Philippines Banks Philippines Banks Banks Banks Banks Banks Bank

Philippines - Banks
The Philippines had 587 banks at end-2017 (down from 602 in the year-earlier period, according
to the BSP), a large chunk of which (464) were classified as rural banks, specialising in small
loans to farmers. There were 43 universal and commercial banks, including the subsidiaries and
local branches of foreign banks, and a further 60 thrift banks (some of which offer
microfinance). There were also 5,494 non-bank financial institutions, almost all of which were
pawn shops.
In local-currency terms, bank loans grew by 17.3% year on year in March 2018, according to the
latest data from the BSP, marking a modest acceleration from 16.4% at the end of last year. The
Economist Intelligence Unit expects lending growth to moderate in the forecast period as
economic activity cools relative to 2013-17, averaging around 12% a year in 2018-22. We
forecast that bank deposits will grow at a similar pace. Accordingly, we expect the aggregate
loan-to-deposit ratio to remain stable, at an average of 76%, in 2018-22. In terms of usage,
deposit accounts amounting to P5,000 (or US$100) and below made up nearly two-thirds of all
deposit accounts in banks, based on a BSP report on financial inclusion published in January
2018.
An improving labour market, historically low interest rates, a booming business-process

outsourcing sector and healthy remittances from Filipinos abroad have fuelled demand for
property. The BSP has moved on several occasions to allay concerns over bank exposure to a
frothy property market. In September 2017, for example, the BSP issued new guidelines to
tighten its supervision of banks' exposure to property and project finance. The enhanced
prudential reporting guidelines, for one, will require banks to submit detailed information of their
real-estate loans involving mid- and high-end residential property from June 2018.
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Financial sector
2013a 2014a 2015a 2016a 2017a 2018b 2019b 2020b 2021b 2022b
Total financial sector
Total loans (US$ bn) 79.6 90.3 93.8 100.8 112.8 125.1 140.9 152.5 176.1 201.2
Short-term loans (US$ bn) 31.2 35.4 36.7 39.5 44.2 49.0 55.2 59.7 69.0 78.8
Long-term loans (US$ bn) 48.4 54.9 57.0 61.3 68.6 76.1 85.7 92.8 107.1 122.4
Deposits (US$ bn) 230.6 260.8 270.5 290.5 324.4 359.3 404.2 437.1 504.2 575.6
Current-account deposits
46.3 53.3 59.4 64.3 75.2 83.1 93.6 100.6 116.3 132.9
(US$ bn)
Time & savings deposits
184.3 207.5 211.1 226.2 249.2 276.1 310.6 336.5 387.9 442.7
(US$ bn)
a
Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts.
Source: The Economist Intelligence Unit.
Crucially, property prices have picked up momentum in recent quarters. According to the BSP's
residential real-estate price index, prices rose by 5.7% year on year in October-December 2017,
marking a rapid acceleration from the 1.8% rate registered in the preceding quarter. For
perspective, property prices rose by an average of 3.5% year on year in 2017, slightly above the
3% average rate of consumer price inflation.
The BSP is not solely focused on mitigating systemic risks in the banking system.
Encouragingly, financial sector liberalisation also remains on the agenda in pursuit of broader
policy goals. Mr Espenilla announced in July 2017 that the BSP has agreed to ease the single
borrower's limit (SBL), which stipulates that a debtor cannot account for more than 25% of a
bank's total loan portfolio. In a bid to make the financial system more efficient, the central bank's
decision will remove banks' short-term exposures to clearing and settlement banks from the SBL
restriction. In October the BSP also decided to exclude banks' loans to their subsidiaries as long
as such credit is guaranteed by multilateral lenders, to support the government's ambitious
infrastructure drive.
One of the BSP's aspirations is to improve the conduct and effectiveness of monetary policy. To
that end, the central bank in February 2018 decided to lower the Philippines' reserve requirement
ratio of 20%-by far the highest in the Association of South-East Asian Nations (ASEAN)-by a
single percentage point, to 19%. More such cuts are likely in 2018-22, irrespective of the upward
trajectory of the BSP's benchmark overnight reverse repurchase rate, as the monetary authority
works to reduce its dependence on reserve requirements to manage liquidity in the banking
sector.
Individuals in the Philippines do not make great use of bank accounts. According to the World
Bank's database on financial inclusion, 34% of the population over 15 years of age had an
individual or shared formal financial account in 2017, up from 31% in 2014 and 27% in 2011.
Although 59% of respondents reported having borrowed money in the previous year in 2017,
only 10% had taken loans from from a financial institution; another 41% had borrowed from
family or friends. Similarly, although 59% of respondents said that they had saved money in the
previous year, only 12% did so at a financial institution. According to the survey, 21% of
Filipinos had a debit card in 2017, 2% a credit card and 4% a housing loan.

Banking sector
2013a 2014a 2015a 2016a 2017a 2018b 2019b 2020b 2021b 2022b
Bank performance
Banking assets (% change in
23.9 12.0 8.2 12.4 11.6 13.1 11.1 11.1 11.1 11.1
local currency)
Bank loans (% change in
15.8 19.1 11.9 16.6 16.5 13.8 11.8 11.1 11.3 11.6
local currency)
Bank deposits (% change in
32.2 12.0 8.3 13.8 11.6 13.9 12.0 11.0 11.0 12.0
local currency)
Net interest income (%
10.9 -4.8 33.4 10.5 15.9 11.6 11.6 12.1 12.1 11.6
change in local currency)
Net margin (net interest
2.8 2.3 2.9 2.8 2.9 2.9 2.9 3.0 3.0 3.0
income/assets; %)
a
Actual. b Economist Intelligence Unit forecasts.
Source: The Economist Intelligence Unit.
Access to and usage of financial services continued to improve in 2017, according to a report
released by the BSP in January 2018. However, progress remains gradual. Out of 1,634 local
government units (LGUs, cities and municipalities), 35% were unbanked as at June 2017, down
from 37% in 2011. The majority of unbanked LGUs are served by unregulated financial
intermediaries such as pawnbrokers.
Yet the Philippines remains a laggard in the region in terms of financial inclusion. For instance,
the number of deposit accounts per 10,000 adults in the Philippines is the fourth-lowest in
ASEAN after Cambodia, Laos and Myanmar. Furthermore, the distribution of financial services
outlets is heavily concentrated on the industrialised island of Luzon. The southern region of
Mindanao, which has been plagued by instability and violence, remains a significant laggard on
this front.
In order to encourage banks to set up in underdeveloped regions, the BSP approved regulations
in mid-2017 allowing banks to set up "branch-lite" units, which have fewer requirements in
terms of branch infrastructure. The BSP is also finalising a policy framework that would
encourage financial institutions to offer a basic deposit account, which would minimise barriers
to opening accounts such as a minimum balance requirement or dormancy charge. Among the
other ongoing initiatives with the potential to expand financial inclusion are the National Retail
Payment System project, which aims to lessen the dependence on cash in carrying out financial
transactions, as well as the development of a national identification system, which should
improve transparency.
Local banks are generally well capitalised, with universal and commercial banks having an
average risk-weighted capital-adequacy ratio (CAR) of 15.7% at the end of the third quarter of
2017 (latest available data), down only marginally from 16% at the end of the previous three-
month period. This is well in excess of the 8% CAR called for by the Basel III international
capital-adequacy standards and the more stringent 10% threshold set by the BSP.
The BSP is encouraging mergers between the numerous small regional banks under its
Consolidated Programme for Rural Banks (CPRB). The scheme, which commenced in 2015 and
has been extended to end-October 2019 (after expiring in August 2017), offers financial and
regulatory incentives to banks in the same geographic area to merge. Support for the programme
is provided by the BSP, the Philippine Deposit Insurance Corporation and the government-
owned Land Bank of the Philippines. It is now easier for banks to qualify in the renewed CPRB:
a merger can now include fewer than five banks as long as the final entity has a combined capital
of P100m (US$2m) or more and a CAR of at least 12%. The incentives include: a subsidy for the
financial advisory cost relating to the merger; technical support for the merger process; and the
possibility that Land Bank may provide an equity injection for the newly merged bank.
A law signed by the former president, Benigno Aquino, in 2014 provided for the full entry of
foreign players. In November 2017 Malaysia's CIMB Group Holdings said that its subsidiary,
CIMB Bank, would set up a retail branch in the Philippines. The lender's impending entry,
expected in the fourth quarter of 2018, comes at a time when foreign interest in the country's
banking industry is growing. Indeed, a deputy governor at the BSP, Chuchi Fonacier, said in
October 2017 that eight foreign banks in total had expressed an interest in entering the market.
As reported in December 2017, CIMB's plans in the Philippines include the establishment of a
full-fledged digital bank. Overall, the entry of foreign institutions will help to strengthen the
capital base of the banking system and introduce into the market a new range of financial
services and products, as well as ensuring best global practices and broadening market access.

Top ten banks in the Philippines
(P m unless noted, end-2017)
Return
Loans &
Total Deposit Stockholders' on
Bank Classification receivables,
assets liabilities equity equity
net
(%)
Domestic,
BDO Unibank 2,533,296 1,716,485 2,044,050 297,369 9.68
universal
Metropolitan Domestic,
1,709,895 1,007,799 1,313,948 196,171 8.87
Bank and Trust universal
Bank of the
Domestic,
Philippine 1,636,388 990,825 1,324,541 176,842 13.27
universal
Islands
Land Bank of Government,
1,615,001 662,102 1,425,390 104,596 14.96
the Philippines universal
Philippine Domestic,
779,795 436,358 597,099 108,897 7.08
National Bank universal
Security Bank Domestic,
755,769 366,526 415,088 103,433 9.61
Corp universal
China Banking Domestic,
665,935 402,150 559,486 77,161 9.84
Corp universal
Development
Government,
Bank of the 597,053 286,457 412,364 46,948 11.66
universal
Philippines
Union Bank of Domestic,
556,082 211,540 399,974 67,773 11.20
the Philippines universal
Rizal
Domestic,
Commercial 443,326 268,223 288,667 66,892 6.73
universal
Banking Corp
Source: Central Bank of the Philippines.
ugust 07, 2018 | Publication: BMI - Industry Reports
Key View (Banking & Financial Services Report

