in 2015. Foreign exchange deposits (in peso terms) increased 7.51% in 2015, down from a 23.6% rise in 2014. Over the same period the growth rate of peso deposits dropped from 10% to 8.5%. Banks are able to fund their dollar lending mainly from dollar deposits, which are in turn funded primarily from remittances. Lending growth peaked in 2014 at 19.1% and slowed to 12% for 2015. As of December 2015, outstanding bank loans came to P6.18trn ($137.2bn) or 47% of 2015 GDP. By comparison, bank loans came to 40.1% of GDP in Indonesia in 2014, 124.7% of GDP in Malaysia and 158.9% of GDP in Thailand, according to the World Bank.

One of the most positive recent developments for banks is the acceleration of public-private partnership (PPP) contracts in the infrastructure sector, which give large banks an opportunity to invest in relatively high-yielding, long-term loans. In addition, banks are also aggressively expanding into retail lending, which is much less developed than in peer countries (see analysis).

Banks continued to hold P828.32bn ($18.4bn) of liquidity in SDA accounts, an amount that represents excess liquidity in the banking system and which is seen as a symptom of under-investment.

Profitability stabilised as the growth rate has moderated. Average sector return on equity was 9.45% in 2015, down slightly from 9.54% in 2014. This was in part due to a compression of the average net interest margin, from 3.5% in 2014 to 3.28% in 2015, due to the recent hike in interest rates.

The BSP’s foreign reserves have stabilised, hovering around $80bn since early in 2014, after dropping during 2013 from more than $85bn as liquidity was released from SDA accounts and the BSP supported the peso against the strong dollar. The peso dropped to a range of 45-47 to the dollar in August-October 2015, reacting to fresh turbulence over events in China, after having traded at 43-45 since mid-2013.

However, since the peso mostly tracks the US dollar, it has risen by around 50% against the Japanese yen and the Indonesian rupiah since 2012. It is also up by more than 10% since 2013 against the Singapore dollar and the Thai baht.

Luis Reyes, head of investor relations at BDO Unibank, told OBG he thought the recent global retreat from emerging markets would only temporarily affect the Philippines. “There is still a lot of money in the global financial system from quantitative easing that is looking for a home,” he said. “For now, the trend is to find a safe haven, but I think over time even if some other emerging markets do not do well we will continue to grow quickly, and eventually investment will flow back in.” He said the peso move would have minimal impact on bank results, as banks are not allowed to hold large open foreign exchange exposures.

A number of banks have raised capital in 2015 to meet the Basel III standards, with most choosing to issue capital-like debt instruments referred to as “Basel bonds” or “Tier 2 notes” because they are specifically designed to meet the Basel agreement’s definition of Tier 2 capital. Some banks needed to boost capital, while others only need to replace outstanding Tier 2 notes that were designed to meet Basel II standards. The industry also saw a wave of stock rights offerings in 2014 and 2015 to boost Tier 1 capital. Banks were also active issuers of long-term negotiable certificates of deposits in recent years as they tried to lock in long-term funding at favourable rates.

The Big Three

The banking sector is dominated by three large domestically owned private banks: BDO, Metropolitan Bank and Trust Company (Metrobank), and Bank of the Philippine Islands (BPI). Between them and their subsidiary banks, the three top banks controlled 43% of banking sector assets as of June 2015, according to the BSP. The big three are the only banks that are active in all parts of the country and all segments of the banking business, from mass-market retail banking to capital markets and large-scale corporate finance deals. All three are part of large family-owned conglomerates that rank among the Philippines’ biggest business groups.

All figures for banking groups’ assets in this report are aggregated, for comparability to the BSP’s published total of sector assets, and do not include any rural bank subsidiaries. As such they differ slightly from the figures for consolidated assets published by the banking groups.

The largest, BDO, had P1.87trn ($41.5bn), or 16.7% of sector assets, as of June 2015, including its subsidiaries BDO Private Bank and BDO Elite Savings Bank. BDO attained its lead with support from its parent SM Group, a mainly retail and real estate conglomerate controlled by the country’s richest person, Henry Sy. The SM Group’s main direct parent, SM Investments Corporation, is the Philippines’ largest firm by market capitalisation, according to the Philippine Stock Exchange (PSE). BDO ranks eighth among listed Philippine companies and first among banks, with a market capitalisation of P362bn ($8bn) as of late November 2015.

BDO rose to the top through a series of mergers and acquisitions in 2001-07 and has maintained its lead with a combination of organic growth and small acquisitions. The bank also enjoys access to prime branch and ATM locations in SM Group’s nationwide chain of malls. As of October 2015, BDO had 1010 branches and more than 3000 ATMs, as well as leasing, insurance, trust and investment bank subsidiaries. BDO’s pursuit of acquisitions sets it apart from its two main rivals, which prefer to grow by opening new branches.

In 2014 the bank acquired and integrated two savings banks, including a 10-branch savings bank from Citibank. Recently BDO has been using acquisitions to accelerate its push into more remote and less banked areas. In July 2015 it completed the acquisition of One Network Bank, a rural bank with 98 branches in Mindanao and Panay.


