YEARENDER: Phl lenders Asia’s best performing bank stocks

MANILA, Philippines - Philippine banks did not just perform relatively well this year; they are, in fact, the best performing bank stocks in the ASEAN region.

“As reflected in the Philippines’ financial index, Philippine banks’ stock prices appreciated by 56.8 percent year-to-date, compared to second-running Thailand’s financial index appreciation of 42.9 percent and Singapore’s financial index appreciation of 36.6 percent,” Bankers Association of the Philippines (BAP) president Alberto Villarosa pointed out.

“Investors appreciated what was happening to Philippine banks and the economy,” he added.

Villarosa, who is also president of Security Banking Corp., took note that since the start of the year, banks have been performing well.

“As of the first three quarters this year, loans growth is 14 percent and profit growth is 15 percent from year ago levels; the non-performing loan (NPL) ratio further declined to 2.05 percent from 2.46 percent of previous year, while NPL cover improved to 136 percent from 123 percent. The industry is also well capitalized with a capital adequacy ratio (CAR) of 16 percent on a solo basis and 18 percent on a consolidated basis,” the BAP official said.

There have been a noted improvement in investors’ confidence, he stressed.

“2012 is another good year for the Philippine banking industry. In terms of the state of the universal and commercial banking industry, it is in good health. Business health indicators are good,” Villarosa said.

He said on the demand side, the renewed confidence in the Philippine economy is driving banks’ loan growth to corporate and SME clients given the historical under-investment relative to other countries in ASEAN.

Low overall interest rates, Villarosa added, will likewise continue to stimulate growth in consumer finance.

“It is very important for the banking industry to continue with its focus on good governance and risk management in order to sustain a healthy business and economic growth for the country,” he said.

Hurdles in 2013

One of the challenges a number of local banks would need to prepare for in the next few months is the implementation of higher capital requirement  under the global Basel III framework.

“It’s (2013) going to be tough for the industry as a whole primarily because of Basel III. There will be pressure in capital raising. Second, rates will continue to be low. Third, the market will continue to be liquid thus more competition, and then fourth, there are lot of changes - regulatory or otherwise - that will have an impact on the banking industry,” BDO Unibank Inc. president Nestor Tan said.

BDO, the country’s largest bank with over P1 trillion in assets, had already completed its capital raising scheme for the Basel III requirement.

The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, decided to adopt the capital adequacy standards in full by Jan. 1, 2014 without recourse to a staggered implementation or a gradual phase-out of ineligible capital instruments.

The earlier implementation of Basel III, the MB noted, would put the Philippines alongside such jurisdictions as China, Australia, Hong Kong SAR and Singapore.

Basel III introduces a complex package of reforms designed to improve the ability of bank capital to absorb losses, extend the coverage of financial risks and have stronger firewalls against periods of stress.

However, the Basel Committee on Banking Supervision (BCBS) outlined a staggered implementation of Basel III stretching through the end of 2018 to allow internationally-active banks time to raise capital organically.

But the BSP said it believes the 2014 compliance to Basel III recognizes the present strong capital position of the banking industry while providing for a reasonable transition period.

By adopting the capital adequacy standards in 2014, the BSP effectively accelerates the implementation of the Basel III accord for universal and commercial banks, including their subsidiary banks and quasi-banks.

A highlight of Basel III is the higher proportion of bank capital that is represented by common equity. Under the BSP framework, Common Equity Tier 1 (CET1) ratio will be set at a regulatory minimum of six percent while the total Tier 1 ratio will be at a 7.5 percent minimum. Both ratios are higher than the respective minimum under Basel III.

Some banks have already raised funds this year to comply ahead with the prescribed Basel III limit by the BSP. But some have yet to decide on when and how to finance the capital build-up.

Despite the challenges to be confronted next year, renowned international rating agency Moody’s Investors Service projected a much better outlook for Philippine banks in 2013 after having reviewed their financial performance this year.

Seeing brighter prospects, Moody’s forecast that Philippine banks’ creditworthiness would likely improve in the next 12 to 18 months on the back of double-digit profit growth, strong capitalization and healthy asset quality indicators buoyed by an “evolving domestic economy.

Just recently, Moody’s upgraded its outlook for local banks to “positive” from “stable,” seeing sustained improvement on the banking system which could then translate to more lending that should support local consumption and investment, thus, economic growth.

“(We) expect household consumption and steady government-led infrastructure spending to underpin a steady economic growth rate of above five percent that will support bank earnings growth without raising concerns about overheating,” Moody’s said in its latest report.

In the near term, or from now until mid-2014, bank profits are also seen to inch up between 11 and 13 percent as regulators tighten watch on real estate lending.

Bank of the Philippine Islands president Aurelio Montinola III, meanwhile, recognizes the presence of a number of challenges that have to be faced by the banking industry.

