Status Report on the Philippine Financial System of thePhilippines)respectvely. Asynopsis ofthereport isavailable onlineat htp://www.bsp.gov.ph. Non (Revised 8367 No. Act Republic of 26 Secton and 1992) of Act Banks (Rural 7353 No. 1995), Act Republicof of Act 29 BanksSecton (Thrif 7906 No. Act Republic of 27 Secton under Associatons Loan and Savings Non‑Stock BSP’s Rules and on Regulatons reportsPromulgated, the as well and as Other Actuatons Purposes) in Connecton with Other Thrif Banks/Ruralfor Banks/ and Banks Foreign of Operatons of Scope and Entry the Liberalizing Act (An 7721 No. Act Republic of implementaton the on report the incorporatesreport semester’s This Pilipinas. ng Sentral Sector,Bangko Examinaton and Supervision Development, Policy Supervisory of Ofce the by Act) Bank Central New (The 7653 No. Act Republic of V Artcle 39(c), Secton to pursuant prepared is report semestral This ‑ Stock Savings and Loan Associaton Act of 1997), and the Republic Act No. 6426 (Foreign Currency Deposit Act Table of Contents Table of Contents

Page Number Glossary of Terms i

Prologue v

The Philippine Financial System: An Assessment 1 The Banking Sector The Philippine Banking System 5 Trust and Other Fiduciary Services 17 Foreign Currency Deposit Units 20 Foreign Bank Branches and Subsidiaries 22

The Non-Bank Financial Institutions Non‑Bank Financial Insttutons with Quasi‑Banking Functons 27 Non‑Stock Savings and Loan Associatons 30

Appendices 33

Status Report on the Philippine Financial System i Glossary of Glossary Terms 1. 11. 10. 7. A. SELECTEDACCOUNTS c. that uponinitalrecogniton are designated by thebankat fair value through proft orloss. for trading andliabilityfor shortpositon. a. d. b. 2. periodsdividedby 2. 5. 4. 3. 9. 6. 8.

TotalAssets TotalCapital (stand HFT assets fnancial allowance), of (net For purposesofcomputng theaverage, oneperiodcovers 12months. Framework. Itisalsodesignedto meet BSP’s statstcal requirements. StandardsAccountngStandards(PAS)(PFRS)/Philippine Reportng2 Basel and BSP for outward remitance andlosses inoperatons lesscapital adjustments. In the case of capital of foreign bank branch, it refers to the sum of permanently assigned capital, undivided Unsecured Subordinated Debt (USD) at fair value through proft or loss (DFVPL), available (DFVPL), loss or proft through value fair at assets, net of direct equity investments. These include fnancial assets held for trading (HFT), designated and “Dueto HeadOfce/Branches/Agencies” offoreign bankbranches. and embedded) and TLPinclusive of IBLandRRPs (net of allowance). profts, and accumulated net earnings which is composed of unremited profts not yet cleared by the by cleared yet not profts unremited of composed is which earnings net accumulated and profts, retained earnings and undivided profts, other comprehensive income, and appraisal increment reserves. subject to certain terms andconditons. specifc date. debt securitesclassifedasloans(UDSCL)andinvestments innon Earning Assets Earning Shares Preferred Redeemable Financial LiabilitesDesignated at Fair Value Through Proft orLoss (DFVPL) Financial LiabilitesHeldfor Trading (HFT) Equity Investments Receivables) and Loans than (Other Assets Financial Financial Philippine the of provisions the with requirements reportorial BSP the align to designed (FRP) Package Reportng Financial of unsecured subordinated debt which may be eligible as Tier 2 (supplementary) capital of the bank, the of capital (supplementary) 2 Tier as eligible be may which debt subordinated unsecured of opsd f h Blne he, noe ttmn ad uprn Shdls Te R i primarily is FRP The Schedules. Supportng and Statement Income Sheet, Balance the of composed

Average earningassets Average assets Average interest-bearing liabilites Average capital ‑ alone and embedded), derivatves with positve fair value HFT

refer to the sum of all assets, adjusted to net of “Due from Head Ofce/Branches/Agencies”fromHead “Due of adjustednetassets,to all referof sum the to

refers to the sum of paid of sum the refersto

refer to the sum of due from BSP, due from other banks, fnancial assets fnancial BSP,frombanks, due other fromof due sum the referto

refer to thesumoftotal assets asofendtwo periodsdividedby 2.

refers to thesumof total capital accounts asofendtwo periodsdividedby 2.

refer to equityinvestments insubsidiaries, associates andjoint ventures.

refer to thesumofearningassets asofendtwo periodsdividedby 2. r fr o rfre sae ise wih rvds o rdmtn n a on redempton for provides which issued shares preferred to efer

s st f nnil ttmns o puetl eotg purposes reportng prudental for statements fnancial of set a is

refers to the amortzed cost of obligatons arising from the issuance

refer to thesumofinterest ‑ in capital of locally incorporate banks, other equity instruments, equity other banks,incorporate locally of capital in ‑ derivatves with positve fair value HFT value fair positve with derivatves

refer to thesumofderivatves withnegatve fair value held ‑ for

refer to the sum of all investments in fnancial in investments all of sum the to refer ‑ sale (AFS), held (AFS), sale ‑ ‑ bearing liabilitesasofendtwo marketable equitysecurites(INMES). ‑ interest rate contracts (stand ‑ to ‑

refer to fnancialliabilites maturity (HTM), unquoted (HTM), maturity ‑ based Capital Adequacy Capital based ‑ interest rate contracts rate interest ‑ debt securites debt ‑ alone Glossary of Terms 12. Interest-bearing Liabilites refer to the sum of fnancial liabilites HFT, fnancial liabilites designated at FVPL, deposit liabilites, bills payable, unsecured subordinated debt, bonds payable, redeemable preferred shares, derivatves with negatve fair value held for hedging and fnance lease payment payable.

13. Liquid Assets refer to the sum of cash and due from banks and other fnancial assets (net of allowance for credit losses).

14. Total Operatng Income refers to the sum of net interest income and non‑interest income.

15. Net Interest Income refers to the diference between interest income, provision for losses on accrued interest income from fnancial assets and interest expense.

16. Provision for Losses on Accrued Interest Income from Financial Assets refers to the impairment loss on accrued interest income from loans and other fnancial assets, net of equity securites, charged against current operatons.

17. Non-Interest Income refers to the sum of dividend income, fee‑based income (including income from fduciary actvites), trading income, foreign exchange profts, profts from sale/derecogniton of non‑trading fnancial assets and liabilites, profts from sale/derecogniton of non‑fnancial assets, profts on fnancial assets and liabilites DFVPL, profts on fair value adjustment in hedge accountng and other non‑interest income.