Metrobank is the second-largest banking group by assets, with P1.5trn ($33.5bn) or 13.5% of sector assets as of June 2015, including its subsidiary Philippine Savings Bank (PSB ank). By market capitalisation it ranks third among banks, with P260.8bn ($5.8bn) as of December 1, 2015. Metro-bank is controlled by George Ty, partly through his holding company GT Capital, which is also listed on the PSE and is active in property development, power generation, automobiles and insurance.

Metrobank owns the investment bank First Metro Investment Corporation, which controls a brokerage and asset management company, and is a partner with GT Capital in a life insurance joint venture with France’s Axa. Metrobank has joint ventures in credit cards and leasing with Australia’s ANZ and Japan’s Orix, respectively, while PSB ank has a motorcycle finance joint venture with Japan’s Sumitomo. Metrobank owns a six-country remittance network and a seven-branch bank in China.


BPI is third by assets, with P1.43trn ($31.7bn), or 12.8% of sector assets as of June 2015 including its subsidiaries BPI Family Savings Bank, BPI Direct Savings Bank and BPI Globe BankO, also a savings bank. However, by market capitalisation BPI ranks second, with P330bn ($7.3bn) as of December 1, 2015. BPI is controlled by the Ayala Group, owned by Zobel de Ayala, one of the largest local business groups and the biggest player in real estate. BPI also owns a securities broker, a leasing company, a foreign exchange trading company and three investment companies, and has joint ventures in non-life and life insurance with Japan’s Mitsui Sumitomo and Hong Kong’s American International Assurance, respectively.

Mid-Sized Banks

The seven mid-sized banks that round out the top 10 include two state-owned banks and another five domestically owned private ones. All top 10 banks are chartered as “universal banks,” which allows them to act as both commercial banks and holding companies. All of the private banks in the top 10 have minority stakes listed on the PSE, as do three smaller private banks. In 2014 the government’s Governance Commission for Government-Owned or Controlled Corporations proposed a merger of the two state banks, arguing that it was duplicative and inefficient to have two state-run commercial banks competing with each other. But the administration did not push the proposal strongly, and a bill introduced in 2015 to merge the banks made no headway.

The central bank has sought to encourage mergers among mid-sized private banks, believing that fewer larger banks would be better able to compete regionally as ASEAN integration progresses. However, most bank owners are reluctant to make themselves more dependent on banks owned by their rivals. Also, getting approval of mergers is a slow process, and a BSP decision in 2014 lifting restrictions on branching in well-covered areas removed one of the main incentives for mergers.

State-owned Land Bank of the Philippines ( Land-bank) was the fourth-largest bank by assets as of June 2015, with P1.1trn ($24.2bn) or 9.8% of sector assets. It is also the fastest-growing bank in the top 10, thanks mainly to the economic catch-up under way in the rural regions where it has traditionally specialised. Landbank was originally a policy bank dedicated to serving farmers and fishers, but it has leveraged its large nationwide branch network to transform into a major commercial retail bank.

Philippine National Bank (PNB) is in fifth position. PNB is owned by the LT Group, a conglomerate run by the family of Lucio Tan. It had P620bn ($13.8bn) or 5.5% of sector assets as of June 2015, including its subsidiary PNB Savings Bank.

State-owned Development Bank of the Philippines (DBP) was the sixth-largest bank as of June 2015, with P463bn ($10.3bn) or 4.2% of sector assets. DBP remains largely a vehicle of state economic development planning, but has also been gradually transforming into a commercially oriented retail bank. DBP’s assets include a small subsidiary, Al Amanah Islamic Investment Bank, the country’s only Islamic bank. Political support for maintaining state banks is tied to some extent on issues of demographics. The two government banks are the only large banks controlled by ethnic Filipinos, as six private banks in the top 10 are controlled by families of Chinese origin and the other two are owned by families of European origin.

Rizal Commercial Banking Corporation (RCBC) was seventh with P478bn ($10.6bn) and 4.3% of sector assets in June 2015, including its subsidiary RCBC Savings Bank. In April 2015 RCBC became the only major bank with a large stake held by a foreign strategic investor after Cathay Financial Holdings, Taiwan’s largest financial group, completed the acquisition of a 20% stake, paying P17.9bn ($400m). The payment included a P7.95bn ($177m) infusion of capital. The deal put RCBC into an alliance with Cathay United Bank, the group’s banking unit, which received approval in April 2015 to open a branch bank in the country. RCBC’s largest shareholder, no longer with a majority, is the Yuchengco Group, a domestic conglomerate owned by the family of Alfonso Yuchengco, also involved in insurance, property, education and health care.

Security Bank stands at number nine, with P442bn ($9.8bn) or 4% of sector assets, and Union Bank rounds out the top 10, with P364bn ($8.1bn) or 3.3% of sector assets. Those include their respective subsidiaries Security Bank Savings and City Savings Bank. Security Bank, controlled by the family of Frederick Dy and unnamed partners, who also has interests in real estate, is the only private bank in the top 10 not affiliated with a major conglomerate. Union Bank is controlled by the Aboitiz Group, owned by the Cebu-based Aboitiz family, which is active in electric power and property.

