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Spurce : Business World Online

PHILIPPINE BANKS continue to gain in financial strength but delinquencies in consumer loans could present a problem, according to credit rater Standard & Poor’s.

“Philippine financial institutions have continued to strengthen their financial profiles on the back of a 7.6% (gross domestic product) growth in 2010 -- the highest recorded in 34 years,” S&P wrote in a May 27 report titled “Philippine Banks Outlook 2011: Gradual Financial Strengthening Under Stable Operating Conditions.”

The report was made available to reporters yesterday along with a June 6 report titled “Asia-Pacific Banking Outlook Is Stable Despite Specter Of Inflation” that was released yesterday.

Local banks were resilient amid the financial crisis in 2008 and 2009, S&P pointed out, adding this was due to their focus on traditional products.

The credit rater also noted their ample liquidity, owing to their wide branch network, and the large banks’ successful capital-raising initiatives.

“The system’s average capital adequacy ratio of 15.2% as at June 30, 2010, is comfortably above the regulatory minimum of 10%,” S&P said.

“Meanwhile, system profitability as measured by return on assets and equity was 1.4% and 11.8% as at Sept. 30, 2010, slightly higher than the 1.2% and 11.4% reported on Dec. 31, 2009.”

Consumer lending

S&P also noted how banks are expanding their consumer lending businesses, in a bid to diversify and seek “higher-yielding” outlets for their liquidity.

But as it observed, “the delinquency in consumer loans is notably above the system average, especially credit cards and residential mortgage; this suggests underlying weaknesses in the underwriting process.”

Figures the credit rater culled from the Bangko Sentral ng Pilipinas (BSP) showed a non-performing loan (NPL) ratio of 7.5% for residential mortgage, 13.5% for credit cards and 4.6% for auto loans as of Sept. 2010. The system NPL ratio was 3.8%.

Philippine banks, for so long, have been focused on corporate borrowers. Their new focus on the consumer segment would be “challenging,” S&P said. “Philippine banks are traditionally corporate-focused banks and some may still be grappling with evolving consumer risk management,” it pointed out.

“Proper credit assessment is hindered by the lack of adequate documentation, especially outside the major cities where the grey economy is prevalent,” it added.

“Higher delinquency cannot be ruled out if consumer lending is not properly managed, especially during a cyclical downturn,” it concluded.

Bank responses

The central bank said there is nothing to be alarmed about.

“Consumer loan portfolio is just 16% of total. And consumer loan NPL is less than 13%,” BSP Gov. Amando M. Tetangco, Jr. said in a text message to BusinessWorld yesteday.

“Profit margins can comfortably cover expected losses. BSP regulations call for aggressive provisioning on past due credit card debt. Bank examinations also target and require stress tests. Availability of a credit bureau soon will help.”

Banks, for their part, said their delinquency rates are not rising and they have been stringent in screening their borrowers.

Nestor V. Tan, president of the country’s largest bank by assets, Banco de Oro Unibank, Inc., said in a text message: “We do not see that (rising delinquency) in our portfolio. The rise in delinquency should not be viewed in isolation, but in the context of the overall business model, the adequacy of provisions and the spread earned from the good portfolio. You just make sure you’re adequately paid for the risk you take.”

East West Banking Corp. President and Chief Executive Officer Antonio C. Moncupa, Jr. pointed out lax credit standards result in delinquencies no matter the country’s economic condition.

“Of course, it will be more pronounced during a downturn. So far, I have not observed any significant signs of this in the industry’s consumer loan portfolio,” he said in a text message.

“In EastWest, we are confident our credit standards and underwriting processes are adequate. We continue to expect good results in our consumer lending business.”

Sterling Bank President and Chief Executive Officer Lamberto R. Villena distinguished between new and old loans.

“If the defaults are relatively new loans, it can indicate weakness in the loan process and may be driven by increased competition in the loan market as banks focus more on increasing loans for revenues to compensate for the contraction in other revenue sources,” he said in a text message.

“Seasoned” borrowers, on the other, may also default due to difficult circumstances. They include overseas workers affected by the turmoil in the countries hosting them.

“To make this distinction will require an in-depth analysis. To address the threat of increased defaults, banks should focus on the basics of good credit and operating efficiency,” he added “In the long run, it will be more prudent to experience a reduction in revenues or interest income than book bad assets. Banks are better off striking a balance between aggressive lending and a higher threat of defaults.” -- Judy T. Gulane with reports from Ann Rozainne R. Gregorio and Antonio Siegfrid O. Alegado.

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