PHL banks prepared to withstand ‘shocks’ — BSP

THE PHILIPPINE banking sector is ready to withstand possible shocks arising from the recent failure of two midsized banks in the United States, the Bangko Sentral ng Pilipinas (BSP) said on Monday.

“The Philippine banking system is strong and prepared to withstand possible shocks posed by the collapse of some banks in the US. Philippine banks have an asset base that significantly differs from that of US banks,” the BSP said in a note for President Ferdinand R. Marcos, Jr. which was shared to the media.

Global financial markets have been on edge after the collapse of Silicon Valley Bank (SVB) and Signature Bank in the United States. A crisis of confidence also hit Credit Suisse, which resulted in a state-led rescue by its Swiss rival UBS Group.

“Nonetheless, the BSP will continue to closely monitor developments, assess their impact on the banking system and respond accordingly,” the central bank said.

In a Viber message to reporters, BSP Governor Felipe M. Medalla noted that developments surrounding Credit Suisse are not a cause of concern and will unlikely significantly impact the global economy.   

“This means (Credit Suisse) is too big to fail. It does not look like that other Globally Systemically Important Banks (GSIBs) have the same problem, in which case the impact on the global economy (and therefore the Philippines) will not be significant,” Mr. Medalla said.   

In its note to Mr. Marcos, the BSP said most Philippine banks hold loans that are “less susceptible” to changes in fair value, while SVB’s security holdings were larger in relation to its capital.

Data from the BSP showed Philippine banks’ total loan portfolio, net of allowance for credit losses, made up the largest share of the banking system’s total assets at 53% or at PHP 11.9 trillion as of end-January. This was followed by investments (29.2% or at PHP 6.57 trillion) and by cash and due from banks (12.2% or at PHP 2.74 trillion).   

On the other hand, SVB had about USD 118-billion debt securities, accounting for 56.6% of its USD 209-billion total assets as of end-December.

For the same period, only 27.5% or around PHP 6.32 trillion of Philippine banks’ total assets were in portfolio investments.

The BSP also emphasized that Philippine banks have lower market risk exposure compared with US lenders.   

Losses of Philippines banks, including estimated net unrealized losses on security holdings due to rising policy rates, are expected to be smaller than those of US lenders, the BSP said.   

The BSP attributed this to the fact that US Fed policy rate hikes were larger and came from a lower level.

The US Federal Reserve has raised its target federal funds rate by 450 basis points (bps) since March last year to 4.5-4.75% from just 0-0.25%, while the BSP overnight reverse repurchase rate was hiked by 400 bps since May 2022 to 6% from just 2%.   

Moreover, the Philippine yield curve did not invert like the US yield curve, the BSP said.   

The BSP also noted that US banks’ bond holdings have longer tenors, some as long as 30 years, compared with Philippine banks, which mostly hold government securities with residual maturity of up to 15 years.   

“(Philippine banks) maintain a diversified lending base across counterparties and industry types and their loan quality is manageable,” the BSP said.   

Based on preliminary data from the central bank, bad loans reached PHP 405.138 billion in January, up by 1.6% from PHP 398.79 billion in December 2022. Still, this is 12.2% lower than PHP 461.66 billion a year earlier. This brought the industry’s nonperforming loan ratio to 3.28%, inching up from the 3.16% in December but lower than the 4.14% in January 2022. 

According to the central bank, Philippine lenders have strong risk governance and risk management systems. The industry could also maintain enough capital to absorb unexpected losses from local policy rate increases.   

Philippine banks are also highly liquid and tend to rely on a wide depositor base compared with US banks, the BSP said. It also reiterated that lenders do not have material exposure to developments outside the country.

Universal and commercial banks’ liquidity coverage ratio stood at 185.7% on solo basis as of end-December last year. This is higher than the 100% minimum requirement of the BSP.   

The minimum liquidity ratios of standalone thrift banks, rural banks, and cooperative banks were at 29.9%, 63.7%, and 44.4%, respectively. All were above the 20% requirement of the central bank. 

The BSP said it has implemented structural reforms, such as the adoption of risk management standards and prudential limits and requirements, to ensure the safety of banks.

Additionally, the BSP said it has strengthened its surveillance mechanisms and coordination efforts in order to closely monitor any developments that may negatively affect the financial system.   

“The BSP also has in place Emergency Loan Facilities which can be tapped by solvent banks experiencing serious liquidity problems (and) was given enhanced resolution authority through the amendments to the Charter of the Philippine Deposit Insurance Corporation,” it said. — Keisha B. Ta-asan