Healthy Banking Sector is Fueling PHL Growth

We have a sound banking system that continues to fuel economic growth despite talks of contagion from the collapse of several banks in the United States and Europe.

Our economy grew at a robust pace of 7.6 percent in 2022, and is expected to sustain the momentum going into 2023 as business activities pick up as a result of greater mobility.

The Bangko Sentral ng Pilipinas’ benchmark interest rates are rising, but the banking industry’s deposits and loans continued to post positive performance. Total assets of banks rose 8.9 percent to P22.2 trillion of as end-November 2022, with total deposits expanding 7.4 percent to P17 trillion.

Latest available data also showed bank loans grew 10.1 percent to P12.2 trillion as of end-November 2022, representing 16straight months of expansion.

The healthy state of our banking system, thus, is ensuring economic growth. Increasing loans are the telltale signs of economic expansion. The outstanding loans of universal and commercial banks are still growing by more than 10 percent as of January 2023, reflecting the still strong demand from businesses and households. Non-performing loan ratio was manageable at 3.3 percent as of end-January 2023, down from 4.1 percent in the same month last year.

Of course, rising interest rates could temper the growth of core banking services, and that is arguably the intention of the BSP as it tries to cool down demand to ease the inflation rate. The BSP is keeping a steady differential between its benchmark rate and the US Federal Reserves’ interest rate to minimize the fluctuation in foreign exchange. The value of the peso against the dollar is a significant factor in keeping inflation rate down in the Philippines, which is a net importer of commodities.

Although there are talks of possible recession in several countries that could affect their banking systems, Philippine lenders are in a better position to withstand such aftermath. Underpinning the strength of our local banks is the improving economy, which one can glean from statistics on electricity, manufacturing and automotive sales.

Manila Electric Co., which serves 7.6 million customers in Metro Manila and its surrounding provinces, reported a 6-percent increase in energy sales volume to 48,916 gigawatt hours in 2022, which exceeded the pre-pandemic levels. Commercial power sales rose by an impressive 14 percent last year.

Factory output, based on the volume of the production index compiled by the Philippine Statistics Authority, expanded 10.6 percent year-on-year in January 2023.

Automotive assemblers and importers reported a 27.2-percent increase in sales in February this year to 30,905 vehicles from a year earlier. It followed the 42-percent rise in January 2023 and 33-percent increase in 2022. Total new vehicle sales last year reached 352,596 units, up from 268,488 in 2021. Banks finance a large portion of vehicle acquisitions in the Philippines.

These data only show that domestic demand continues to grow, which feeds the expansion of the banking sector.  Hong Kong and Shanghai Banking Corp., a major international bank, acknowledged that “the banking system in the Philippines remains sound and liquid for now, despite the aggressive pace of rate hikes over the past 10 months.”

HSBC sees the Philippine financial system as liquid as the amount of bank funds parked with the BSP remains higher than pre-pandemic levels. This is an indicator of excess liquidity in the system.

I am confident that our economic and monetary officials are highly equipped to handle the challenges emanating from the external front.

The BSP has assured the citizens that the Philippine banking system could withstand the possible shocks from the collapse of Silicon Valley Bank and Signature Bank in the United States. In Europe, the UBS Group took over Credit Suisse for $3.25 billion as part of an “emergency ordinance” to prevent financial market instability in the region.

BSP Governor Felipe Medalla has reassured the public that unlike foreign banks, Philippine lenders mostly hold loans that are less susceptible to changes in fair value. Philippine banks have lower market risk exposure and maintain a diversified lending base, with manageable loan quality.

Bank executives have attested to the strength of the local financial institutions. Developments in the US financial system, says the Bankers Association of the Philippines, will have no substantial or material impact on local banks.

While our officials and bank executives are confident about the strength of the local banking system, we should remain cautious and vigilant in case the contagion from the global financial system becomes real with deepening effect.

Concerns over a possible financial contagion have already punished global stocks, with our own Philippine Stock Exchange index giving up gains it accumulated in the early part of 2023.

We hope that our economic and monetary officials will continue to closely watch global developments and respond proactively to avert any adverse impact on the local economy. It is also time for the banking sector to use its excess liquidity to feed local demand and take advantage of rising economic activities in the Philippines, instead of parking their funds elsewhere.