18. Dividend Income refers to cash dividends earned on equity securites held as HFT, DFVPL, AFS and INMES.

19. Fee-based Income refers to the sum of income from payment services, intermediaton services, custodianship, underwritng and securites dealership, securitzaton actvites, fduciary actvites and other fee‑based income.

20. Trading Income refers to the sum of realized gains/(losses) from sale/redempton, and unrealized gains/ (losses) from marking‑to‑market of HFT fnancial assets, and realized gains/(losses) from foreign exchange transactons.

21. Non-Interest Expenses refer to the sum of compensaton and fringe benefts, taxes and licenses, other administratve expenses, depreciaton and amortzaton, impairment losses and provisions.

22. Losses or Recoveries on Financial Assets refer to the sum of provision for credit losses on loans and receivables and other fnancial assets, bad debts writen‑of and recovery on charged‑of assets.

23. Income Tax Expense refers to provision for income tax.

24. Net Proft or Loss refers to the diference of total operatng income and non‑interest expenses, plus/ (less) the recoveries/(losses) on fnancial assets, share in the proft (loss) of unconsolidated subsidiaries, associates, joint ventures and minority interest in proft (loss) of subsidiaries.

25. Non-Performing Loans (NPL) refer to past due loan accounts whose principal and/or interest is unpaid for 30 days or more afer due date. This applies to loans payable in lump sum and in quarterly, semi‑ annual or annual installments, including: the outstanding balance of loans payable in monthly installments when three or more installments are in arrears; the outstanding balance of loans payable in daily, weekly or semi‑monthly installments when the total amount of arrearages reaches 10 percent of the total loan receivable balance; and restructured loans which do not meet the requirements to be treated as performing loans under existng rules and regulatons, including all items in litgaton. Efectve January 2013, Circular No. 772 dated 16 October 2012 removed the exclusion of loans qualifed as loss from NPL classifcaton for the reportng of gross NPLs and the rato of gross NPLs to gross TLP. The complementary concepts of net NPLs (gross NPLs less specifc allowance for credit losses on TLP) and the rato of net NPLs to gross TLP were also introduced. ii iii Status Report on the Philippine Financial System 29. 28. 27. 26. 30. 32. 31.

Allowance on NPAsAllowanceon Based on the new FRP framework provided for under Circular No. 512 dated 3 February 2006 and efectve Gross Assets to thesaidproperty istransferred to thebuyers onlyuponfullpayment oftheagreed sellingprice. be highlyprobable. restructured loansreplaced current restructured loans. banking purposes or held for investment, acquired by the bank in setlement of loans through foreclosure through foreclosurethroughor through asaletransacton. sales contract receivables (SCR);andallowance for lossesonROPA. Non-Current Assets Held for Sale for Held Assets Non-Current Distressed Assets (NPA) Assets Non-Performing Real and Other Propertes Acquired (ROPA) exclude performing sales contract receivables, which met certain requirements under Circular No. 380. No. Circular under requirements certain met which receivables,contract sales performingexclude on SCR,allowance for lossesonROPA. conditon subject only to terms that are usual and customary for sales of such assets and the sale must sale the and assets such of sales forcustomary and usual are that terms to only subject conditon on 31December2006,NPA shouldalsoincludenon or Sales Contract Receivable (SCR) Receivable Contract Sales dacion in payment and/or for other reasons, whose carrying amount will be recovered principally recovered be will amount carrying whose reasons, other for and/or payment in

refer to total assets plus allowance for credit losses on loans; allowance for credit losses on

refer to the sum of NPLs, ROPA, gross, non

refersallowanceallowanceforforloans, of on creditsum creditlosses tolosses the dacion in payment and subsequently sold on installment basis whereby the ttle the whereby installmentbasis on sold subsequently and payment in

refer to the sum of NPL and ROPA, gross. Efectve March 2003, NPAs 2003, March Efectve gross. ROPA, and NPL of sum the to refer refers to the amortzed cost of assets acquired in setlement of loans of setlement in acquired assets of cost amortzed the torefers r efer to ROPAs that are available for immediate sale in their present their in sale immediate for available are ROPAsthat to efer

refer to real and other propertes, other than those used for ‑ current assets heldfor sale. ‑ current assets held for sale and performing Glossary of Terms

B. FINANCIAL AND OTHER RATIOS

1. Capital adequacy rato (CAR) refers to the rato of qualifying capital to total risk weighted assets. With the implementaton of the reforms under the Basel III framework, the BSP issued Circular No. 781 dated 13 January 2013 providing the new computaton of qualifying capital under the Basel III standards. Two new ratos, the Common Equity Tier 1 and Tier 1 Capital ratos, were introduced apart from the total CAR. While the three major risks (credit, market and operatonal risks) are stll covered by the calculaton of risk‑based capital, the qualifying capital was strengthened through the eligibility criteria for recogniton as capital including the required loss absorbency features of capital instruments. Foreign bank branches shall comply with the same risk‑based capital adequacy ratos applicable to domestc banks in the same category. In computng the risk‑based capital adequacy ratos, Common Equity Tier 1 (CET1) shall include permanently assigned capital, undivided profts, accumulated net earnings and other capital components. Any net due from head ofce, branches, subsidiaries and other ofces outside the Philippines, excluding accumulated net earnings shall be deducted from CET 1 capital.

2. Cost-to-Income rato refers to the rato of non‑interest expenses to total operatng income.

3. Density rato refers to the rato of the total number of domestc banking ofces to the total number of cites/municipalites in the Philippines.

4. Distressed assets rato refers to the rato of distressed assets to total loans (gross of allowance for probable losses), inclusive of interbank loans, plus ROPA (gross of allowance for losses).

5. Earning asset yield refers to the rato of interest income to average earning assets.

6. Funding cost refers to the rato of interest expenses to average interest‑bearing liabilites.

7. Interest spread refers to the diference between earning asset yield and funding cost.

8. Liquid assets rato refers to the rato of liquid assets to total deposit liabilites.

9. Net interest margin refers to the rato of net interest income to average earning assets.

10. NPA coverage rato refers to the rato of allowance on NPAs to total NPAs.

11. NPA rato refers to the rato of NPAs to total assets, gross of allowance for probable losses.

12. NPL coverage rato refers to the rato of allowance for credit losses on loans to total NPLs.

13. NPL rato refers to the rato of NPLs to total loans (gross of allowance for credit losses), inclusive of interbank loans.

14. Populaton-to-banking ofces rato (Customer Rato) refers to the rato of the total populaton to the total number of domestc banking ofces.