Philippines Banking & Financial Services Key
View - Philippines - Q4 2018)
Growth in the Philippine financial services' sector is expected to be far more subdued in
USD terms than the growth rates witnessed in 2016 and 2017, coming down to around
3% from higher rates of around 7% and 9% which were seen in these previous two
years. This is largely because of the risks which are starting to mount in the Philippine
economy which are detracting from the impressive growth trajectory which has been
seen prior to 2018. Examples of risks mounting in the banking and financial services'
sectors include slowing loan growth - although FY2017 banking sector results overall
were positive, generally indicating strong asset growth and few changes in the overall
asset quality and profitability of the major Philippine banks - as interest rate hikes were
implemented in both May and June 2018. Additionally, after peaking at historical levels
in January 2018, the Philippine Stock Exchange's benchmark Index has been extremely
volatile, and plummeted to trading to below the 7,000-point mark in June 2018. Overall
this indicates the Philippine economy could be overheating and also demonstrates the
emergence of broader trend of increasing investor fatigue with the Philippine business
environment. These events t
Key View: Growth in the Philippine financial services' sector is expected to be far more
subdued in USD terms than the growth rates witnessed in 2016 and 2017, coming down
to around 3% from higher rates of around 7% and 9% which were seen in these
previous two years. This is largely because of the risks which are starting to mount in
the Philippine economy which are detracting from the impressive growth trajectory
which has been seen prior to 2018. Examples of risks mounting in the banking and
financial services' sectors include slowing loan growth - although FY2017 banking
sector results overall were positive, generally indicating strong asset growth and few
changes in the overall asset quality and profitability of the major Philippine banks - as
interest rate hikes were implemented in both May and June 2018. Additionally, after
peaking at historical levels in January 2018, the Philippine Stock Exchange's
benchmark Index has been extremely volatile, and plummeted to trading to below the
7,000-point mark in June 2018. Overall this indicates the Philippine economy could be
overheating and also demonstrates the emergence of broader trend of increasing
investor fatigue with the Philippine business environment. These events therefore are
creating additional difficulties for banking and financial services' sector growth over the
course of this year.
The Philippine banking sector comes with many potential rewards but with many high-
profile risks attached. The most pertinent rewards stem from the fact that the banking
sector is largely viewed as stable, well-capitalised and not having any significant
liquidity restraints. Furthermore, the sector is far more open to foreign players with the
launch of the ASEAN Economic Community single market in 2015, and as of 2014 the
Filipino government has allowed 100% foreign equity in local subsidiaries of banks.
Banking penetration rates in the country remain low on a global basis, indicating
significant customer potential from the country's middle class. Additionally, the FY2017
banking sector results overall were positive, generally indicating strong asset growth
and few changes in the overall asset quality and profitability of the major Philippine
banks. We note that despite this, downside risks are rising, driven mostly by the various
political headwinds the country is facing and rising global interest rates and local
inflation. We expect banking asset sector growth to slowdown quite significantly from
around 2021 as a result of these.
We remain upbeat about the prospects for the Philippines insurance sector. Both major
segments should benefit from the steady rises in household incomes and economic
activity in general. In both cases, premiums will be boosted by the development and
distribution of innovative products. Recognising that the very favourable trends that are
driving the life segment remain intact, we have maintained our forecasts this quarter.
Density should continue to grow strongly. We remain of the view that price competition -
especially in the transport insurance and health & personal accident insurance sub-
sectors - will constrain premium growth in the non-life sector. Nevertheless, positive
structural trends such as the expansion of the economy, rising household incomes and
growing understanding of the benefits of insurance should result in the segment
returning to its long-term growth trend from 2018.
Given the strong economic growth trajectory that is expected for the Philippines and the
country's growing middle-class, more opportunities are starting to emerge for asset
management services such as private equity firms, private wealth management firms,
investment banking and pension funds. Key barriers for new and existing market
entrants are largely linked to the country's small stock exchange and uncertain political
and security environments.
The Philippine Stock Exchange (PSE) is one of the oldest stock exchanges in Asia and
provides another facet to the country's financial services offerings. The PSE has one of
the smaller market capitalisations in the East and South East Asian region, with slightly
more than 300 companies listed on it and trading activity dominated by the sale of
government bonds. As a result of the country's promising economy growth trajectory
and growing middle-class, the PSE enjoyed a successful 2017 and early 2018. This was
shown by its bench index peaking past its highest-ever recorded level eight times over
the course of 2017, and in January 2018 it broke past the 9,000-point mark for the first
time ever. Nevertheless, the rest of 2018 has been extremely volatile, and since
reaching this landmark point, the benchmark index plummeted to trading below the
7,000-point mark in June 2018. Reasons for this crash have been listed as rising
political risks, poor performance of the Philippine peso, rising inflation, trade war
tensions between the US and China and a weakening domestic business environment.
Latest Trends And Developments

 The Bangko Sentral Ng Pilipinas (BSP) hiked its benchmark overnight reverse
repurchase facility (RRP) rate by 25bps to 3.50% at its June 20 2018 bi-quarterly
meeting, while the corresponding overnight lending and deposit facilities rates were also
raised by the same amount to 4.00% and 3.00%, respectively. The move to hike interest
rates by a cumulative 50bps over May 2018 and June 2018 was largely in line with our
expectations and came at a time when global monetary conditions are tightening, while
domestic inflationary pressures continue to mount. Given that the BSP struck a
relatively hawkish tone at its press release, stating that it is 'prepared to take further
policy action as needed to achieve its price and financial stability objectives', we have
revised our forecast for the central bank to tighten its policy rate by a further 25bps to
3.75% before end-2018.
 The Philippine economy expanded by 6.8% y-o-y in real terms in Q118, up from 6.5% y-
o-y in the previous quarter, and 6.7% for full-year 2017. The growth acceleration was
mainly driven by strong fixed capital formation, particularly in the construction sector,
which was supported by the government's 'Build, Build, Build' programme. This was
slightly different from 2017 when growth was largely driven by the ongoing global
economic recovery, which raised the demand for Philippine exports. On the back of a
stronger-than-expected real GDP growth performance in Q118, we have raised our real
GDP growth forecast for 2018 to 6.5%, from 6.3% previously. However, we are sticking
to our view that economic growth is likely to moderate over the coming quarters. Even
as the Philippines continues to enjoy positive demographics, the economy is showing
signs of overheating, and we expect the deterioration in the business environment to
weigh on private investment.
 The Bangko Sentral Ng Pilipinas (BSP) has adopted the net stable funding ratio (NSFR)
under Basel III for the larger universal and commercial banks to further strengthen their
ability to withstand liquidity stress. This complements the Liquidity Coverage Ratio
(LCR) which was first rolled out on July 1, 2016, and came into full effect on January 1,
2018. We believe that the adoption of the NSFR under Basel III by Philippine
commercial banks will be positive for financial stability over the long-run. However,
banks are likely to feel short-term pain in the form of higher funding and transition costs,
while businesses could see the availability of long-term financing drop.
 The use of blockchain technology and the trading of cryptocurrencies is becoming
extremely popular in the Philippines, a factor which prompted Philippines authorities to
include virtual currency exchanges as entities regulated by their AML/CFT laws. In June
2018 the BSP reported that around USD40m in cryptocurrency trades occurred monthly
in the Philippines, and in July 2018 the BSP approved the applications for two new
cryptocurrency exchanges. Additionally, it was reported in July 2018 that the BSP had
approved a pilot project to test the possibility of the introduction of a blockchain payment
system in order to boost the digital capacities of their correspondent banking partners
and speed up remittance clearing times. This comes on the back of a June 2018
announcement that, AlipayHK (a Hong Kong entity) had launched a blockchain-based
cash transferral service between Hong Kong and the Philippines. This services will
allow transfers to take place in real time between banks, individuals, shops and 'stored
value facilities'.
 We note that the Philippine Stock Exchange's benchmark index, the PSEi Index, has
begun to recover somewhat since reaching an annual low of around 6896.88 points on
June 25 2018. As of July 19 2018, the index has recovered to trade at around 7,400
points.
Financial Services Forecasts (Philippines 2016-2021)

INDICATOR 2016 2017E 2018F 2019F 2020F 2021F
Finance nominal GVA, USDbn 25.21 27.49 27.85 30.32 33.90 37.91
Finance USD nominal growth, %
7.1 9.0 1.3 8.9 11.8 11.8
y-o-y
Finance nominal GVA, PHPbn 1,164.72 1,297.39 1,462.01 1,637.14 1,826.06 2,031.92
Finance PHP nominal GVA
9.5 11.4 12.7 12.0 11.5 11.3
growth, % y-o-y
Finance nominal GVA, % total
8.04 8.21 8.32 8.41 8.48 8.55
GVA

INDICATOR 2022F 2023F 2024F 2025F 2026F 2027F
11.7 11.7 11.7 11.6 11.6 11.6
y-o-y
11.2 11.1 11.1 11.1 11.1 11.0
growth, % y-o-y
8.61 8.67 8.72 8.77 8.81 8.85
GVA
August 07, 2018 | Publication: BMI - Industry Reports
Market Overview (Banking & Financial Services

Report Philippines Banking Regulatory
Environment - Philippines - Q4 2018)
In terms of regulatory oversight, the stability and transparency of banking operations of
the Filipino banking sector is well provided for. Banks in the Philippines are reportedly
on track with adopting the additional capital adequacy ratio requirements as prescribed
under BASEL III, with the final deadline of 2019 set for complete implementation. The
fact that the BSP has required all banks to prepare their financial statements in line with
the International Financial Reporting Standards since 2005 boosts the level of
transparency of the operations of licensed banks in the Philippines. The major downside
risk comes in terms of the high exposure to financial crimes such as money laundering,
cybercrime and tax evasions, which market entrants will face because of the country's
high levels of corruption, the presence of terrorist groups and the prevalence of
organised crime.
In terms of regulatory oversight, the stability and transparency of banking operations of
the Filipino banking sector is well provided for. In 2016, the Philippine central bank -
Bangko Sentral ng Pilipinas (BSP) - said that all banks in the country will be have to be
compliant with BASEL III liquidity ratio requirements by January 1 2018. In May 2017,
the BSP announced that the largest banks were compliant with BASEL III ahead of
schedule, and that banks in the Philippines had adopted six of 10 standards under the
BASEK III regime within the end-2016 implementation target, while additional reform
strategies are being prepared for roll-out - with 2019 set as the final deadline. The fact
that the BSP has required all banks to prepare their financial statements in line with the
International Financial Reporting Standards (IFRIS) since 2005 boosts the level of
transparency of the operations of licensed banks in the Philippines.
The major downside risk comes in terms of the high exposure to financial crimes such
as money laundering, cybercrime and tax evasions, which market entrants will face
because of the country's high levels of corruption, the presence of terrorist groups and
the prevalence of organised crime. While the country does have Anti-Money Laundering
and Counter-terrorist financing laws in place, which banks must comply with in terms of
reporting Suspicious Transactions (STRs) etc., in its 2017 Money Laundering and
Financial Crime Report, the US Department of State highlighted the Philippines as one
of the top 88 states in the world where money laundering remains a serious concern.
The report noted that this was due to the 'international narcotics trade, high degree of
corruption among government officials, trafficking in persons, and the high volume of
remittances from Filipinos living abroad'. This report suggested that the significant
presence of terrorist groups in the Philippines meant that the country's financial system
was used to launder funds used for the financing of terrorist activities.
While the Philippines has not been on the Financial Action Task Force's (FATF) money-
laundering blacklist since the early 2000s, many international bodies have highlighted
legislative gaps in the country's Anti-Money Laundering (AML) and counter-terrorist
financing laws as helping fuel such activities. Such gaps include the failure to include
various types of sectors in those that must comply with AML legislation, and that tax
evasion is currently not defined as a predicate crime (as part of the larger crime of
money laundering or financing of terrorist activities) in Filipino law.
As of January 4 2018, more stringent registration and reporting guidelines have come
into force for accountable institutions as per Filipino AML laws. Now, accountable
institutions such as banks, insurance companies, and securities dealing firms are
required to submit Suspicious Transaction Reports (STRs) within five days of the
suspicious incident occurring. As of this date, casinos will have to comply fully with the
applicable AML laws. The laws have been tightened further amid the surge of terrorism
in the South East Asian region.
Key Legislation
 The New Central Bank Act governs the activities of the BSP.
 The General Banking Law of 2000 provides for the regulation of the organisation and
operations of banks in the Philippines and the laws under which banks are licensed by
the BSP.
 Anti-Money Laundering Act of 2001 requires all universal, commercial, thrift, rural, and
cooperative banks as well as offshore banking units and quasi-banks to implement
'Know Your Customer' due diligence procedures when vetting clients, to implemented
enhanced due diligence procedures for domestic and foreign 'politically exposed
persons', and to report any suspicious transactions as defined by these laws to The
Anti-Money Laundering Council (AMLC) (the Filipino Financial Intelligence Unit).
 Republic Act no. 10167 further strengthens AML compliance requirements.
 Republic Act No. 10168 criminalises the financing of terrorist activities as a stand-alone
offence and provides for the legal penalties.
Industry Regulators
The first relevant authority is the Philippine central bank, the Bangko Sentral ng
Pilipinas (BSP). The BSP was established in 1993 according to the provisions of the
1987 constitution and the 1993 Central Bank Act. It is the successor to the Central Bank
of the Philippines that was established in 1949. The BSP's primary objective is to
maintain price stability. Its roles include conducting monetary policy in accordance with
the primary objective, issuing notes and coins, acting as a last-resort lender to banks
and a supervisor of the banking system, managing the country's foreign currency
reserves, determining the exchange rate policy and acting as banker to the government.
The BSP supervises the operations of banks and exercises regulatory powers as
provided in the New Central Bank Act and other pertinent laws over the operations of
finance companies and non-bank financial institutions performing quasi-banking
functions.
The second relevant authority is the Bankers Association of the Philippines (BAP). The
BAP was founded in 1949 and incorporated in 1964. Its main objectives are to ensure
the stability, robustness and growth of the financial system and to maintain links with
parliament, government institutions, and other banking and related associations. The
BAP works with the BSP to frame banking rules and regulations for the purpose of
increasing the efficiency and effectiveness of banking services.
Competitive Landscape (Banking & Financial