“The global economic and banking scenario, depending on where you are, will continue to be challenged. The good news for the Philippines is that things look good now. But I think it’s been an extraordinary year of earnings for many companies, so the challenge always is after an excellent year what’s the anchor?” he said.

Montinola noted that optimism in the industry’s growth prospects could also be anchored on government’s initiative to push for Private-Public Partnership (PPP) where more entities are seen raising more funds, thus spurring heightened activities in the banking sector.

As long as the economy is doing better, Montinola said, the banking industry will also be good.

“I think it’s been already mentioned that the economic growth, I’m hoping which I already  said, as long as the Philippines is in the six percent range, everything above six percent is a bonus and is good for the country and if we could do better, that would be great but like all things no matter how well we are doing, there are always challenges. The positive part is that the elections is coming up, infrastructure and PPP projects are continuing. The business mood is good,” the BPI chief pointed out.

For medium-sized banks, United Coconut Planters Bank senior vice president and head of marketing group Norman Martin Reyes said he likewise sees continuing growth next year.

“We are optimistic for UCPB’s outlook for 2013. We are very confident in sustaining our growth momentum,” said Reyes.

“The growth prospect for 2013 continues to be bright specially if the country gets its expected ratings upgrade, thanks to the government’s prudent fiscal management.”

From a multilateral financial institution’s point of view, International Finance Corp. (IFC) country resident representative Jesse Ang echoes the local bank officials’ outlook.

“I think in 2013 we will have a good opportunity in terms of growth outlook if we continue with the reforms,” he said.

Ang said he also believes that PPP would help fuel growth in the banking industry. “PPP in 2013 for us is very important as this will start the ball rolling and we are talking about a pretty large amount of cash here,” the IFC official said.

According to Ang, next year’s election would also be a factor in the overall growth of the economy, not only in the banking industry.

“Economy will be quite good in 2013. There would be a pump cash in the economy but hopefully we would elect a Congress and also local government officials who can help the Aquino administration push for important bills and continue with his reforms. I hope important laws would be passed in 2013,” he said.

Mergers and consolidations

Another important aspect the banking industry could look forward to is the impending merger and consolidation among banks.

Chamber of Thrift Banks (CTB) president and HSBC Savings Bank president Patrick Cheng said merger and/or acquisition among banks is almost certain to happen in the banking sector.

“It’s inevitable that there would be consolidation,” he said, noting that their regional counterparts have been growing four to five times bigger in terms of assets.

“If you will look at our regional counterparts, given that two big banks will merge will result in P1.5 trillion compared to other regional (Indonesia, Malaysia, Thailand) banks’ assets of P4 trillion to P5 trillion. So there is still a lot of room for mergers and consolidations,” Cheng said.

BPI Family Savings Bank president and CEO Jose Teodoro Limcaoco, on the other hand, said while mergers and consolidations are happening among big banks, smaller banks would have to try to focus on their own market.

“We  have to look for other ways to serve our clients. That’s part of the ball game. There are some banks who decided to be bigger so we have to find our niche and I guess it’s our ability to work closely with customers and we are interested in cross selling which should give some lots of opportunities to serve our market,” Limcaoco added.

Morever, Limcaoco said there is one way to look at mergers among big banks.

“Opportunities like this as market liberalizes would also give us more revenue enhancing capabilities but I think we should look at it this way: the Philippines is picking up. We have more consumer spending, more spending coming from overseas workers, BPO flows, our economy, I think, should be able to support bigger banks and lots more opportunities, I think we should look at this as a positive. Merger among big banks would also be in line with the growth of our economy,” the BPI Family Bank official said.

Recently, there were talks of BPI merging with Philippine National Bank and Allied Bank.

Montinola said they would likely be coming up with the decision on the proposed merger of the three banks in early part of 2013.

Once merged, BPI/PNB/Allied would overtake BDO’s current position as the country’s biggest bank in terms of assets.

BDO, for its part, has been vocal about its lack of interest to merge with other banks just to keep up with the competition.

But industry sources have been saying that if BDO would want to maintain its leadership in the industry, it could merge with China Banking Corp. Both BDO and Chinabank are owned by the Sy family.

Not only mergers and consolidation would pose a challenge to the industry next year. There would also be pressure to grow big and strong with the entry of more foreign banks in the country.

Early next year, the acquisition of majority stake of Bank of Commerce by CIMB of Malaysia would have been consummated.

Maybank, also one of the biggest financial groups in Malaysia, has sounded off plans to pour in $100 to $200 million to its local subsidiary Maybank Philippines to keep up with growing competition in the industry.

There is also a pressure from local banks to grow with the impending impact of the 2015 ASEAN where there would be more foreign financial institutions coming in the local banking front.

Some banks, like BPI, have opted to forge strategic partnership through corresponding banking agreements.

BPI has entered into numerous memoranda of agreements with some Japanese banks to be able to catch up with the regional growth.