15. Return on assets (ROA) refers to the rato of net proft or loss to average assets.

16. Return on equity (ROE) refers to the rato of net proft or loss to average capital.

iv v Status Report on the Philippine Financial System Prologue No. with Secton94ofRepublic ActNo.8791(TheGeneral BankingLaw of2000). transferred to the Home Guarantee Corporaton (HGC) efectve 7 February 2002, in accordance banks andquasi quasi non following: the except 7653, No. Act Republic of 130 Secton with accordance in proprietorships, single for (DTI) Industry Tradeand of Department the to and partnerships, enttes were turned over to the Securites and Exchange Commission (SEC) for corporatons and 11,781 branches andfour ofshore bankingunits(OBUs). non 5,989 ofces, other and branches 9,700 with banks Sector.Atend Examinaton Center,and Data Supervision Supervisory the to insttutons supervised/regulated Central BankAct. New The or 7653 No. Act Republic of V Artcle (c), 39 Secton with compliance in Congress, of houses both and President the to Governor the by submited is and (BSP), Pilipinas ng Sentral Sector,BangkoExaminaton and Supervision Development, Policy Supervisory of Ofce the by Manual ofAccounts andtheBSPreportorial requirements withtheprovisions ofthePFRS/PAS. issuance of the new Financial Reportng Package (FRP) for banks. The FRP is designed to align the the cooperatvethrough banks,and ruralfor amended as 2000, June 26 dated 249 No. Circular and banks,for thrif amended as 2000, December dated19 270 commercialNo. Circularbanks, supportng schedules issued under Circular 108 dated 9 May 1996, as amended for universal and amended Statement of Consolidated Conditon (CSOC), the BSP Consolidated Statementof of consistng Income requirementsand the Expenses reportorial (CSIE) and BSP their (PAS),the and StandardsAccounts of Manual Accountng the Philippine and (PFRS) Standards Reportng

4 dtd 0 eray 09 ad n ie ih h aotn f h Piipn Financial Philippine the of adopton the with line in and 2009, February 10 dated 644 ‑ banking functons and/or with trust licenses, non Finally, pursuant to Circular No. 512 dated 3 February 2006, as amended and Circular and amended as 2006, February 3 dated 512 No. Circular to pursuant Finally, were associatons loan and building over regulaton and supervision the Likewise, non over BSP the of regulaton and supervision the 1998, July 3 Efectve BSP by submited reports periodic various the from culled basically is report This The

tts eot n h Piipn Fnnil System Financial Philippine the on Report Status ‑ December 2014, BSP supervised/regulated fnancial insttutons consisted of 648 consistedinsttutonssupervised/regulatedof fnancial BSP 2014, December ‑ banks, non ‑ stock savings andloanassociatons andpawnshops. ‑ banks which are subsidiaries/afliates of ‑ bank fnancial insttutons (NBFIs) with (NBFIs) insttutons fnancial bank s smsrl eot prepared report semestral a is ‑ banks with banks ‑ banking System Assessment The Philippine Financial System: An Assessment The Philippine fnancial system is riding the competitive wave of change in 2014 with responsive, responsible and and remarkable performance. Post 2007‑2008 Global Financial Crisis (GFC), the 02 July 2014) and rules on interlocking positons global fnancial market conditons have changed (Circular No. 851 dated 30 September 2014) were and the demands for regulatng the ever evolving in place to reinforce the role and accountability of fnancial services industry reached new dimensions. the Board of Directors as corporate decision makers. This is characterized by tougher operatng conditons, In order to strengthen the credit risk management uneven growth prospects and lingering fragilites culture of BSP‑supervised insttutons, the BSP worldwide. In response to this challenge, the BSP has issued the consolidated guidelines on credit risk pursued responsive and pro‑actve reforms on banks’ management framework (Circular No. 855 dated capitalizaton, corporate governance standards 29 October 2014) and progressively align the same and risk management, foreign partcipaton, with the Basel Core Principles for Efectve Banking macro‑fnancial surveillance and macroprudental Supervision as well as insttute enhancements in the supervision, fnancial inclusion and capital market existng bank reports on salary loans (Circular No. reforms to meet the demands of the new emerging 837 dated 18 June 2014) in response to the rising market landscape and regional integraton. trend of salary loans in terms of volume and number of accounts and ensure that the rising bank exposure In order to strengthen the local banks’ risk‑based to this consumer fnance segment are well‑managed capital and align the domestc capital standards and conform to fair and sound credit practces. During with internatonal norms, more reforms in the the review period, salary loans reached P47.6 billion existng capital rules were pursued to align the but remained manageable as they only accounted same with the provisions of Basel III for universal for 5.6 percent of the total loan portolio. and commercial banks and Basel 1.5 for standalone thrif, rural and cooperatve banks. These include On further liberalizaton of the banking sector, the amendment to risk disclosure requirements the BSP is setng the stage for foreign investment on loss absorbency features of capital instruments and competton as the country joins the ASEAN (Circular No. 826 dated 14 February 2014), reducton Economic Community by 2015 and stands ready to in the risk weight/capital charge on foreign currency tap consequental opportunites from the ASEAN denominated government securites under Basel Banking Integraton by 20201. In 2014, the banking 1.5 (Circular No. 827 dated 28 February 2014) and system was fully liberalized with the passage of the implementng guidelines on the framework for amended Rural Bank Act (Republic Act No. 10574) dealing with domestc systemically important banks which allowed the infusion of foreign equity in the (DSIBs) under Basel III (Circular No. 856 dated 29 capital of rural banks and Foreign Banks Law (Republic October 2014). Parallel to these, the minimum capital Act No. 10641) which allowed 100 percent foreign requirement of all bank categories was increased to partcipaton in the provision of banking services further strengthen the banking system by holding including foreclosure proceedings. These initatves sufcient capital bufers against unforeseen shocks are seen to pave the way for more foreign direct during tmes of stress. Accordingly, solvency ratos investments and fully prepare the banking system remained both well above BSP’s regulatory minimum towards regional competton (Box Artcle 1). of 10 percent and the internatonal standard of 8 percent with the capital adequacy rato (CAR) of 17.0 Cognizant that ample liquidity in the system could percent and 16.2 percent on consolidated and solo boost real estate fnancing and push the gradual shif bases, respectvely. Moreover, it is second highest in towards higher yield‑higher risk consumer fnance, ASEAN‑5 and already Basel III‑compliant. which both have procyclical efect on the economy and may pose fnancial stability concerns, the BSP Key reforms on corporate governance and risk expanded its macro‑fnancial surveillance tools i.e., management in 2014 respond to the need to develop real estate stress test (REST) limit (Circular No. 839 a deeper culture of good governance and prudent dated 27 June 2014), cross‑border fnancial positons risk taking. Toward this end, amendments on the of banks (Circular No. 850 dated 08 September 2014) qualifcatons of a director (Circular No. 840 dated and deposit interest rate report (Circular No. 848 ______1 The ASEAN Banking Integraton Framework (ABIF) was fnalized on 21 March 2015 during the 1st ASEAN Finance Ministers and Central Bank Governor’s Meetng in Kuala Lumpur, Malaysia