Services Report Philippines Banking Competitive
Landscape - Philippines - Q4 2018)
In general, the Filipino banking sector is an attractive and growing sector, given the
country's expected robust economic growth for 2017, and the fact that the local banking
sector is well capitalised and does not have any significant liquidity restraints at present.
Furthermore, since 2014 the Filipino banking sector has become far more open to
international players in terms of opportunities.
In general, the Filipino banking sector is an attractive and growing sector, given the
country's expected robust economic growth for 2017, and the fact that the local banking
sector is well capitalised and does not have any significant liquidity restraints at present.
Furthermore, since 2014 the Filipino banking sector has become far more open to
international players in terms of opportunities. During that year, the Republic Act 10641
came into force, which now allows foreign banks to open branches in the Philippines
and own up to 100% in voting stock in their Filipino subsidiaries (as opposed to having a
local partner). And in 2015, the AEC was launched. It aims to integrate ASEAN member
states into a single market, which will provide a base for facilitating freer flows of goods,
services, investment, educated labour and capital flow among member states. In order
to better integrate the flow of financial services among AEC member states, the AEC
has launched the ASEAN Banking Integration Framework (ABIF). The aim of ABIF is to
make it easier for banks from AEC member states to provide cross-border banking
services, and means that a bank licensed in one member state will receive equal
treatment in others. Bilateral processes are ongoing to achieve this, and the Philippines
has currently signed agreements with Malaysia, Thailand and Indonesia.
Interest from foreign banks in expanding their operations into the Philippines continues
to grow. In October, the Bangko Sentral ng Pilipinas (BSP) stated that they had
received applications to operate in the Philippines from eight foreign banks in the course
of 2017, all of which were at different stages of being processed. The majority of these
banks are reportedly headquartered in other Asian countries. As foreign banks are
gaining interest in the Philippines as a market to expand into, the BSP is also
encouraging local banks to capitalise on the opportunities afforded to them by the
launch of the AEC in 2015 and expand their footprints in other AEC member states. In
October 2017, the BSP deputy governor encouraged local banks to expand their
presence in countries such as Singapore, Brunei, Cambodia, Laos, Myanmar and
Vietnam. By 2018, as per the commitments made in the ABIF, all member states should
have established at least one transaction as per this framework in order to better
facilitate the freedom of financial service flows among AEC member states.
As in 2016, in 2017 BDO Unibank came out as the largest bank in the Philippines in
terms of banking assets. BDO Unibank's total assets increased by around 14.7%
between 2016 and 2017, and also increased in quality as the bank's NPL ratio fell from
2.7% to 2.3% and its NPL reserves rose from 64.9% of NPLs in 2016 to around 73.5%
of NPLs in 2017. In terms of profitability, BDO Unibank's return on assets ratio stayed
the same (at 1.5%) as it was in 2016, and its return on average equity ratio saw a
decrease from 12.8% in 2016 to 10.4% in 2017. In 2017, BDO Unibank had the second
highest return on average equity ratio out of the four top five Philippine banks for which
data is available for this indicator. BDO Unibank is a commercial bank and listed on the
Philippine Stock Exchange (PSE). In terms of services offered, BDO Unibank offers an
array of these which include: tending (to corporate and consumer) clients, deposit-
taking, foreign exchange, brokering, trust and investments, and credit provisions. The
bank has a private banking arm, an investment banking arm, rural banking and offer
stock exchange brokering services as well. According to its PSE profile, as of December
2016 BDO Unibank has 1,103 domestic branches, one branch in Hong Kong and 3,655
automated teller machines (ATMs) and 328 cash accept machines.
Top 10 Commercial And Retail Banks By Total Assets, PHPmn

Total Assets Total Common Equity Date BDO Unibank 2,797,589 294,438 31/03/2018
Metropolitan Bank & Trust Company (Metrobank) 2,065,685 216,663 31/03/2018 Bank
of the Philippine Islands (BPI) 1,914,411 192,412 31/03/2018 Land Bank of the
Philippines (Land Bank) 1,634,251 108,195 31/03/2018 Philippine National Bank (PNB)
850,703 121,206 31/03/2018 China Banking Corporation (Chinabank) 723,435 83,029
31/03/2018 Security Bank 702,582 105,641 31/03/2018 Union Bank of the Philippines
(Unionbank) 608,441 75,027 31/03/2018 Rizal Commercial Banking Corp. (RCBC)
585,712 67,952 31/03/2018 United Coconut Planters Bank (UCPB) 326,512 18,636
31/12/2017
Metrobank remains the second largest bank in the Philippines in 2017 as it was in 2016.
In this period Metrobank's total assets increased by around 10.9% and maintained their
quality, as the banks NPL ratio did not change between 2016 and 2017 (at 0.8% of total
loans). We do note that Metrobank's NPL reserve ratio did fall slightly in this period,
from constituting 139.1% of NPLs to constituting 117% of NPLs. In terms of profitability,
the bank's return on average equity ratio increased slightly from 9.9% in 2016 to 10.1%
in 2017. We note that the bank's return on average assets stayed the same (at 1.5%)
between these years. Metrobank was ncorporated in 1962 in the Philippines. It acquired
its universal banking licence in 1981. As of end-2016, the Metrobank Group had a
domestic network of 860 domestic branches and 1,950 ATMs nationwide. The bank
also had 31 foreign branches, subsidiaries and representative offices. Metrobank is a
universal bank providing a full range of services to large local and multinational
corporations; middle-market, high net worth individuals; and retail segments. The bank
owns substantial equities in allied and non-allied undertakings, such as life and non-life
insurance, consumer banking, investment management, credit cards, leasing, real
estate development and car manufacturing and distribution. It has significant equity
ownerships in local and international subsidiaries, such as First Metro Investment
Corporation, Metrobank Card Corporation, Orix Metro Leasing and Finance
Corporation and the Philippines Savings Bank.
Top 10 Banks - Asset Quality
Growth of Gross Loans (%) NPL Charges (% of gross loans) Date BDO Unibank 7.5 0.4
31/03/2018 Metrobank -0.4 0.6 31/03/2018 BPI -1.1 0.3 31/03/2018 Land Bank 4.7 na
31/03/2018 PNB 4.5 0.1 31/03/2018 Chinabank 0.1 0.2 31/03/2018 Security Bank 1.0
0.0 31/03/2018 Unionbank 8.0 0.0 31/03/2018 RCBC 5.1 0.5 31/03/2018 UCPB 12.6
0.5 31/12/2017
As of the end of 2017, BPI is the third largest bank in the Philippines in terms of total
assets. BPI's assets increased by around 10.3% between 2016 and 2017, and saw a
mild increase in quality as the bank's NPL ratio decreased slightly from around 1.7% to
1.5% in this period. BPI's NPL reserve ratio increased slightly from constituting around
104% of NPLs in 2016 to constituting 114% of NPLs in 2017. Profitability on the other
hand for BPI was slightly lower in 2017 than it was in 2016, as the bank's return on
asset ratio fell from 1.7% to 1.6%, and its return on equity ratio fell from 13.7% to
12.9%. We do note however that despite these slight decreases in profitability, the bank
still had the highest return on asset and return on equity ratios out of the four top five
Philippine banks for which data is available for these indicators in 2016 and 2017. BPI is
the oldest bank in the country still in operation. It is owned by the Ayala Corporation, the
largest conglomerate in the Philippines. BPI pioneered rural banking in the Philippines,
with its countryside banking operations preceding many other banks by a number of
years. As of December 2016, the bank had a network of over 800 branches (including a
large rural network) across the Philippines, Hong Kong and Europe, and close to 3,000
ATMs and cash deposit machines (CDMs). BPI has also launched a new mobile-based
cash management system. The new technology is the first mobile banking platform in
the country. Expresslink Mobile is the mobile version of the Expresslink service, which
allows BPI's corporate clients to check their account balances and pay bills online.
Top 10 Banks - Earnings And Profitability

Net Interest Income (% of earning assets) Expenses (% of gross revenues) Operating
Profit (% of average assets) Net Income (% of average equity) Date BDO Unibank 4.0
68.5 1.2 8.1 31/03/2018 Metrobank 3.8 55.5 1.6 12.2 31/03/2018 BPI 3.2 53.7 1.7 13.6
31/03/2018 Land Bank na na na na 31/03/2018 PNB 3.9 73.4 1.0 4.9 31/03/2018
Chinabank 3.6 69.0 1.0 7.3 31/03/2018 Security Bank 3.1 52.9 1.7 9.0 31/03/2018
Unionbank 3.4 50.5 2.3 16.0 31/03/2018 RCBC 4.3 71.9 1.0 6.8 31/03/2018 UCPB 5.0
57.8 1.6 22.3 31/12/2017
In 2017, the Land Bank of the Philippines (Land Bank) was the fourth largest
commercial bank in the Philippines in terms of assets. Between 2016 and 2017, Land
Bank witnessed a 15.3% growth in total assets. Data regarding the quality of the Land
Bank's assets (such as its NPL ratio) and its profitability are not currently available for
2017. The Land Bank is owned by the Philippine government and prioritises socio-
economic development in its mandate by striving to increase access to credit to
individuals or businesses who may struggle with a private commercial bank such as
farmers and fisherman, SMME's, schools, hospitals and agri-business entities. Its profits
are used to finance development projects in the Philippines.
Top 10 Banks - Capital And Leverage

