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MGR: The Covid-19 pandemic has greatly impacted the global economy and the banking sector was one of the hardest-hit sectors. Please describe the current situation in the Philippines’ banking and financial sector.

BSP: Following decades of structural reforms, which have resulted in sound macroeconomic fundamentals, the Philippine economy entered the pandemic from a position of strength. In particular, the economy had ample fiscal and monetary space to accommodate the huge cost of crisis response without causing unmanageable debts nor creating stresses to the financial system down the road. 

Mirroring the economy at large, the Philippine banking system also entered the Covid-19 crisis from a position of strength, aided by regulatory reforms over the past two decades. Banks had healthy indicators going to the pandemic, including hefty capitalization, ample allowance for credit losses, and low exposure to bad debts. 

As such, while they are not immune from the effects of the crisis, banks in the country continue to demonstrate strength and stability. They continue to enjoy growing deposits and assets, they remain profitable, and their performance indicators remain healthy. 

For instance, capital adequacy ratio (CAR) of the Philippine banking system stood at 17.17 percent in June 2021, even higher than the pre-pandemic level of 15.61 percent in December 2019. These figures were well above the minimum requirement of 10 percent set by the Bangko Sentral ng Pilipinas (BSP) and the 8 percent prescribed by the Bank for International Settlements (BIS).  

Moreover, banks have continued to rein in non-performing loans (NPLs) within manageable levels, reflecting gains from prudent reforms and improvements in banks’ credit risk management systems. NPLs of the Philippine banking system reached 4.51 percent of the total loan portfolio in August 2021, up from the pre-pandemic level of 2.04 percent in December 2019, as the crisis affected some borrowers’ capacity to pay. Nevertheless, the latest figure was still well below the double-digit levels seen in the aftermath of the Asian financial crisis of the late 1990s. 

Furthermore, banks’ allowance for credit losses has remained ample throughout the crisis. The NPL coverage ratio—the proportion of allowance for credit losses to total NPLs—stayed high at 83.52 percent in August 2021, from 92.59 percent in December 2019.  

With healthy performance indicators, the Philippine banking system remains capable of supporting economic recovery and growth moving forward. 

It is worth noting that the Philippine economy is already well into the recovery process, with gross domestic product (GDP) growing by a robust 11.8 percent in the second quarter of this year. 

The BSP, together with the rest of the Philippine government, envisions a post-COVID Philippine economy that is better than ever—one that is stronger, more technologically advanced, more inclusive, and more sustainable. 

The Philippine banking system, which continues to be a pillar of strength for the economy amid its healthy performance indicators, will be a key partner in the attainment of this lofty goal. 

For instance, under the BSP’s Digital Payments Transformation Roadmap (DPTR), banks play an instrumental role in the country’s shift from cash to digital payments—with the digitalization of financial services seen to accelerate economic growth and enhance accessibility of these vital services to a greater number of Filipinos. 

Last year the BSP’s target of having 1 in 5 payments done using digital platforms was achieved. With this, the country is poised to meet the target under the roadmap of having at least half of financial transactions done electronically by 2023. Another target under the roadmap is to expand financial inclusion so that at least 70 percent of adult Filipinos are onboarded to the formal financial system by 2023, aided in part by the digitalization of financial services.

Moreover, banks also play a crucial role in the BSP’s sustainable finance agenda. Last year, the BSP issued the Sustainable Finance Framework, which sets broad expectations for banks to incorporate sustainability principles in their operations. We will issue more regulations on sustainability moving forward. The BSP recognizes the capacity of the financial sector to drive the sustainability agenda, such as via investments in green initiatives. 

MGR: The Philippines has been a close and reliable regional US ally, and this has led to increased interest by American corporations, investors, and individuals to conduct business in the country.

  1. What is the connection of the US and the Philippines’ banking sectors?

BSP: The Philippines and the US are bound by our shared history, which has given rise to an enduring bilateral relationship marked by strong economic, trade, and people-to-people ties. 

Against this backdrop, the banking sectors of our countries have also been connected. This connection can be traced back to the American Colonial Period. At that time, banks from the US started to establish branches to cater to growing American economic interests and capital inflow into the country.

Currently, there are three US banks that have branches in the Philippines, namely: Citibank, Bank of America, and JP Morgan Chase. Meanwhile, Bank of New York Mellon has a representative office in Manila.

Similarly, Philippine universal or commercial banks have several branches operating in the US.

Given that the US is among the Philippines’ biggest trading partners and is home to many overseas Filipinos who send remittances back home, majority of the Philippine banking systems’ cross-border claims are claims to the US and a large portion of cross-border funds going through the Philippine banking system is sourced from the US. 

  1. In what ways can the two countries further cooperate in this field?

BSP: The Philippines is keen to collaborate with the US on high-impact initiatives that will leverage on the latter’s experience and expertise in working with the private sector and governments around the world.

Given the US and Philippines’ commitment to digital transformation, financial inclusion, and technical skills/capacity building, such programs that will advance the Philippines’ development agenda and accelerate economic growth amid the COVID-19 pandemic may be explored in these primary areas.  Both countries can also work together in advancing sustainable finance initiatives as climate developments pose a threat to economic sustainability.

MGR: What is your final message to our readers in Washington DC regarding Bangko Sentral ng Pilipinas and the future of the Philippines banking sector?

BSP: Aided by a sound regulatory environment, banks in the country remain on solid footing as they continue to be profitable, enjoy growing assets and deposits, and maintain sufficient capital, liquidity, and loan-loss reserves. 

The outlook remains favorable for the Philippine banking system, which can support the country’s economic recovery and growth moving forward.

The Bangko Sentral ng Pilipinas remains committed to providing a regulatory environment that is responsive to changes in the financial landscape and changes in the preferences of financial consumers to support overall economic growth while keeping the emphasis on risk management and consumer protection. 

Digitalization of financial services—which helps accelerate economic growth and helps enhance the accessibility of these services to more Filipinos—and sustainable finance are two of the top agenda of the BSP. 

On financial digitalization, it is the thrust of the Bangko Sentral to allow innovations to prosper while preserving financial stability and upholding financial integrity and consumers’ interests. We envision a financial marketplace where financial and non-financial institutions forge partnerships to deliver innovative and affordable financial products and services to Filipinos, more so in unserved and underserved areas.  

On sustainability, the Bangko Sentral is one with other central banks and financial supervisors in responding to the call for action to manage climate change risks. The Bangko Sentral has released the Sustainable Finance Framework that spells out expectations for banks in terms of managing the impact of environmental and social risks on their operations. These policies are complemented with capacity-building activities to develop and enhance skillsets and deepen the understanding of industry players on the management of such risks. 

The Bangko Sentral is also actively collaborating with key government agencies in the country in the promotion of sustainable finance. The Inter-agency Technical Working Group on Sustainable Finance or the “Green Force” released last 20 October 2021 the Philippine Sustainable Finance Roadmap and the Sustainable Finance Guiding Principles. These will set the direction in terms of harmonizing regulations or establishing common standards in the areas of governance, risk management, disclosures on sustainable finance. 

The BSP, together with the Philippine government, aims for a post-COVID Philippine economy that is better than ever. Banks in the country—given their resources and favorable performance—can and are expected to help realize this goal.