1 Box Article 1 Moving Towards Financial Integration

The forthcoming ASEAN banking integraton presents both without constraints on foreign ownership and the number of opportunites and challenges for banks and other market foreign bank branches that may be set up. players. Under the new law, foreign banks can now own up to 100 There are advantages and benefts to having an integrated percent (from 60 percent) of the votng stock of an existng regional fnancial market. domestc bank or a new banking subsidiary incorporated in the Philippines. In recogniton of the added economic Financial integraton encourages competton and technology contributons by foreign banks, their aggregate share in the transfer. The Philippine banking system stands to gain from banking system was also increased from 30 percent to 40 the opening of new markets to local players as this will percent. With the expected increase in the share of total expand banks’ customer base. Market integraton will also assets under the management of foreign banks, the MB shall facilitate ease in mobilizing savings and allocatng funds to adopt necessary measures to ensure that the 60 percent more productve investments. In turn, this will help reduce domestc‑controlled proporton is preserved. Such measures operatonal cost and enhance productvity. shall consider vested rights and non‑impairment of contracts that will be non‑discriminatory to existng foreign banks. Status Report on the Philippine Financial System Banking market integraton is also expected to improve fnancial infrastructure when regionally compettve ASEAN Meanwhile, the minimum capital requirements applicable banks integrate their technologies and innovatons in their to foreign bank branches have been aligned with that of operatons at the host country. domestc banks of the same category. However, foreign banks entering under R.A. No. 10641 shall comply outright with Notwithstanding the advantages, there are challenges and the new capital requirements as well as with the prescribed risks to an integrated market. minimum capital ratos.

There is the key issue of the governance of banks and Foreign banks can avail of any of the three modes of entry managing competng opportunites against limited resources. into the Philippines. At any tme, however, they must only Heightened competton may spur banks to expand into areas avail of one mode of entry subject to compliance with all the which they are not familiar with or not yet fully geared for requirements. from a risk perspectve. Banks must be able to manage the risks that arise from new business opportunites brought Pursuing proactve reforms. The BSP has also sought to about by an integrated ASEAN banking market. The key to establish the prudental norms within which banks operate, being able to compete in such an environment is by having a creatng an enabling environment while encouraging sound governance structure and risk culture. competton among banks but within the limits of acceptable risk management practces. Reform initatves pursued along The emergence of an integrated banking community in the this line include the increase in the minimum capitalizaton region also exacerbates the need to further develop core of banks, the recent changes in the eligibility and quality of competencies. This is so because market players, as well as bank capital under the Basel III framework, the adopton of regulators, have to be at the comparatve level of their peers pre‑emptve macroprudental measures to strengthen the in the region. banking system’s ability to withstand shocks, prescribing prudental ratos (CAR, NPL, RELs among others) as a means Banks need also to invest in informaton and communicaton to mitgate and manage risks, setng standards for a sound technology. The delivery of banking services has seen governance culture, and insttutonalizing the collecton of signifcant changes in recent years because of the availability data on cross‑border fnancial positons of banks on a periodic of afordable technology and this has afected the minimum basis. The later aims to provide the BSP with a comprehensive scale needed for the efectve conduct of banking operatons. view of potental fnancial risks and transmission channels emanatng from foreign counterparts of Philippine banks Responding to the Challenges of Financial Integration and can thus be considered an important development in preparaton for the forthcoming regional integraton. From a regulatory standpoint, the BSP’s move to liberalize the fnancial sector and pursue policy reforms is seen to boost The upcoming regional integraton is deemed to be a potental the compettveness of domestc banks in preparaton for the game changer for ASEAN countries. For Philippine banks, the regional integraton. opportunites for growth and expansion must be carefully considered vis‑à‑vis the challenges and risks of an integrated Foreign bank liberalizaton. The Monetary Board (MB) has fnancial market. Banks need to be properly positoned to approved the Implementng Rules and Regulatons (IRR) of be able to tap these opportunites and reap the benefts of Republic Act No. 10641 (An Act Allowing the Full Entry of integraton. Foreign Banks in the Philippines, Amending for This Purpose R.A. No. 7721). R.A. No. 10641 was signed into law in July ______2014, allowing more foreign banks to operate in the country Reference:

______“Preparing the Philippine Banking System for Economic Integraton: A a In its “Vision 2020”, the ASEAN Economic Community (AEC) espouses an Central Banker’s Perspectve”, paper presented by Deputy Governor Nestor integrated, efciently functoning regional fnancial market by year 2020. A. Espenilla, Jr. at the Angara Center in December 2014.

2 System Assessment dated 08 September 2014) to mitgate the buildup banking hours (Circular No. 835 dated 05 June 2014) of systemic risk and provide the groundwork for and branch network expansion to promote further efectve macroprudental supervision in the future. fnancial inclusion. During the review period, there was an increasing footprint of bigger banks into The BSP also recognized and responded to the the 2nd and 3rd class municipalites to compete on valuable contributon of micro, small and medium consumer fnancing as the paterns of urbanizaton enterprises (MSME) in economic development gradually moving away from congested big cites and in terms of employment generaton. In order to regional hubs into rural growth fronters. generate a more comprehensive and accurate picture of the scale and scope of banking services These deep fnancial sector reforms coupled delivered to the MSME sector and support the overall with a favorable macroeconomic environment fnancial inclusion agenda, existng microfnance all supported the banking system’s contnued reports were amended to redefne microfnance remarkable performance in 2014. The System loans as well as the small and medium enterprises expanded by 12 percent on double‑digit growth loans in the Financial Reportng Package (FRP) of in loans (19.5 percent) and portolio investments banks (Circular No. 836 dated 13 June 2014). During (13.3 percent) with stable funding from domestc, the review period, there were 179 banks engaged in retail deposits which similarly grew by 12.1 percent microfnance operatons with a total loan portolio of year‑on‑year. Despite the robust expansion, the P10.9 billion and serving a total of 1.2 billion micro quality of banks’ credit underwritng standards and borrowers. commitment to asset cleanup are stll on point as gross non‑performing loan (NPL) rato further eased In 2014, total corporate bond issuances (Source: to 2.3 percent from 2.8 percent last year. This is 1.7 Bloomberg) reached a record high of 26 percent percentage points lower from the pre‑1997 Asian (P295.0 billion) year‑on‑year expansion led by Financial Crisis level of around 4 percent and a fnancial corporatons with an annual growth of signifcant turnaround from the peak of 16 percent 71 percent (P184.1 billion) which broadly indicate during the Oil Crisis in 2001. There was also ample a small but palpable shif towards capital market liquidity in the system for further expansionary fnancing given the relatvely low interest rate credit as liquid assets‑to‑deposit rato rose to 55.6 environment, System’s ample liquidity, favorable percent from 59.5 percent last year. Apart from investor sentment and improved macroeconomic stronger balance sheets, banks reported a positve environment. In response to the call of expeditng botom line as net proft, albeit growth dipped by the development of the local capital market to 6.9 percent, to P135.0 billion from P144.9 billion in prepare the System with this compettve challenge, 2013. reforms were focused on widening the array of available fnancial products and services to the Thus, it came as no surprise that internatonal market: long‑term negotable certfcates of tme credit watchers and market analysts consider the deposits (LTNCD), unit investment trust funds Philippine banking system as one of the strongest in (UITF), fnancial derivatves, personal equity and the region as it is currently the only banking system retrement account (PERA) products and the revised out of the 69 rated banking systems in the world cross‑selling framework (Cf: Circular Nos. 824 dated that received a POSITIVE outlook from Moody’s in 30 January 2014, 834 dated 26 May 2014, 852 and 2014 (two tmes in a row). The country’s fnancial 853 dated 21 October 2014, 860 dated 28 November freedom score also improved by 10 notches on 2014, and 844 dated 11 August 2014). contnuing modernizaton and liberalizaton of the banking system with the removal of limits to The Philippine fnancial system is stll primarily foreign bank entry in 2014 against the backdrop of bank‑based, a stable structural feature of the an efcient regulatory environment. The movement domestc economy, with the total assets of the in the country’s fnancial freedom score largely banking system accountng for 80.8 percent of the contributed to the improvement of country’s ranking total assets of the fnancial system and 88.3 percent in the 2015 Index of Economic Freedom, which the of economic output (GDP) and with deposit liabilites Heritage Foundaton also considers as “one of the funding 76.4 percent of intermediaton actvites. 10 best score improvements” and “above world and With these, it is paramount that the System becomes regional averages”. highly responsible and accountable to its various stakeholders. To address this concern, reforms were Summing up, the Philippine fnancial system’s pursued in the area of bank protecton (Circular performance in 2014 can be summarized in three No. 823 dated 10 January 2014) and consumer Rs: responsive to compettve shifs and growing protecton (Circular Nos. 857 dated 24 November demands of the market, responsible to its various 2014, 845 dated 15 August 2014, and 859 dated 24 stakeholders, and remarkable against regional and November 2014). Alongside, the delivery of banking global standards. services was improved through the liberalizaton of