Tangible Common Equity (% of tangible assets) Common Equity Tier 1 Ratio Net
Income Minus Cash Dividends (% of total equity) Date BDO Unibank 10.3 na 6.3
31/03/2018 Metrobank 9.8 12.0 11.8 31/03/2018 BPI 9.7 12.7 13.3 31/03/2018 Land
Bank 6.6 10.5 na 31/03/2018 PNB 12.4 na 4.9 31/03/2018 Chinabank 10.7 12.8 7.3
31/03/2018 Security Bank 14.5 na 9.0 31/03/2018 Unionbank 10.7 12.0 15.9
31/03/2018 RCBC 10.9 na 6.8 31/03/2018 UCPB 5.3 na 22.3 31/12/2017
The final bank in 2017 in the Philippines' top five commercial banks is PNB. Between
2016 and 2017, PNB saw a 10.9% increase in the value of its total assets. In terms of
asset quality, this deteriorated in this period, as PNB's NPL ratio increased from 1.3% in
2016 to 1.6% in 2017 and its NPL reserve ratio fell slightly from constituting 155% of
NPLs in 2016 to constituting 113.8% of NPLs in 2017. Nevertheless, we do note that the
bank's overall profitability saw a slight improvement in this twelve month period. PNB's
return on average asset ratio increased from 1.2% in 2016 to 1.4% in 2017 and its
return on average equity ratio increased from 6.6% to 7.2%. Nevertheless, overall out of
the four top five Philippine banks for which data is available for these indicators, in 2017
PNB reported the lowest return ratios on average assets and average equity. PNB was
originally established in 1916, and became the first universal bank in the country in
1981. As at June 2016, the bank had 670 domestic branches and 4960 ATMs. PNB
also has 72 overseas branches and offices, mainly concentrated in Hong Kong, the
USA, Canada, and Saudi Arabia. The bank also maintains correspondent banking
relationships with more than 900 banks and financial institutions worldwide. As a result
of this large geographic coverage, the bank is a leading provider of remittance and other
banking services to Overseas Filipino Workers. In 2008 PNB and Allied Banking
Corporation announced a merger. Although it was initially beset by regulatory
difficulties, in September 2011, Allied Banking Corporation and PNB announced that
regulatory negotiations over their merger were progressing well, and the two banks
worked on the synchronisation of their IT systems as well as branch rationalisation and
expansion plans. In March 2012, shareholders of the two firms approved the revised
terms of their much-awaited merger, paving the way for the creation of the country's
fourth largest privately owned bank. The deal was completed in February 2013.
Top 10 Banks - Funding And Liquidity

Loans (% of customer deposits) Customer Deposits (% of total funding) Date BDO
Unibank 84.1 93.7 31/03/2018 Metrobank 80.7 87.6 31/03/2018 BPI 76.2 96.0
31/03/2018 Land Bank 45.3 98.1 31/03/2018 PNB 76.4 95.0 31/03/2018 Chinabank
74.1 98.0 31/03/2018 Security Bank 88.3 73.2 31/03/2018 Unionbank 66.5 86.4
31/03/2018 RCBC 94.0 78.9 31/03/2018 UCPB 60.3 97.6 31/12/2017
Notable foreign players include Citibank, Chinabank, Bank of America and JP
Morgan Chase. Wells Fargo Bank and Bank of New York Mellon both have
representative office in the Philippines. Other foreign players include Deutsche Bank,
HSBC and Standard Chartered Bank.
Key View (Banking & Financial Services Report

Philippines Banking Snapshot - Philippines - Q4
2018)
Key View: The Philippine banking sector comes with many potential rewards but with
many high-profile risks attached. The most pertinent rewards stem from the fact that the
banking sector is largely viewed as stable, well-capitalised and not having any
significant liquidity restraints. Furthermore, the sector is far more open to foreign players
with the launch of the ASEAN Economic Community single market in 2015, and as of
2014 the Filipino government has allowed 100% foreign equity in local subsidiaries of
banks. Banking penetration rates in the country remain low on a global basis, indicating

 The Bangko Sentral Ng Pilipinas (BSP) has adopted the net stable funding ratio (NSFR)
2018. We believe that the adoption of the NSFR under Basel III by Philippine
 While the Philippine city of Marawi is no longer occupied by Islamic State, we
emphasise that money laundering and terrorist financing risks are still very high for
financial services providers in the country. In the US Department of State's 2018
International Narcotics Control Strategy Report, the Philippines was named a 'major
money laundering jurisdiction'. The reasons given for this classification are: the
country's strategic location within international trafficking routes; high levels of
corruption; the significant volume of remittances set back from Filipinos living abroad;
various gaps in the country's anti-money laundering/countering the financing of
terrorism (AML/CFT) laws in regards to designated non-financial businesses and
professions; stringent bank secrecy laws and that non-profit organisations are not
regulated by national AML/CFT laws.
 The use of blockchain technology and the trading of cryptocurrencies is becoming
extremely popular in the Philippines, a factor which prompted Philippines authorities to
include virtual currency exchanges as entities regulated by their AML/CFT laws. In June
2018 the BSP reported that around USD40m in cryptocurrency trades occurred monthly
in the Philippines, and in July 2018 the BSP approved the applications for two new
cryptocurrency exchanges. Additionally, it was reported in July 2018 that the BSP had
approved a pilot project to test the possibility of the introduction of a blockchain payment
system in order to boost the digital capacities of their correspondent banking partners
and speed up remittance clearing times. This comes on the back of a June 2018
announcement that, AlipayHK (a Hong Kong entity) had launched a blockchain-based
cash transferral service between Hong Kong and the Philippines. This services will
allow transfers to take place in real time between banks, individuals, shops and 'stored
value facilities'.
 Annual financial results for the 2017 year for the Philippine banking sector have now
been released. In terms of any major shake-ups to the Philippines' banking competitive
landscape which have emerged from these in comparison to the 2016 financial results,
there are not that many. For example, in top five banks in terms of total banking assets
in the Philippines in 2017 remain unchanged from 2016 and all the top five banks saw
small increases in the total assets they hold. In terms of asset quality across the board,
there have been no significant shifts as all top five banks reported either very small
increments or decreases in their non-performing loan (NPL) ratios and reserves. BDO
Unibank (which had the highest NPL ratio out of the top five banks paired with the
lowest NPL reserves in 2016), saw its NPL ratio drop from 2.7% of total loans in 2016 to
2.3% in 2017, and its NPL reserves rise from 64.9% of total NPLs in 2016 to 73.5% in
2017. In terms of profitability, in 2017 the Bank of the Philippine Islands (BPI) reported
the highest profit return on average assets (at 1.6%) out of the four top five Philippine
banks for which data is available for this indicator. Additionally in 2017, BPI also
reported the highest return on average equity (at 12.9%) out of the four top five
Philippine banks for which data is available for this indicator. Across the board there
were very small changes in terms of the top banks' profitability ratios, with Metropolitan
Bank & Trust Company (Metrobank) and Philippine National Bank (PNB) reporting
increases in their return on average assets and return on average equity ratios of
around 0.2 - 0.9%.
Banking Asset Growth Expected To Be Slowed Down By Rising Domestic Inflation And
Global Interest Rates
Total Banking Assets (2016-2027)
f = Fitch Solutions forecast. Source: Bangko Sentral ng Pilipinas, Fitch Solutions
SWOT (Banking & Financial Services Report

Philippines Banking & Financial Services SWOT -
Philippines - Q4 2018)
The Philippines provides an attractive market for banking and financial services
because of its promising economic growth trajectory and growing middle-class.
Downside risks include market players facing a high degree of exposure to financial
crimes such as money laundering, cybercrime and tax evasion in the country.
SWOT Analysis
Strengths
 Strong real GDP growth and the country's growing middle class will provide great
opportunities for expansion by domestic and local players in the banking and financial
services' sectors.
 The Filipino banking sector is largely viewed as stable, well capitalised and not having
any significant liquidity restraints.
 Both life and non-life insurance segments are expected to grow rapidly throughout our
forecast period.
Weaknesses
 Market players face a high degree of exposure to financial crimes such as money
laundering, cybercrime and tax evasions, largely due to the high levels of corruption,
terrorist group presence and prevalence of organised crime within the Philippines.
 Prevailing widespread poverty in the Philippines, particularly in rural areas, hampers
growth potential for banking and financial services' sectors.
 The insurance regulatory environment is at times opaque, creating uncertainty for
investors.
 The Philippine Stock Exchange (PSE) has one of the smaller market capitalisations in
the East and South East Asian region.
Opportunities
 Banks can target Philippine repatriated earnings; overseas workers annually inject an
amount equivalent to almost 10% of GDP.
 Liberalisation of the banking sector could attract more foreign direct investment (FDI)
inflows to the country.
 Financial inclusion rates (from both banking sector penetration and insurance coverage)
remain low which creates enormous potential for future growth over the long term in the
Philippines.
 The pension fund industry in the Philippines has been given a boost by the final rolling
out of the Personal Equity and Retirement Account scheme by the Central Bank in late
2016.
Threats
 The banking sector is set to face increased competition from foreign banks as the
ASEAN Economic Community gradually matures.
 The Philippines is extremely vulnerable to natural disasters, resulting in large spikes in
insurance claims.

Macroeconomic Forecasts (Banking & Financial Services Report Philippines Household Income
Forecasts - Philippines - Q4 2018)
Household Income Data And Forecasts

Household Income Data (Philippines 2016-2022)
Indicator 2016e 2017e 2018f 2019f 2020f 2021f 2022f

Households, 24,112,07 24,686,60 25,239,82 25,770,27 26,276,26 26,755,47 27,205,19
number 0 9 7 6 2 9 6
Households,
2.5 2.4 2.2 2.1 2.0 1.8 1.7
% y-o-y
Average
working
2.7 2.7 2.7 2.7 2.7 2.7 2.7
adults per
household
Gross
Income, per 321,873.6 344,891.2 376,514.3 409,837.4 445,164.2 483,228.5 524,328.9
household, 3 1 9 0 2 5 7
PHP
Gross
Income, per
6,966.96 7,307.02 7,171.70 7,589.58 8,264.44 9,016.19 9,832.21
household,
USD
Gross
Income, per 115,367.0 123,812.8 135,416.2 147,643.4 160,605.8 174,572.7 189,653.7
capita, PHP
Gross
Income, per 2,497.12 2,623.15 2,579.36 2,734.14 2,981.64 3,257.22 3,556.38
capita, USD
Disposable
Income, per 308,998.6 331,095.5 361,453.8 393,443.9 427,357.6 463,899.4 503,355.8
household, 9 6 1 0 5 1 1
PHP
Disposable
Income, per
6,688.3 7,014.7 6,884.8 7,286.0 7,933.9 8,655.5 9,438.9
household,
USD
Disposable
110,752.3 118,860.2 129,999.5 141,737.6 154,181.6 167,589.8 182,067.5
Income, per
0 7 9 7 0 2 0
capita, PHP
Indicator 2016e 2017e 2018f 2019f 2020f 2021f 2022f
Disposable
Income, per 2,397.2 2,518.2 2,476.2 2,624.8 2,862.4 3,126.9 3,414.1
capita, USD
Tax and
social
contributions 4.0 4.0 4.0 4.0 4.0 4.0 4.0
, % of gross
income
Tax and
social
contributions 4,614.68 4,952.51 5,416.65 5,905.74 6,424.23 6,982.91 7,586.15
, per capita,
PHP
Tax and
social
contributions 99.9 104.9 103.2 109.4 119.3 130.3 142.3
, per capita,
USD
Households
'000 earning 12,503.1 13,645.1 13,738.6 15,069.0 16,881.3 18,684.2 20,392.1
USD5,000+
Households
'000 earning 3,694.9 4,187.3 4,103.8 4,733.5 5,782.7 7,040.9 8,488.2
USD10,000+
Households
'000 earning 69.2 76.9 71.9 81.8 100.4 124.0 153.4
USD50,000+
Households
earning
51.9 55.3 54.4 58.5 64.2 69.8 75.0
USD5,000+,
% total
Households
earning
15.3 17.0 16.3 18.4 22.0 26.3 31.2
USD10,000+
, % total
Households
earning
0.3 0.3 0.3 0.3 0.4 0.5 0.6
USD50,000+
, % total
More on these topics
Industry Trend Analysis (Banking & Financial

Services Report NSFR Positive For Financial
Stability But Philippine Banks To Feel Short-Term
Pain - Philippines - Q4 2018)
We believe that the adoption of the NSFR under Basel III by Philippine commercial
banks will be positive for financial stability over the long-run. However, banks are likely
to feel short-term pain in the form of higher funding and transition costs, while
businesses could see the availability of long-term financing drop.
Key View: We believe that the adoption of the NSFR under Basel III by Philippine
The Bangko Sentral Ng Pilipinas (BSP) has adopted the net stable funding ratio (NSFR)
2018. The rationale is to limit structural maturity mismatches and to reform the asset
and liability structures of banks to make them less prone to cyclical factors. The BSP
has typically been ahead of its regional peers when it comes to the adoption of macro
prudential regulations and we believe that this will continue to help safeguard financial
stability. Nevertheless, we expect Philippines banks to feel some pinch in the short-term
in the form of higher transition and funding costs as they adjust their balance sheets in
order to comply with the new standard.
What Is The NSFR?