In February 2016 President Benigno Aquino signed an executive order for the merger of DBP and Landbank, creating the nation’s second-biggest lender by assets. The move is intended to create a more efficient and financially viable institution that would continue supporting the government’s economic growth agenda, Aquino said.

Another eight domestically owned universal and commercial banks controlled a combined P993bn ($22bn) or 8.9% of sector assets as of June 2015. Taken together, the 16 private, domestically owned universal and commercial banks controlled nearly 89% of sector assets. Commercial banks are similar to universal banks but are not allowed to be holding companies or engage in investment banking.

Foreign Banks

Foreign banks have a small but important presence, which has been held back by restrictions on foreign ownership of land and the difficulty of competing with domestic conglomerates. The first wave of liberalisation was in 1995, when 10 licences were granted. The next wave was in 2014. Until then foreign banks were not allowed to acquire more than 60% of the shares of Philippine banks, and the other route into the market, establishing a branch bank, was also blocked as the quota on the total number of licences the BSP was allowed to issue to foreign bank branches was full.

A law adopted in July 2014 eliminated the quota on foreign bank branch licences and allowed foreign banks to acquire up to 100% of Philippine banks. Between July and October 2015 five foreign banks received approval from the BSP to enter the market (see analysis). In all, the 17 foreign banks operating as of June 2015, which does not include the five new entrants, had P995bn ($22.1bn) or 8.9% of sector assets, according to the BSP figures.

In January 2016 Security Bank announced that it had accepted The Bank of Tokyo-Mitsubishi UFJ’s offer of a strategic partnership agreement. The transaction is set to be completed in the first half of the year, subject to regulatory approval. It will be the largest equity investment in a Philippine financial institution by a foreign investor, with the Japanese bank becoming the second-largest shareholder in Security Bank, with 20% of voting stock.

Small Banks Consolidating

The BSP’s drive to shore up capital is having its biggest effect on the hundreds of smaller domestically owned banks, many of which are being forced to merge, sell or close by the higher capital standards and moves by large banks into their traditional niche markets. Where banks do not meet the new capital standard, the BSP is actively arranging mergers or encouraging larger banks to buy them out. Excluding the 15 savings banks owned by major domestic banks or foreign banks, there were another 53 savings banks as of June 2015 with a combined P225bn ($5bn) or 2% of sector assets. On top of those were a further 503 rural banks and 29 cooperative banks with a total of P192bn ($4.3bn) or just 2% of total sector assets as of June 2015. The recent consolidation continues a long-term trend: the total of 532 rural and cooperative banks has fallen steadily from 703 in 2008 and 809 in 1999.

Reggie L Ocampo, president of First Macro Bank, told OBG there are other regulations requiring additional capital for riskier or less traditional kinds of loans, which are pushing some clients of small banks who are less well documented towards informal lenders. At the same time, bigger banks are moving into the lower-income neighbourhoods where smaller banks are typically present.

Thrift Banks

Savings banks, formally called thrift banks, may not engage in asset management, securities brokerage or retail foreign exchange. Rural and “cooperative” banks are small neighbourhood banks that are restricted to local currency deposits and lending to individuals and businesses. The “rural” name can be misleading as urbanisation has turned many banks with rural bank charters into de facto city neighbourhood banks.

Branch numbers give another indication of the relative scales of the different types of banks. The 15 domestically owned universal banks had a combined 5422 locations as of June 2015, according to the BSP. The five domestically owned commercial banks operated a total of 378 locations. The 67 domestically owned savings banks had a combined 2006 locations, or an average of 30 each, while the 532 rural and cooperative banks had a combined 2569 locations, or an average of about five each. Among foreign-owned banks, the four chartered as subsidiaries had 110 locations or an average of 28 each, and the 14 chartered as branches had a combined 38 locations, an average of three each.


Philippine banks have plenty of space to continue their run of catch-up growth, given the still-sizeable unbanked population, continued economic development and rising incomes. Mergers will be a key theme in coming years. “Consistent economic growth and liquidity allows breathing room for domestic mid-sized banks; however, whenever growth slows down, the stricter regulations will weigh in more heavily and competition will intensify, leading to consolidation,” Herminio Famatigan Jr, president and CEO of Maybank Philippines, told OBG. Another key issue ahead is whether the constitutional restriction on foreign land ownership will be lifted. If so, the banking sector would be likely to see larger-scale foreign investment. ASEAN integration remains far enough off that real-world implementation is hard to predict. Philippine banks are too much smaller than their regional peers to catch up by the 2020 schedule for integration, so they are likely to remain domestically focused and be to some extent defensive. However, Philippine banks are accustomed to greater independence from their government than banks in some other major ASEAN countries, which should be good preparation to meet rising competition in retail markets at home and elsewhere in the bloc.

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The Report: The Philippines 2016

Banking chapter from The Report: The Philippines 2016

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