3 Philippine Banking System Overview Figure 1 Philippine Banking System Banks insttuted signifcant strategies to re‑positon their Total Banking Units ability to determine and beter service the changing For End-Periods Indicated No. of Branches (LHS) No. of Head Offices (RHS) and diferentated needs of their stakeholders thereby, 996 10,000 976 1,000 947 929 increasing customer base. Banks also enhanced credit 9,500 912 950 899 893 879 9,000 862 900 underwritng and administraton practces that are 847 8,500 818 850 785 infused with a deeper culture of good governance to 8,000 758 800 7,500 726 750 siphon soured loans and strengthen their capacity to 696 7,000 673 700 648 absorb losses under stress conditons. Finally, bank 6,500 650 6,000 600 strengthened their capital base in response not only 5,500 550 to regulatory reforms that have capital implicatons 1998* 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 but also to prime themselves in antcipaton of ASEAN * Start of the rationalization of merger and consolidation incentives Head Offices (RHS) Branches (LHS) banking integraton which will usher in the entry Notwithstanding the decline in the number of and withstand increasing market competton whose operatng banks, the overall branch network was Status Report on the Philippine Financial System Financial Philippine the on Report Status funding source is slowly veering towards non‑bank further augmented with the establishment of fnancing partcularly those made available by capital additonal regular branches and other banking ofces markets. As of end‑December 2014, the volume of (OBOs). This led to a more inclusive fnancial system peso‑denominated bonds increased by 45.4 percent since these OBOs served as vital access points for to P4,655.1 billion compared to the P3,202.4 billion the efectve delivery of banking services ranging outstanding issuances as of end‑December 2010. from credit, savings, remitances, foreign exchange, Cognizance of this circumstance, universal and electronic money (e‑money) conversion, bills payment, commercial banks (U/KBs) are now branching out to and government pay‑out benefts. (Appendix 4) 1st to 3rd class municipalites to further improve their of new foreign bank entrants whose capital may be Major bank categories are universal and commercial bigger than those of local banks. banks (U/KBs), thrif banks (TBs) and rural and Banking landscape remained streamlined but with cooperatve banks (R/CBs). There were 36 universal notable expansion in branch network and commercial banks with 5,797 branches/other ofces; 69 thrif banks with 1,851 branches/other The banking system landscape remained streamlined ofces; and 543 rural and cooperatve banks with 2,065 as a result of the ongoing industry consolidaton. branches/other ofces. This brought the total number of operatng banking units to 10,361 (inclusive of 13 There were 648 operatng banks (from 673 last year) with representatve ofces abroad of domestc banks) from a network of 9,713 branches/other ofces (from 9,262 9,935 at end‑2013. branches/other ofces last year). Of these branches/ other ofces, 46 (down from 51 banking ofces at end‑ U/KBs have the largest distributon network at 59.7 December 2013) were domiciled ofshore. percent followed by R/CBs at 21.2 percent. TBs, on the other hand, had a share of 19.1 percent. Since the start of the ratonalizaton of merger and consolidaton incentves of the BSP in 1998, the banking The compositon of banking ofces is detailed in landscape became more streamlined over the years. Figure 2. The current number of operatng banks was 348 banks ______less than the peak of 996 banks in 1998 (Figure 1). 2 Inclusive of representatve ofces (ROs) abroad of domestc banks

Figure 2 Philippine Banking System Physical Composition: Share to Total Banking Offices For End-Periods Indicated End-Dec 2013 End-Dec 2014 Branches/ Branches/ Bank Category Head Head Total Other Total Other Office Office Offices Offices All Banks 9,935 673 9,262 10,361 648 9,713 Universal and Commercial Banks 5,461 36 5,425 5,833 36 5,797 Thrift Banks 1,828 71 1,757 1,920 69 1,851 Rural and Cooperative Banks 2,646 566 2,080 2,608 543 2,065

` Branches/Other Offices In Percent (%) Head Office In Percent (%)

90.0 84.1% 83.8% 100.0 80.0 90.0 Universal and 70.0 80.0 Universal and Commercial Banks 60.0 70.0 Commercial Banks 58.6% 59.7% 60.0 Thrift Banks 50.0 Thrift Banks 50.0 40.0 40.0 Rural and 30.0 Cooperative Banks Rural and 30.0 22.4% 21.2% 20.0 19.0% 19.1% 10.5% 10.6% Cooperative Banks 20.0 10.0 5.4% 5.6% 10.0 - - End-Dec 2013 End-Dec 2014 End-Dec 2013 End-Dec 2014 4 Figure 3 Banking System Philippine Banking System Comparative Share to Physical Network As of End-December 2014