The NSFR and the LCR are both tools for liquidity supervision, which are part of the
Basel III package. The LCR governs the short-term aspect and requires banks to hold
sufficient high-quality liquid assets (HQLA) that can be easily converted into cash to
cover its total net cash outflows over a 30-days period. The NSFR covers the long-term
aspect, and requires the amount of available stable funding (ASF) to exceed the
required stable funding (RSF) for a one-year period of extended stress. Under the
NSFR rule, a factor will be applied to the components of ASF and RSF category, and
the ratio must be kept at a minimum of 100% at all times. For more details, see tables
below.
Summary Of Liability Categories And Corresponding ASF Factors
ASF Factor Components Of ASF Category 100 Total regulatory capital Other capital
instruments and liabilities with effective residual maturity of one year or more 95 Stable
non-maturity (demand) deposits and term deposits (
Summary Of Asset Categories And Associated RSF Factors

RSF Factor Components Of RSF Category 0 Coins and banknotes All central bank
reserves Unencumbered loans to banks subject to prudential supervision with residual
maturities of less than six months 5 Unencumbered Level 1 assets, excluding coins,
banknotes and central bank reserves 15 Unencumbered Level 2A assets 50
Unencumbered Level 2B assets HQLA encumbered for a period of six months or more
and less than one year Loans to banks subject to prudential supervision with residual
maturities six months or more and less than one year Deposits held at other financial
institutions for operational purposes All other assets not included in the above
categories with residual maturity of less than one year, including loans to non-bank
financial institutions, loans to non-financial corporate clients, loans to retail and small
business customers, and loans to sovereigns, central banks and PSEs 65
Unencumbered residential mortgages with a residual maturity of one year or more and
with a risk weight of less than or equal to 35% Other unencumbered loans not included
in the above categories, excluding loans to financial institutions, with a residual maturity
of one year or more and with a risk weight of less than or equal to 35% under the
Standardised Approach 85 Other unencumbered performing loans with risk weights
greater than 35% under the Standardised Approach and residual maturities of one year
or more, excluding loans to financial institutions Unencumbered securities that are not in
default and do not qualify as HQLA including exchange-traded equities Physical traded
commodities, including gold 100 All assets that are encumbered for a period of one year
or more Derivatives receivable net of derivatives payable if receivables are greater than
payables All other assets not included in the above categories, including non-performing
loans, loans to financial institutions with a residual maturity of one year or more, non-
exchange-traded equities, fixed assets, pension assets, intangibles, deferred tax assets,
retained interest, insurance assets, subsidiary interests, and defaulted securities
How Will The Measure Be Rolled Out?

The implementation of the new prudential measure will be done in two phases and was
announced by the BSP on June 4. The BSP only requires universal and commercial
banks, as well as selected subsidiaries of these banks to comply with the LCR and
NSFR standards. The smaller institutions (thrift banks, rural banks, cooperative banks,
and quasi-banks) are subjected to the Minimum Liquidity Ratio (MLR) requirement
instead, which (according to the BSP) 'better suits their simpler liquidity risk profile'. An
observation period of six months from July 1 to December 31 has been implemented to
provide the universal and commercial banks with time to transition to the new NSFR.
During this period, banks that fail to meet the prescribed minimum ratio are required to
submit a funding plan or actions that will be taken to improve their funding profiles and
comply with the requirement. From January 1, 2019, the covered banks will need to
maintain an NSFR of 100% on both solo and consolidated basis and breaches would be
dealt with 'using the tools in the BSP's menu of supervisory enforcement framework'.
Rising Fast But Still Not An Issue For Most Banks

Philippines - Loan To Deposit Ratio, %
Source: BSP, Fitch Solutions
Negative For Financial Intermediation

In general, we believe that banks will likely be forced to cut back on short-term
wholesale funding and raise deposit rates to attract more retail deposits, which could
see funding costs increase over the coming quarters. However, we note that this is
unlikely to be a big issue for most Philippine banks given that the overall industry loan-
to-deposit ratio stood at 74.3% as of April 2018. There will also likely be an increase in
the issuance for longer-dated debt by banks with a maturity of one year or greater,
which could lead to a steepening of the yield curve. Lastly, banks are likely to be
discouraged from conducting business that involve higher RSF. This may see banks cut
back on long-term lending, undermining banks' traditional role in liquidity and maturity
transformation in the economy. This poses downside risks to economic growth in the
Philippines given that the country has an underdeveloped capital markets and
businesses rely more on banks for long-term financing.
Key Banking Forecasts (Philippines 2016-2022)
INDICATO
2016 2017 2018F 2019F 2020F 2021F 2022F
R
Total
12,301,72 13,763,27 15,277,23 16,804,96 18,485,45 20,334,00 22,367,40
assets,
7 8 9 3 9 5 6
PHPmn
Total
assets, % 12.9 11.9 11.0 10.0 10.0 10.0 10.0
y-o-y
Client
10,223,26 11,552,29 13,054,09 14,751,12
loans, 6,706,311 7,867,078 9,047,139
8 2 1 2
PHPmn
Client
loans, % y- 17.3 17.3 15.0 13.0 13.0 13.0 13.0
o-y
Client
10,614,36 11,781,94 13,077,96 14,516,53 16,113,35 17,885,82
deposits, 9,482,803
6 6 0 6 5 4
PHPmn
Client
deposits, % 14.3 11.9 11.0 11.0 11.0 11.0 11.0
y-o-y
Loan/depos
70.72 74.12 76.79 78.17 79.58 81.01 82.47
it ratio
Loan/asset
54.52 57.16 59.22 60.83 62.49 64.20 65.95
ratio
Macroeconomic Forecasts (Banking & Financial Services Report Philippines Banking Forecast
Tables - Philippines - Q4 2018)
Appendix
Assets Forecasts (Philippines 2016-2021)
Indicator 2016 2017 2018f 2019f 2020f 2021f

Total assets, PHPmn 12,301,727 13,763,278 15,277,239 16,804,963 18,485,459 20,334,005
Total assets, USDmn 248,018 276,093 282,911 311,203 344,043 380,349
Total assets, % of
85.0 87.1 87.0 86.4 86.0 85.6
GDP
Total assets, % y-o-y 12.9 11.9 11.0 10.0 10.0 10.0
Client loans, PHPmn 6,706,311 7,867,078 9,047,139 10,223,268 11,552,292 13,054,091
Client loans, USDmn 135,207 157,815 167,539 189,319 215,006 244,178
Client loans, % of
46.3 49.8 51.5 52.5 53.7 55.0
GDP
Client loans, % y-o-y 17.3 17.3 15.0 13.0 13.0 13.0
Client loans, USD per
1,308 1,504 1,572 1,751 1,959 2,193
capita
Client loans, % of
54.5 57.2 59.2 60.8 62.5 64.2
total assets
Assets Forecasts (Philippines 2022-2027)
Indicator 2022f 2023f 2024f 2025f 2026f 2027f

Total assets, PHPmn 22,367,406 24,604,146 27,064,561 29,771,017 32,748,119 36,022,931
Total assets, USDmn 420,487 464,860 513,915 568,147 628,103 694,385
Total assets, % of
85.4 85.1 84.7 84.4 84.0 83.6
GDP
Total assets, % y-o-y 10.0 10.0 10.0 10.0 10.0 10.0
Client loans, PHPmn 14,751,122 16,668,768 18,835,708 21,284,350 24,051,316 27,177,987
Client loans, USDmn 277,307 314,932 357,662 406,189 461,300 523,888
Client loans, % of
56.3 57.6 59.0 60.3 61.7 63.1
GDP
Client loans, % y-o-y 13.0 13.0 13.0 13.0 13.0 13.0
Client loans, USD per
2,456 2,750 3,081 3,452 3,868 4,337
capita
Client loans, % of
65.9 67.7 69.6 71.5 73.4 75.4
total assets
Liabilities Forecasts (Philippines 2016-2021)
Indicator 2016 2017 2018f 2019f 2020f 2021f

Total liabilities and
12,301,727 13,763,278 15,277,239 16,804,963 18,485,459 20,334,005
capital, PHPmn
248,018 276,093 282,911 311,203 344,043 380,349
capital, USDmn
85.0 87.1 87.0 86.4 86.0 85.6
capital, % of GDP
12.9 11.9 11.0 10.0 10.0 10.0
capital, % y-o-y
Client deposits,
9,482,803 10,614,366 11,781,946 13,077,960 14,516,536 16,113,355
PHPmn
Client deposits,
191,185 212,926 218,184 242,184 270,175 301,401
USDmn
Client deposits, % of
65.5 67.2 67.1 67.2 67.5 67.9
GDP
Client deposits, % y-
14.3 11.9 11.0 11.0 11.0 11.0
o-y
Client deposits, USD
1,850 2,029 2,048 2,240 2,462 2,707
per capita
77.1 77.1 77.1 77.8 78.5 79.2
total liabilities

Liabilities Forecasts (Philippines 2022-2027)

22,367,406 24,604,146 27,064,561 29,771,017 32,748,119 36,022,931
capital, PHPmn
420,487 464,860 513,915 568,147 628,103 694,385
capital, USDmn
85.4 85.1 84.7 84.4 84.0 83.6
capital, % of GDP
10.0 10.0 10.0 10.0 10.0 10.0
capital, % y-o-y
Client deposits,
17,885,824 19,853,265 22,037,124 24,461,207 27,151,940 30,138,654
PHPmn
Client deposits,
336,237 375,098 418,452 466,815 520,769 580,958
USDmn
68.3 68.6 69.0 69.3 69.7 69.9
GDP
Client deposits, % y-
11.0 11.0 11.0 11.0 11.0 11.0
o-y
Client deposits, USD
2,978 3,276 3,604 3,967 4,367 4,809
per capita
80.0 80.7 81.4 82.2 82.9 83.7
total liabilities
Key Ratios Forecasts (Philippines 2016-2027)
Indicator 2016 2017 2018f 2019f 2020f 2021f 2022f 2023f 2024f 2025f 2026f 2027f
Loan/deposit
70.72 74.12 76.79 78.17 79.58 81.01 82.47 83.96 85.47 87.01 88.58 90.18
ratio
Loan/asset
54.52 57.16 59.22 60.83 62.49 64.20 65.95 67.75 69.60 71.49 73.44 75.45
ratio