Fig. 3.3 Composition of UKBs - Private Domestic Banks, Fig. 3.1 Philippine Financial System Fig. 3.2 Major Bank Categories Government Banks, Foreign Bank Branches2% & Subsidiaries 36 141 17 5.6% 2.4% 0.1% 69 10.6% 492 10,348 8.4% 36.8% 17,770 63.2% 5,200 543 89.2% 83.8%

89% Banks Non-Banks OBUs & Foreign ROs UKBs TBs RCBs Private Domestic Government Foreign

Fig. 3.4 Domestic Banks vs. Foreign Bank Branches and Subsidiaries

Domestic Banks Foreign Bank Branches and Subsidiaries 17 2.7% 66 3 10.5% 3 0.5% 15.8%

Universal and Commercial Banks Thrift Banks 16 543 Universal and 84.2% Rural and 86.3% Commercial Cooperative Banks Banks Government Banks 19 Head Offices 629 Head Offices

Banks accounted for 36.8 percent (up from 35.6 in Bank coverage remains predominant in NCR and end‑December 2013) of all fnancial insttutons being other urbanized areas in terms of income class and supervised by the BSP. Non‑banks3 held the remaining regional profle 63.2 percent. Meanwhile, there were four ofshore banking units (OBUs) operatng in the Philippines and In terms of distributon of banking ofces per 13 representatve ofces (ROs) abroad of domestc city/municipality income class, bank coverage is banks. (Figure 3.1) predominant in NCR with 3,175 head ofces/branches. Outside NCR, banking ofces are mostly found in By banking category, R/CBs had the most number of 1st class cites (1,779 head ofces/branches) and head ofce units at 83.8 percent (Figure 3.2). U/KBs, municipalites (1,525 head ofces/branches). Notably, though fewer in terms of head ofce units, have the U/KBs have expanded their reach in areas considered widest network consistng of large private domestc as the home turf of rural banks, i.e., in 1st to 3rd class banks (89.2 percent), government banks (8.4 percent) municipalites with a total of 680 banking ofces vis‑à‑ and foreign bank branches and subsidiaries (2.4 vis R/CBs’ network of 1,026 ofces/branches. Network percent). (Figure 3.3) expansion in these areas is indicatve of banks’ initatves to support inclusive growth by providing For banks domiciled onshore, domestc banks by access to fnance for all Filipinos, regardless of their far outnumbered the foreign banks with 629 head socio‑economic status. ofces composed of: 17 private domestc banks; three government banks; 66 stand‑alone TBs; and 543 R/ By regional distributon, banking presence remained CBs. On the other hand, there were 19 foreign bank concentrated in highly urbanized areas of the country. branches and subsidiaries (16 U/KBs and three foreign Natonal Capital Region (NCR) had 100 percent bank bank‑linked TBs) operatng in the country (Figure 3.4). coverage, followed by CALABARZON (Region IV‑A) with 95.1 percent, Central Luzon (Region III) with 93.1 The Top 5 banks in the country held the bulk of the percent, Cagayan Valley (Region II) with 81.7 percent total assets of the banking system and Western Visayas (Region VI) with 78.9 percent. These regions are densely populated and mostly The Top 5 banks4 in the country – composed of four ______universal banks and one government bank – accounted 3 The BSP also supervises non‑banks with quasi‑banking functons and/or trust license, for 53.6 percent (up from 51.7 percent last year) of the fnancial allied subsidiaries/afliates of banks and quasi‑banks, non‑stock savings and total assets of the Philippine banking system. In terms loan associatons, pawnshops and other fnancial insttutons which under special laws are of deposit share and capital accounts, these banks also subject to BSP supervision. Of these fnancial insttutons, pawnshops held the lion’s share represented a sizeable proporton at 57.4 percent (up at 61.9 percent or 17,422 ofces at end‑December 2014 (down from 63.2 percent or 17,652 from 54.6 percent) and 52.4 percent (up from 52.3 pawnshops a year ago). percent), respectvely. 4 Based on Published Balance Sheet as of 31 December 2014

5 urbanized, making them viable hubs for business and percent, and the Zamboanga Peninsula (Region IX) other industries. at 1.9 percent. Establishing bank branches in these parts of the country remains a challenge due to Bank coverage in most parts of the country’s cites the generally low populaton density, geographic and municipalites range between 60 to 79 percent inaccessibility, and prevailing geo‑politcal and socio‑ as of end‑December 2014 (Figure 4). economic situatons in these localites.

Figure 4 Universal banks have strong presence in the Middle Philippine Banking System East and in the Asia-Pacifc region Heat Map of Bank Coverage As of End-December 2014 Overseas bank branches are clustered mostly in the Middle East followed by Asia‑Pacifc, North America and Europe (Figure 6). Bank branches in the Middle East stood at 20 ofces (from year ago’s 22 ofces), representng 43.5 percent of total branches abroad. Banking ofces in the Middle East are mostly remitance desk ofces (14 ofces)5, refectng the strong remitance infows coursed through the Status Report on the Philippine Financial System Financial Philippine the on Report Status banking system.

In the Asia‑Pacifc region, domestc banks have set up either branches or representatve ofces (17 ofces or 37.0 percent of total branches abroad). Some of these ofces are in Japan with six ofces (two ROs of

Figure 6 Philippine Banking System The Natonal Capital Region (NCR) leads the Top 5 Distribution of Offshore Banking Offices regions with 3,275 banking ofces or 31.7 percent of As of End-December 2014 total banking ofces natonwide. Other regions that Middle East registered hefy shares are: CALABARZON or Region 43.5% IV‑A with 1,566 banking ofces or 15.2 percent share; Central Luzon (Region III) with 1,033 banking ofces North America 10.9% or 10.0 percent share; Central Visayas (Region VII) with 683 banking ofces or 6.6 percent share; and the Europe 8.7% Western Visayas (Region VI) with 600 banking ofces or 5.8 percent share. These fve leading regions Asia-Pacific 37.0%

accounted for 69.3 percent of the total banking 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 network natonwide (Figure 5 and Appendix 4). % to Total Overseas Banking Network

Low bank coverage has been noted in the ______Autonomous Region of Muslim Mindanao (ARMM) 4 Secton X154 of the Manual of Regulatons for Banks (MORB) sets down the rules with merely 0.2 percent of the region’s cites and for the establishment of branches or other ofces abroad by domestc banks. These municipalites having banking ofces. This was ofces cover not only branches but also agencies, representatve ofces, remitance followed by Cordillera Autonomous Region (CAR) centers, remitance desk ofces and other ofces which are integral in the operatons at 1.5 percent, Eastern Visayas (Region VIII) at 1.8 of the parent domestc bank. Figure 5 Philippine Banking System Regional Distribution of Banking Offices:Top Five Regions As of End-December 2014

Number of City/Municipality Number of Banking Offices With Without Total Head Total Banking Banking Banking Branches Office Offices Offices Offices Grand Total 10,361 648 8,541 Nationwide 1,634 1,039 595 10,315 648 8,528 National Capital Region (NCR) 17 17 0 3,275 83 3,092 Region III Central Luzon 130 121 9 1,033 87 878 Region IV-A CALABARZON 142 135 7 1,566 119 1,194 Region VI Western Visayas 133 105 28 600 58 447 Region VII Central Visayas 132 84 48 683 46 571 6 Banking System domestc banks, two regular branches, one extension Figure 8 ofce and one sub‑branch). Domestc banks also have Philippine Banking System Number of ATM Units banking ofces in Hong Kong (two regular branches For End-Periods Indicated Total = 15,695 units Number (N) and one RO), Singapore (one regular branch, one RO YoY Growth = 8.0% and one limited purpose branch), Korea (two regular 16,600 14,600 branches), Taiwan (one regular branch and one RO) 12,600 and China (one RO). 10,600 8,600 The fnancial industry also displayed strong support 6,600 to the funding needs of its clients with improved 4,600 customer rato 2,600 600 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 201220132014 The country’s bank density rato, as measured by Figure 9 banking ofces per city/municipality, remained Philippine Banking System Off-site On-site unchanged from last year at six banks. Customer Comparative ATM Growth rato, nevertheless, improved by 2.4 percent to As of End-Years Indicated 50.0 9,682 persons served per banking ofce from 9,917 45.0 persons per each banking ofce in end‑December 40.0 35.0 2013. Banks’ density rato mirrored the populaton 30.0 25.0 dispersion patern which is concentrated in highly 20.0 15.0 populous, urbanized and higher income areas of the 10.0 Growth Rate (%) 5.0 archipelago (Appendix 5). 0.0 -5.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20132014 The use of electronic banking (e-banking) On-site 6.7 -1.2 6.1 20.1 12.0 9.4 4.5 6.0 5.9 7.3 7.2 10.2 16.4 6.9 technology allowed greater access to fnancial Off-site 16.2 45.0 4.5 18.1 17.9 13.4 3.5 13.8 17.1 18.1 26.4 22.0 22.5 9.5 services Total 8.6 8.3 5.7 19.6 13.6 10.5 4.2 8.2 9.3 10.8 13.8 14.7 18.9 8.0

Banks have capitalized on the use of various electronic of‑site ATMs may be atributed to the BSP’s policy initatve of removing the restricton on the itnerary banking (e‑banking) channels, allowing for greater 7 access to fnancial services. E‑banking platorms such of mobile ATMs which was previously confned to as electronic wallet are being ofered by 62 banks, Metro Manila alone, giving banks greater fexibility internet banking by 44 banks, cash/remitance cards to utlize innovatve delivery channels to provide by 26 banks, and hybrid mobile/internet via BancNet‑ fnancial services to more Filipinos. MegaLink switch by 47 banks (Figure 7 and Appendix 7). Many banks saw the need to merge with, or acquire, other banks as part of their market strategy Figure 7 Approved E-Banking and E-Money Applications As of End-December 2014 Many banks also saw the need to merge with, or Electronic Wallet (Smart Money) acquire, other banks as part of their market strategy.

Electronic Wallet… Figure 10 Philippine Banking System Cash Card/Remittance Card Merger/Consolidation/Acquisition End-December 2014 ETFPS (BIR) MERGER Bancnet POS Cash-out Aggregator/Acquirer Bank Bank Surviving Entity Involved Entities Effectivity Date Mobile/ Internet thru Bancnet & Megalink Switch Category Category 1 China Bank Savings, Inc. TB China Bank Savings, Inc. TB 20-Jan-14 Proprietary Unity Bank, A Rural Bank, Inc. RB

Internet 2 East West Banking Corporation UB East West Banking Corporation UB 31-Jul-14 Green Bank (A Rural Bank), Inc. RB Phone banking CONSOLIDATION

Mobile Bank Bank Consolidated Entity Constituent Entities Effectivity Date Category Category

0 10 20 30 40 50 60 70 1 Bank of Florida, Inc. (A Rural Bank) RB Bank of Florida, Inc. (A Rural Bank) RB 2-Jan-14 Bank of Lubao, Inc. (A Rural Bank) RB

2 Network Consolidated Cooperative Bank CB Cooperative Bank of Agusan del Sur CB 8-Sep-14 Capiz Settlers Cooperative Rural Bank, Inc. CB Cooperative Bank of Camarines Norte CB Automated teller machines (ATMs) also remained a Cooperative Bank of Leyte CB Sorsogon Provincial Cooperative Bank CB key e‑banking platorm. The number of banks with Southern Leyte Cooperative Bank CB