Macroeconomic Forecasts (Macroeconomic Data Report Philippines Macroeconomic Forecasts -
Philippines - Q4 2018)
Macro Table
Macroeconomic Indicators (Philippines 2017-2027)
Indicator 2017e 2018f 2019f 2020f 2021f 2022f 2023f 2024f 2025f 2026f 2027f
Nominal GDP,
334.7 334.5 360.3 399.2 443.0 491.3 545.1 604.9 671.5 745.7 828.5
USDbn
Nominal GDP,
296.2 290.8 313.3 341.2 378.6 419.9 465.9 517.0 574.0 637.4 708.1
EURbn
GDP per
3,180 3,127 3,315 3,615 3,949 4,312 4,711 5,149 5,632 6,165 6,752
capita, USD
GDP per
2,815 2,719 2,883 3,090 3,375 3,685 4,026 4,401 4,814 5,269 5,771
capita, EUR
Real GDP
growth, % y- 6.7 6.5 6.3 6.3 6.2 6.1 6.1 6.2 6.2 6.2 6.3
o-y
Private final
consumption, 73.3 72.6 71.8 70.9 70.1 69.4 68.6 67.9 67.1 66.3 65.5
% of GDP
Private final
consumption,
5.8 5.5 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
real growth %
y-o-y
Government
final
11.3 11.4 11.4 11.4 11.4 11.3 11.2 11.0 10.9 10.8 10.6
consumption,
% of GDP
Government
final
consumption, 7.3 7.5 6.5 6.0 6.0 5.0 5.0 5.0 5.0 5.0 5.0
real growth %
y-o-y
Fixed capital
formation, % 25.2 26.0 26.9 27.9 28.6 29.4 30.2 31.0 31.8 32.6 33.5
of GDP
Fixed capital
formation, real
10.3 10.0 10.0 10.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0
growth % y-o-
y
Population, 104.9 106.5 108.1 109.7 111.3 112.9 114.5 116.0 117.6 119.2 120.7
mn 2 1 1 0 0 0 0 9 6 3 9
Unemploymen
t, % of labour 6.2 6.2 6.1 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0
force, eop
Consumer
price inflation, 3.2 4.4 4.3 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0
% y-o-y, ave
Lending rate,
4.5 5.3 5.8 5.8 5.8 5.8 5.8 5.8 5.8 5.8 5.8
%, ave
Central bank
policy rate, % 3.00 3.75 4.25 4.25 4.25 4.25 4.25 4.25 4.25 4.25 4.25
eop
Exchange rate
47.20 52.50 54.00 53.87 53.60 53.33 53.06 52.80 52.53 52.27 52.01
PHP/USD, ave
Exchange rate
53.34 60.38 62.10 63.02 62.71 62.39 62.08 61.77 61.46 61.15 60.85
PHP/EUR, ave
Budget
balance, -7.4 -9.8 -10.7 -11.4 -12.2 -14.5 -15.2 -15.8 -16.4 -17.0 -17.5
USDbn
Budget
balance, % of -2.2 -2.9 -3.0 -2.9 -2.8 -2.9 -2.8 -2.6 -2.4 -2.3 -2.1
GDP
Goods and
services
83.8 93.3 103.4 114.5 126.9 140.8 156.1 173.2 192.1 213.1 236.4
exports,
USDbn
Goods and
services
115.5 128.2 141.6 156.0 171.9 189.4 208.7 229.9 253.3 279.1 307.6
imports,
USDbn
Balance of
trade in goods
-31.7 -34.9 -38.2 -41.5 -44.9 -48.6 -52.5 -56.7 -61.2 -66.0 -71.2
and services,
USDbn
Balance of
trade in goods
-9.5 -10.4 -10.6 -10.4 -10.1 -9.9 -9.6 -9.4 -9.1 -8.9 -8.6
and services,
% of GDP
Current
account
-2.5 -3.9 -4.2 -4.4 -4.4 -4.4 -4.3 -4.1 -3.8 -3.4 -2.9
balance,
USDbn
Current
account
-0.8 -1.2 -1.2 -1.1 -1.0 -0.9 -0.8 -0.7 -0.6 -0.5 -0.3
balance, % of
GDP
Foreign
reserves ex 70.9 67.0 67.0 58.3 53.9 49.5 45.2 41.1 37.3 33.9 31.0
gold, USDbn
Import cover,
7.4 6.3 6.3 4.5 3.8 3.1 2.6 2.1 1.8 1.5 1.2
months
Economic Analysis (Economic Activity Report

Philippines' Growth Likely To Remain On Slowing
Path - Philippines - Q4 2018)
We have revised our 2018 real GDP growth forecast for the Philippines to 6.5%, from
6.3% previously, following Q1's stellar economic growth performance. However, we
maintain our view that growth is likely to remain on a slowing path over the coming
quarters given that monetary conditions are expected to tighten further, and the
deterioration in the business environment will likely continue to weigh on private
investment and confidence.
Key View: We have revised our 2018 real GDP growth forecast for the Philippines to
6.5%, from 6.3% previously, following Q1's stellar economic growth performance.
However, we maintain our view that growth is likely to remain on a slowing path over the
coming quarters given that monetary conditions are expected to tighten further, and the
deterioration in the business environment will likely continue to weigh on private
investment and confidence.
The Philippine economy expanded by 6.8% y-o-y in real terms in Q118, up from 6.5% y-
o-y in the previous quarter, and 6.7% for full-year 2017. The growth acceleration was
mainly driven by strong fixed capital formation, particularly in the construction sector,
which was supported by the government's 'Build, Build, Build' programme. This was
slightly different from 2017 when growth was largely driven by the ongoing global
economic recovery, which raised the demand for Philippine exports. On the back of a
stronger-than-expected real GDP growth performance in Q118, we have raised our real
GDP growth forecast for 2018 to 6.5%, from 6.3% previously. However, we are sticking
to our view that economic growth is likely to moderate over the coming quarters. Even
as the Philippines continues to enjoy positive demographics, the economy is showing
signs of overheating, and we expect the deterioration in the business environment to
weigh on private investment.
Strong Government Spending And Investment A Key Driver Of Growth

Philippines - Contribution To Real GDP Growth Breakdown, pp
Source: PSA, Fitch Solutions
Looking at the breakdown of GDP by expenditure, the main drivers of growth in Q118
were government consumption (which grew by 13.6% y-o-y) and fixed capital formation
(which increased by 12.5% y-o-y). Both components were driven by President Duterte's
expansionary fiscal policy and are likely to continue to provide support to headline GDP,
allowing for growth above 6% over the coming quarters. According to the Department of
Budget and Management, infrastructure and other capital outlays surged by 33.7% y-o-
y in Q118, reaching PHP151.7bn, while the fiscal deficit almost doubled to PHP162.3bn
in Q118 (4.1% of GDP), from around PHP83.0bn in Q117 (2.3% of GDP). Given that the
Philippine government has embarked on fiscal reforms to boost revenue and
deleveraged considerably since the early 2000s (public debt as a share of GDP
declined from 77% in 2003 to 49.1% in 2017), this should allow the Duterte
administration to continue to keep up its strong spending in the near-term.
Philippines Topping The Region
Asia - Labour Force Growth, %
2018 Forecast. Source: National Sources, Fitch Solutions
Positive Demographics To Act As A Tailwind

Another major (and structural) economic growth theme in the Philippines is the positive
demographics which we expect to continue to support the development of the labour-
intensive business process outsourcing (BPO) and manufacturing industries, as well as
the retail and consumer goods sectors. More than 51% of the population is under the
age of 25, while just under one-third is under the age of 15, and we forecast the working
age population to grow by an average of 1.9% over the next few years. This will provide
the necessary labour force that is required for the BPO and manufacturing industries,
which employ around five million people in the country. Looking at GDP by production,
the manufacturing industry (which expanded by 8.0%) remains one of the top
contributor to growth in Q118, after clocking in an impressive growth rate of 8.4% in
2017.
PHP One Of The Worst Performing Currencies

Asia - Year-To-Date Spot Return, %
Bloomberg, Fitch Solutions. Updated May 16
Weakening Private Investment And Confidence Suggest Slower Growth Likely

That said, we believe that growth will continue to moderate in 2018, similar to 2017
when growth slowed to 6.7% from 6.9% in 2016. Looking at financial markets, which
tend to provide some indication of market sentiment and confidence, the Philippine peso
has been one of the worst performing currencies in the region year-to-date, and likewise
for the benchmark equity index PCOMP. Moreover, inflation has risen steadily to 4.5%
y-o-y in April, well above the central bank's target of 3+-1.0%. While the Monetary
Board increased its benchmark interest rate by 25bps to 3.25% on May 10, inflation will
likely remain an issue over the coming months, and we continue to forecast another
25bps hike to 3.50% by the end of the year. Such a move may slow domestic demand
and will likely act as a dampener to growth.
In addition, we expect the deteriorating business environment to continue to weigh on
private investment over the coming quarters. While overall construction grew by 10.1%
y-o-y in Q118, it was mainly buoyed by public construction activities (20.8% of total),
which expanded by 25.1% y-o-y, while private construction grew by just 6.8% y-o-y.
Indeed, in terms of the ease of doing business, the Philippines saw the biggest
deterioration in ASEAN, sliding by 14 positions in the 2018 World Bank's Ease Of Doing
Business ranking to 113th position globally. Moreover, abrupt and drastic measures
taken by the Duterte administration at times with the intention of safeguarding the
interest of the country have also stifled investor confidence and disrupted businesses.
For instance, President Duterte ordered the closure of the Boracay Island in February
on few weeks' notice to protect the environment and threatened to ban all open pit
mining including existing ones in April if mining companies did not put in extra efforts to
plant trees. A ban on new open pit mines has already been in place since last April,
affecting projects such as the USD5.9bn copper-gold Tampakan project in southern
Mindanao Island.
une 22, 2018 (16:50) | Publication: EIU - Industry Briefings
Philippines central bank raises interest rates

again
Event
On June 20th the Bangko Sentral ng Pilipinas (BSP, the central bank) raised its
benchmark policy rate, the overnight reverse repurchase (repo) rate, by 25 basis points
to 3.5%.
Analysis
The adjustment, which is the second interest-rate increase sanctioned by the BSP so
far this year, is in reaction to an acceleration in consumer price inflation. Prices rose by
an average of 4.1% year on year in the first five months of this year, breaching the
BSP's consumer price inflation target range of 2-4%. Inflationary pressures have
increased on the back of firmer global oil prices, as well as the significant weakness of
the peso against the US dollar, which has pushed up import prices. There is plenty of
headroom for raising the benchmark rate. In June 2016 the overnight reverse repo rate
was reduced to 3%-a record low-and was left unchanged until May this year.
We expect the BSP to raise its policy interest rate at least two more times this year. The
central bank's actions will help to support the value of the peso against the US dollar,
but we do not expect them to reverse the currency's trend this year. Consumer price
inflation tends to be more acute in the second half of the year, owing to inclement
weather that causes disruptions to supply chains. This means that the rate of consumer
price inflation will also continue to accelerate. A further tightening of monetary policy
should not have a significant impact on domestic growth fundamentals this year. We
expect the economy to grow by a sturdy 6.4% in 2018 as a whole as the government
continues to ramp up infrastructure spending.
Impact on the forecast
The BSP's move is in line with our expectation and therefore no change is needed to
our monetary policy outlook. We expect the BSP to sanction two more 25-basis-point
increases in the policy interest rate this year.
June 19, 2018 (19:40) | Publication: EIU - Industry Briefings
Philippines: Banking sector risk

Philippines: banking sector risk

Rating
June 2018 BBB
Current assessment
The score for this category remains unchanged at 41, with the rating at BBB. The net-
foreign-asset position of the financial sector remained positive and, in fact, strengthened
in 2017. Therefore the local banking sector does not need to rely on potentially volatile
financing flows from overseas, reducing its vulnerability to exchange-rate movements
and global financial shocks. Overall, the banking system is broadly healthy: local banks
are profitable and have high levels of capital relative to assets. According to the latest
available data from the Bangko Sentral ng Pilipinas (BSP, the central bank), the ratio of
banks' risk-weighted capital to assets stood at 15% at end-September 2017, down from
15.4% at end-2016. Nevertheless, this was still much higher than the amount required
under Basel III prudential norms. The fact that commercial banks have a limited reach
among households beyond the National Capital Region leaves them reliant on
corporate-sector demand for credit. This can act to hold back profit growth.
Positive factors
 The proportion of non-performing loans at universal and commercial banks stood at the
equivalent of 1.7% of their total loan portfolio at end-2017 (down from 1.9% at end-
2016), according to the latest available data from the BSP.
 Healthy economic growth underpinned a robust increase of 9% in the financial sector's
net profit in 2017.
Negative factors
 Loan growth remains high and suggests that the economy could be gradually
overheating. In 2017 it averaged 16.4%, compared with 16.6% in 2016. Nominal GDP
growth, by comparison, rose at a slower pace of 8.7% in 2016 and 9.2% in 2017. Much
of the increase in lending in 2017 was driven by real estate loans, which grew by 17%.
Rating outlook
The score remains at the risky end of the BBB rating band and there is a significant
likelihood of a downgrade in 2018-19. Although it is not our central forecast, a
weakening in banks' net-foreign-asset position could lead to a downgrade in the rating.
Our expectation that consumer price inflation will accelerate in 2018 could also be a
trigger for a downgrade. Offsetting this, the BSP's efforts to strengthen the banking
sector and make it more resilient to external shocks through macroprudential measures
will continue in 2018-19. These measures have included the introduction of a cap on
real-estate loans of 60% of their collateral value. Such policies will take time to temper
consumer credit growth but will eventually help to reduce the risk of generating an asset
price bubble. However, the measures will not remove the downside risk that would be
posed by a drop in workers' remittances, which are the main driver of investment activity
in the local property sector. A significant drop in remittances would result in an increase
in mortgage defaults, and could put the rating at risk of a downgrade to BB.
June 06, 2018 | Publication: BMI - Industry Reports
BMI Industry View (Banking & Financial Services

Report - Philippines - Q3 2018)
Growth it the Philippine financial services' sector is expected to be far more subdued in
USD terms that the growth rates witnessed in 2016 and 2017, coming down to around
3% from higher rates of around 7.1% and 8.3% which were seen in these previous two
years. This is largely because of the risks which are starting to mount in the Philippine
economy which are detracting from the impressive growth trajectory which has been
seen prior to 2018. Examples of risks mounting in the banking and financial services'
sectors include that while FY2017 banking sector results overall were positive, generally
indicating strong asset growth and few changes in the overall asset quality and
profitability of the major Philippine banks, but we expect loan growth to slow as a rates
hike appears imminent with how global interest rates and domestic inflation levels are
rising. Additionally, after peaking at historical levels in January 2018, the Philippine
Stock Exchange's benchmark Index has been extremely volatile, and has plummeted to
trading at just above the 7,500-point mark as of May 2018. Overall this indicates the
Philippine economy could be overheating and also demonstrates the emergence of
broader trend of increasing investor fatigue with the Philippine business environment.
These events therefore are creating additional difficulties for banking and financial
services' sector growth over the course of this year.
BMI View: Growth it the Philippine financial services' sector is expected to be far more
subdued in USD terms that the growth rates witnessed in 2016 and 2017, coming down
to around 3% from higher rates of around 7.1% and 8.3% which were seen in these
previous two years. This is largely because of the risks which are starting to mount in
the Philippine economy which are detracting from the impressive growth trajectory
which has been seen prior to 2018. Examples of risks mounting in the banking and
financial services' sectors include that while FY2017 banking sector results overall were
positive, generally indicating strong asset growth and few changes in the overall asset
quality and profitability of the major Philippine banks, but we expect loan growth to slow
as a rates hike appears imminent with how global interest rates and domestic inflation
levels are rising. Additionally, after peaking at historical levels in January 2018, the
Philippine Stock Exchange's benchmark Index has been extremely volatile, and has
plummeted to trading at just above the 7,500-point mark as of May 2018. Overall this
indicates the Philipine economy could be overheating and also demonstrates the
emergence of broader trend of increasing investor fatigue with the Philippine business
environment. These events therefore are creating additional difficulties for banking and
financial services' sector growth over the course of this year.
Significant Potential Comes With Significant Risks

Asia - Commercial Banking Risk/Reward Index Scores
Note: 100 = Lowest risk. 0 = Highest risk. Score shown in brackets is the country-
specific score. Source: BMI Commercial Banking Risk/Reward Index
We remain upbeat about the prospects for the Philippines' insurance sector. Both major
segments should benefit from the steady rise in household income and economic
activity generally. In both cases, premiums will be boosted by the development and
distribution of innovative products. We have once again left our forecasts unchanged
this quarter.
Given the strong economic growth trajectory that is expected for the Philippines and the
country's growing middle class, more opportunities are starting to emerge for asset
management services such as private equity firms, private wealth management firms,
investment banking and pension funds. Key barriers for new and existing market
entrants are largely linked to the country's small stock exchange and uncertain political
and security environments. For example, 2016 saw the introduction of martial law under
President Rodrigo Duterte to the Philippines in order to deal with the country's massive
organised-crime problem, and 2017 having seen the Islamic State occupy the Filipino
city of Marawi.
The Philippine Stock Exchange (PSE) is one of the oldest stock exchanges in Asia and
provides another facet to the country's financial services offerings. The PSE has one of
the smaller market capitalisations in the East and South East Asian region, with slightly
more than 300 companies listed on it and trading activity dominated by the sale of
government bonds. As a result of the country's promising economy growth trajectory
and growing middle-class, the PSE enjoy a successful 2017 and early 2018. This was
shown by its bench index peaking past its highest-ever recorded level eight times over
the course of 2017, and in January 2018 it broke past the 9,000-point mark for the first
time ever. Nevertheless, the rest of 2018 has been extremely volatile, and since
reaching this landmark point, the benchmark index has plummeted to trading at just
above the 7,500-point mark. Reasons for this crash have been listed as rising political
risks, poor performance of the Philippine peso, rising inflation and a weakening
business environment.

 Annual financial results for the 2017 year for the Philippine banking sector have now
been released. In terms of any major shake-ups to the Philippines' banking competitive
landscape which have emerged from these in comparison to the 2016 financial results,
there are not that many. For example, in top five banks in terms of total banking assets
in the Philippines in 2017 remain unchanged from 2016 and all the top five banks saw
small increases in the total assets they hold. In terms of asset quality across the board,
there have been no significant shifts as all top five banks reported either very small
increments or decreases in their non-performing loan (NPL) ratios and reserves. BDO
Unibank (which had the highest NPL ratio out of the top five banks paired with the
lowest NPL reserves in 2016), saw its NPL ratio drop from 2.7% of total loans in 2016 to
2.3% in 2017, and its NPL reserves rise from 64.9% of total NPLs in 2016 to 73.5% in
2017. In terms of profitability, in 2017 the Bank of the Philippine Islands (BPI) reported
the highest profit return on average assets (at 1.6%) out of the four top five Philippine
banks for which data is available for this indicator. Additionally in 2017, BPI also
reported the highest return on average equity (at 12.9%) out of the four top five
Philippine banks for which data is available for this indicator. Across the board there
were very small changes in terms of the top banks' profitability ratios, with Metropolitan
Bank & Trust Company (Metrobank) and Philippine National Bank (PNB) reporting
increases in their return on average assets and return on average equity ratios of
around 0.2 - 0.9%.
 We expect the Philippine banking system to remain stable over the medium term, as
risks to financial stability, albeit rising, remain low. Key metrics that measure asset
quality, capital adequacy, and liquidity show that the banking sector remains in a solid
shape amid a robust macroeconomic backdrop and an accommodative interest rate
environment. However, we believe that the Bangko Sentral Ng Pilipinas (BSP) will likely
gradually unwind its loose monetary policy stance over the coming quarters as global
interest rates and domestic inflation continue to rise (see ' Rate Hikes Imminent As
Inflation Risks Heighten', March 23 2018). This will likely weigh on loan growth to some
extent, while credit stress could start to rise, and eat into the profitability of banks over
the coming quarters.
 Thee year 2018 has proved so far to be an extremely volatile one, in terms of the
performance of the PSEi Index.While on January 29 2018 the PSEi Index had reached
a historical height of 9,058.62 points, since then it has been on a drastic downward
trend and as of May 8 2018 was currently at a low 7,543.44 points. We do note that this
is still higher than the value which the PSEi Index opened 2017 at, as on January 6
2017 the index was trading at a lower 7,248.2 points. According to Bloomberg,this slide
has seen Philippine stocks lose about USD20bn in value since the start of 2018.
Reports indicate that the global uptick in crude prices which have been witnessed since
the beginning of 2018 (crude and refined fuels are two of the country's largest imports)
and the very poor performance of the Philippine peso in the beginning of 2018, have
been two of the largest contributors to this stock market slump. Global trade war
tensions, peaking inflation, and prevailing domestic security threats have also all been
cited as causes for this.
 Ultimately this significant slump of the PSE seems to be indicative of the broader trend
of emerging investor fatigue with the Philippine business environment. For example,
fixed capital formation already slowed to 10.3% in 2017, from 25.2% in 2016. In our
view, the slowdown in investment is indicative that the Duterte administration's violent
anti-drug war has likely had a negative impact on investor sentiment, while a rise in
Trump's protectionist rhetoric has led many US investors adopting a wait-and-see
approach with regards to new ventures in locating their business offshore. Meanwhile,
in terms of the ease of doing business in the country, the Philippines saw the biggest
deterioration in ASEAN, sliding by 14 positions in the 2018 World Bank's Ease of Doing
Business ranking to 113th position globally.
 The Philippine Department of Finance (DOF) submitted the second (of five) package of
the government's Comprehensive Tax Reform Program (CTRP) to the congress in
January 2018 and it is now in the official period of deliberation in the House of
Representatives, as of March 5 2018. While the proposed tax reforms in the second
package would streamline the complex tax system, we believe it will likely weigh on the
country's competitiveness, and create uncertainty for investors in the near-term. The
sequel came after the first package was signed into law by President Rodrigo Duterte in
December 2017, and aims to lower corporate income taxes and reduce fiscal incentives
to investors to achieve the government's objective of making the tax system more
efficient and fairer. This could spell further concerns for the Phillipine Stock exchange
and asset management sector.
INDICATOR 2016 2017E 2018F 2019F 2020F 2021F

INDICATOR 2016 2017E 2018F 2019F 2020F 2021F
7.1 8.3 3.0 11.9 11.8 11.8
y-o-y
9.5 10.7 11.7 11.5 11.5 11.2
growth, % y-o-y
8.04 8.16 8.24 8.32 8.39 8.45
GVA
INDICATOR 2022F 2023F 2024F 2025F 2026F 2027F

11.7 11.6 11.7 11.6 11.6 11.6
y-o-y
11.2 11.1 11.1 11.1 11.0 11.0
growth, % y-o-y
8.51 8.56 8.61 8.66 8.70 8.74
GVA
May 31, 2018 (10:21) | Publication: EIU - Industry Reports
Philippines - Financial regulation

Overview
The central bank supervises the operation of banks and exercises regulatory powers
over non-bank financial institutions with quasi-banking functions, under Section 12 of
the New Central Bank Act of 1993. It is also responsible for formulating and
implementing monetary policy; managing liquidity; currency issuance; managing
foreign-currency reserves; and exchange-rate policy. As a lender of last resort, it
extends loans, discounts and advances to banks for liquidity purposes. At the day-to-
day level the BSP manages the country's external debt, monitors foreign-exchange
trans-actions and issues regulation affecting exports, imports and invisibles trade.
Responsibility for issuing government securities passed to the Bureau of the Treasury in
1995.
The Insurance Commission, a unit of the Department of Finance, oversees insurers and
pre-need companies. The Securities and Exchange Commission, an independent
agency, oversees licensed firms and supervises the securities markets and fund
managers.
The Republic Act 9302, which took effect in 2004, amended the charter of the Philippine
Deposit Insurance Corporation (PDIC), restoring its authority to examine banks, with
prior approval of the BSP's monetary board. The Republic Act 9576, which took effect in
2009, increased the maximum deposit-insurance coverage provided by the PDIC from
P250,000 (US$5,600) to P500,000 per depositor. The PDIC also provides liquidity to
banks, along with the BSP.
Following the 1997-98 Asian financial crisis, the BSP prioritised moves to strengthen the
Philippine financial system. It encouraged consolidation in the banking sector, urged
banks to clean up balance sheets and required them to build up capital. To reduce
banks' high levels of related-party lending, the BSP also set ceilings on lending to
banks' directors, officers, stockholders and related interests (collectively known as
DOSRI). In August 2017 the BSP issued new corporate governance regulations to
better ensure the independence of banks' boards from their management. For one, the
new guidelines state that the chair of a board cannot be the chief executive officer of a
bank, and vice versa. In addition, banks must now ensure that non-executive directors
account for a majority of the board.
The BSP eased a previous moratorium on the establishment of new banks and the
expansion of existing ones in 2011, allowing all commercial and thrift banks with fewer
than 200 branches to establish new branches anywhere in the country. In 2014 the BSP
extended this provision to all banks, except rural banks opening branches in
Metropolitan Manila. The BSP is encouraging mergers between the country's many
small rural banks through its CPRB scheme.
In 2016 the BSP signed an agreement with Bank Negara Malaysia (that country's
central bank) as part of a wider attempt to forge greater financial integration among the
members of the Association of South-East Asian Nations (ASEAN). The accord sets out
the guidelines to be adopted regarding cross-border investment and the entry of
qualified ASEAN banks. It is one of the first bilateral pacts to be signed under the terms
of the ASEAN Banking Integration Framework. Under the agreement, up to three
qualified ASEAN banks from Malaysia will be allowed to operate in the Philippines
without discrimination; similar access will be granted to Philippine banks that want to set
up shop in Malaysia. "Qualified" banks are those that are majority-owned in their host
country and are liquid and well managed. In March 2017 the BSP announced that it is
looking to sign two more bilateral agreements with other central banks in the ASEAN
region.
The BSP issued Circular No. 523 in 2006, authorising itself to take "prompt corrective
action" if a bank's prescribed capital ratios fall below the minimum and its Capital, Asset
Quality, Management, Earnings, Liquidity and Sensitivity (CAMELS) composite rating
falls below 3 (the CAMELS system rates lenders on a scale of 1-5, with 5 being the
highest score) or if a serious supervisory concern has been identified that places the
bank at a more than normal risk of failure. The General Banking Law authorises the
BSP to enforce prompt corrective action, which includes requiring banks to implement
specific corporate-governance reforms, a business-improvement plan or a capital-
restoration programme.
Since 2011 the BSP has required universal and commercial banks to submit annual
plans for raising sufficient capital to cover non-traditional types of risk such as reputation
risk, interest-rate risk and liquidity risk. The practice, called the Internal Capital
Adequacy Assessment Process, was part of the BSP's commitment to full adoption of
Basel II. Since 2014 the BSP has also undertaken a series of macroprudential
measures to strengthen the banking system and make it more resilient against shocks.
These have included the introduction of a cap on real-estate loans of 60% of collateral
value.
In recent years the BSP has placed a high priority on expanding access to financial
services. For example, the BSP expanded the products and services that can be offered
by microfinance institutions (MFIs) and, via Circular 685 (effective from 2010), set out
regulations for the establishment and recognition of rating agencies for MFIs. Circular
694, effective from 2010, permitted banks to establish outlets (called micro-banking
offices) in remote locations.
These actions built on earlier moves by the BSP to encourage bank participation in
microfinance, including the partial lifting in 2001 of a moratorium on the establishment of
banks engaged in microfinance, and the opening in the same year of a rediscount
facility for microfinance loans (MFLs). A variety of lending requirements apply to MFLs.
In 2008 Congress (the legislature) enacted the Credit Information System Act, which
aimed to expand a credit bureau that had been operated by the BSP to allow banks to
share data on borrowers. However, the authorities failed to provide the new entity with a
budget, and the project was stillborn. In 2011 the country's five largest credit-card
issuers established a credit-information bureau in partnership with a US firm,
TransUnion, to manage credit information on borrowers.
The BSP announced in May 2018 that it had approved new regulations that will allow
the entry of players other than banks and affiliates into the credit-card market. The
central bank said that the new Credit Card Industry Regulation Law is aimed at ensuring
fair and competitive interest rates, as well as transparency and innovation in the
financial services sector. Companies are now required to disclose fully how transaction
and other credit-card-related fees are calculated. The new rules also mandate that firms
provide prior notification to customers in case any of these rates are changed, while
keeping in mind consumers' security and privacy concerns.
Regulatory watchlist
The BSP has indicated that it would consider "creative" methods to address volatile
capital inflows, which at times put significant upward and downward pressure on the
peso. However, monetary officials are unlikely to agree to impose a tax or outright
restrictions on short-term flows, despite the mounting pressure on the Philippine peso
over the past few quarters. A more likely option is the calibrated use of regulations, such
as the introduction of requirements for more reports on lending to property developers,
additional disclosures of non-performing loans and other prudential measures to prevent
asset price bubbles.
The Philippines is introducing the higher minimum-capital requirements for banks set
out in the Basel III international capital-adequacy framework, well ahead of time.
Although the Basel III agreement says that the stricter standards should be introduced
by 2019, in the Philippines these were effective from the start of 2015. Commercial
banks in the Philippines will be obliged to set aside more capital than is required under
Basel III. Local regulations stipulate a 6% ratio for common-equity tier-1 capital,
compared with 4.5% under Basel III; a 7.5% ratio for tier-1 capital (6% under Basel III);
and a 10% ratio for total capital (8% under Basel III). The BSP also introduced a 2.5%
capital-conservation buffer at the start of 2014, five years ahead of the Basel III
schedule. In 2015 the BSP set a leverage ratio of 5% for local banks, a stiffer
requirement than in most other countries. The leverage ratio measures base capital as
a percentage of total assets without any of the customary weighting for risk
adjustments. These moves aim to boost confidence in the country's banking sector.
In October 2017 the Philippines introduced a new set of rules that would allow the Anti-
Money Laundering Council (AMLC) to monitor funds entering and exiting the substantial
casino sector. This was a breakthrough move that led to the country being removed
from the list of closely monitored nations from the Asia-Pacific Group (APG) on Money
Laundering. The banking and casino industries had been under scrutiny after it was
discovered in February 2016 that Chinese cyber-criminals had used financial institutions
in the Philippines to launder US$81m stolen from Bangladesh Bank (the central bank).
In September of that year the APG gave the Philippines until June to pass anti-money
laundering rules that cover casino operations. The new rules are not stringent, reflecting
the government's reluctance to rein in what it considers a strategic sector: it sets the
threshold of transactions that casinos must report to the AMLC at P5m (US$100,000),
with no threshold for transactions that are considered to be suspicious, however. As
part of efforts to ramp up the gambling sector, consecutive administrations in the
Philippines have upheld the bank secrecy law, one of the strictest in the world and on
par with those in Switzerland. The impact of this law has been that the Philippines has
become a hub for money laundering in Asia.

Philippines Banks Philippines Banks Banks Banks Banks Banks Bank

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Philippines - Banks

An improving labour market, historically low interest rates, a booming business-process

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ugust 07, 2018 | Publication: BMI - Industry Reports

Key View (Banking & Financial Services Report

Latest Trends And Developments

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Financial Services Forecasts (Philippines 2016-2021)

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August 07, 2018 | Publication: BMI - Industry Reports

Market Overview (Banking & Financial Services

August 07, 2018 | Publication: BMI - Industry Reports

Competitive Landscape (Banking & Financial

Top 10 Commercial And Retail Banks By Total Assets, PHPmn

Top 10 Banks - Earnings And Profitability

Top 10 Banks - Capital And Leverage

Top 10 Banks - Funding And Liquidity

August 07, 2018 | Publication: BMI - Industry Reports

Key View (Banking & Financial Services Report

Latest Trends And Developments

August 07, 2018 | Publication: BMI - Industry Reports

SWOT (Banking & Financial Services Report

August 07, 2018 | Publication: BMI - Industry Reports

Household Income Data And Forecasts

Household Income Data (Philippines 2016-2022)

Indicator 2016e 2017e 2018f 2019f 2020f 2021f 2022f

Industry Trend Analysis (Banking & Financial

What Is The NSFR?

Summary Of Asset Categories And Associated RSF Factors

How Will The Measure Be Rolled Out?

Rising Fast But Still Not An Issue For Most Banks

Source: BSP, Fitch Solutions

Negative For Financial Intermediation

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Key Banking Forecasts (Philippines 2016-2022)

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Assets Forecasts (Philippines 2016-2021)

Indicator 2016 2017 2018f 2019f 2020f 2021f

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Assets Forecasts (Philippines 2022-2027)

Indicator 2022f 2023f 2024f 2025f 2026f 2027f

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Liabilities Forecasts (Philippines 2016-2021)

Indicator 2016 2017 2018f 2019f 2020f 2021f

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Indicator 2022f 2023f 2024f 2025f 2026f 2027f

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Key Ratios Forecasts (Philippines 2016-2027)

August 07, 2018 | Publication: BMI - Industry Reports

Macroeconomic Indicators (Philippines 2017-2027)

August 07, 2018 | Publication: BMI - Industry Reports

Economic Analysis (Economic Activity Report

Strong Government Spending And Investment A Key Driver Of Growth

Source: PSA, Fitch Solutions

2018 Forecast. Source: National Sources, Fitch Solutions

Positive Demographics To Act As A Tailwind

PHP One Of The Worst Performing Currencies

Weakening Private Investment And Confidence Suggest Slower Growth Likely

une 22, 2018 (16:50) | Publication: EIU - Industry Briefings

Philippines central bank raises interest rates