ATM network reached 115 (from 102 banks at end‑ ACQUISITION Bank Bank Parent Entity Acquired Entity Effectivity Date December 2013), composed of 107 domestc banks Category Category and eight foreign bank branches and subsidiaries. 1 BDO Unibank, Inc. UB Citibank Savings, Inc. TB 25-Mar-14 2 China Banking Corporation UB Planters Development Bank TB 15-May-14 The system’s ATM network grew by 1,165 units (8.0 3 Philippine Bank of Communications KB Rural Bank of Nagcarlan, Inc. RB 24-Jul-14 4 BDO Unibank, Inc. UB The Real Bank (A Thrift Bank), Inc. TB 8-Aug-14 percent) to 15,695 from year ago’s 14,530 units 5 Philippine Bank of Communications KB Banco Dipolog, Inc. RB 4-Sep-14 (Figure 8). These ATMs were mostly on‑site ATMs at ______57.8 percent (down from last year’s 58.3 percent). 6 Of‑site ATMs or stand‑alone ATM units are mostly found in university belts, Of‑site ATMs6, nonetheless, grew at a faster rate by convenience stores, private‑public ofces, shopping malls, LRT/MRT statons, 9.5 percent compared to on‑site ATM’s growth of 6.9 airports, seaports and bus terminals. percent year‑on‑year (Figure 9).The faster growth in 7 BSP Circular No. 735 dated 16 August 2011 7 The bigger banks, specifcally, are in acquisiton mode Figure 13 with fve cases of acquisiton reported during the Philippine Banking System year. In additon, there were four cases of mergers Selected Ratios and Domestic Interest Rates and consolidatons that transpired in 2014 (Figure For End-Periods Indicated 10). Selected Ratios Domestic Interest Rates In Percent (%) In Percent (%) Meanwhile, the banking landscape was also 9.0 11.0 10.0 8.0 characterized by the exit of weaker players with the 9.0 7.0 8.0 reported closure of 15 banks – one thrif bank, 13 6.0 7.0 rural banks and one cooperatve bank. (Figure 11) 5.0 6.0 5.0 4.0 Figure 11 4.0 Philippine Banking System 3.0 3.0 Yield Reversal Number of Closed Banks 2.0 2.0 1.0 1.0 End-December 2014 - - 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Name of Bank Bank Date of Closure Savings Deposit Rates Earning Asset Yield Category Bank Average Lending 1 Silangan Savings and Loan Bank, Inc. TB 9-Jan-14 Funding Cost T-bills (91-day) 2 Rural Bank of Reina Mercedes (Isabela), Inc. RB 7-Feb-14 Net Interest Margin Short-Term Time Deposit (<360 days) 3 Rural Bank of Montevista (Davao del Norte), Inc. RB 6-Mar-14 Status Report on the Philippine Financial System Financial Philippine the on Report Status 4 Rural Bank of Pres. M.A. Roxas (Zamboanga del RB 20-Mar-14 Norte), Inc. Figure 14 5 Rural Bank of Lingayen, Inc. (Operating under the RB 3-Apr-14 Philippine Banking System business name/style "GULF BANK", a Rural Bank) Interest Income 6 Cavite Rural Banking Corporation RB 9-May-14 (In Billion Pesos, For End-Periods Indicated) 7 Asian Consumers Bank (A Rural Bank), Inc. RB 26-Jun-14 500 8 Rural Bank of Oroquieta (Mis. Occ.), Inc. RB 21-Jul-14 9 Banco Carmona (Cavite), Inc., A Rural Bank RB 1-Aug-14 400 10 Rural Bank of Lobo, Inc. RB 18-Sep-14 Financial Liabilities Held for Trading 11 Fil-Agro Rural Bank, Inc. RB 25-Sep-14 Other Interest Expense 12 Rural Bank of Padre Burgos (Southern Leyte), Inc. RB 12-Sep-14 300 21.2% Loans and Receivables 13 Cooperative Bank of Tarlac, Inc. CB 24-Oct-14 Held-to-Maturity Financial Assets 14 Synergy Rural Bank (Batangas), Inc. RB 6-Nov-14 200 Available-for-Sale Financial Assets 15 Rural Bank of Burauen (Leyte), Inc. RB 4-Dec-14 Averted further losses by ↑ HTM and ↓ AFS Financial Assets Held for Trading 100 Due from Bangko Sentral ng Pilipinas Banks insttuted balanced and defensive portolio in Other Interest Income 2014 to sustain a positve operatng income, balance - sheet growth, and frmed up capital base 2013 2014 (100) Revenue from lending actvites sustained positve botomline, albeit moderated by lower gains from actvity and Held‑to‑Maturity (HTM). Interest earned revaluaton of fnancial investments on loans to individuals, corporate and government of P285.6 billion increased by 21.2 percent YoY The system’s performance recorded a net proft accountng for a signifcant porton at 70.4 percent of P135.0 billion driven mainly by interest income (Figure 14). Interest Income from HTM assets of from increased lending (Figure 12). The proporton P31.8 billion, or 80.0 percent increase YoY mitgated of interest to operatng income was at 59.6 percent the 30.5 percent drop in interest income from AFS (P274.3 billion). Interest income from fnancial assets assets to P5.9 billion. other than loans stood at 18.1 percent (P83.4 billion) while fees and commission income at 14.2 percent Interest expense related to deposit taking actvity, on (P65.2 billion) of total operatng income. the other hand, slightly rose by 0.2 percent to P70.6 billion. Further, interest income picked up with banks taking advantage of market’s foresight of potental reversal Non‑interest income from foreign exchange of of yields downtrend (Figure 13) by increasing credit P3.4 billion (down by 69.4 percent YoY) and sale/ redempton/de‑recogniton of non‑trading fnancial Figure 12 Philippine Banking System instruments of P5.6 billion (down by 80.7 percent 8 Results of Operations YoY) posted lower proft due to sofening of the Non-Interest (In Billion Pesos, For End-Periods Indicated) 9 Income peso‑dollar exchange rate and revaluaton loss from 500 trimmed down

400 ______8 300 The peso sofened against the US dollar by 4.6 percent to PhP44.4/US$ owing to 200 expectatons of increase in US interest rates as the US Federal Reserve winds down bond purchases. 100 9 Lingering uncertaintes in the global fnancial market and local equites’ performance 0 that is highly infuenced by market development in the external front pulled down 2006 2007 2008 2009 2010 2011 2012 2013 2014 value of fnancial assets. Net Interest Income Non-Interest Income

8 Banking System

Figure 15 Figure 17 Philippine Banking System Philippine Banking System Non-Interest Income Profitability Trends (In Billion Pesos, For End-Periods Indicated) Lower gains from (In Percent, For End-Periods Indicated) 200.0 sale/redemption/ (LHS) (RHS) derecognition of 5.0 16.0 150.0 Available-for-Sale 4.5 Return on Equity, RHS 14.0 100.0 4.0 12.0 50.0 3.5 3.0 Net Interest Margin, LHS 10.0 - 2.5 8.0 2008 2009 2010 2011 2012 2013 2014 2.0 (50.0) 6.0 1.5 Fees and Commissions Income 4.0 Dividend Income 1.0 Return on Assets, LHS Profit/(Loss) from Sale/Redemption/Derecognition of Non-Trading Financial Assets and Liabilities 0.5 2.0 Foreign Exchange Profit/(Loss) 0.0 0.0 Profit/(Loss) on Fair Value Adjustment in Hedge Accounting Profit/(Loss) on Financial Assets and Liabilities Designated at Fair Value through Profit or Loss 2008 2009 2010 2011 2012 2013 2014 Profit/(Loss) from Sale/Derecognition of Non-Financial Assets Trading Income Other income

Figure 16 System’s asset portolio exibited considerable growth Philippine Banking System in credit actvity and holdings of fnancial assets Gains/(Losses) from Sale/Redemption/De-recognition of Non-Trading Financial Assets and Liabilities (In Billion Pesos, For End-Periods Indicated) Banks’ cautous strategy of building a defensive and 70 Available-for-Sale balanced asset portolio that will not only withstand 60 Held-to-Maturity unantcipated stress in the funding stream but also 50 alleviate downward pressure of lower trading‑related 40 Investments in Unconsolidated -76.7% Subsidiaries, Associates and Joint Ventures gains buoyed proftability. It was observed that the 30 Loans and Receivables 20 percentage of loans to total assets grew to 52.2 percent Investment in Non-Marketable Equity Securities 10 (up from 49.1 percent last year) and fnancial assets - Unquoted Debt Securities Classified as Loans other than loans booked as Held‑to‑Maturity (HTM) 2013 2014 to 7.4 percent (up from 3.6 percent), respectvely. Conversely, cash and due from BSP/other banks fell to selling/redeeming/de‑recognizing of Available‑For‑ 22.2 percent (down from 25.6 percent). These overall Sale (AFS) assets (Figure 15 and 16). indicate banks’ behavior to safeguard proftability amid rising domestc interest rates. Non‑interest expenses are comprised largely of compensaton/fringe benefts at 36.2 percent (P104.0 billion) followed by taxes and licenses at 9.5 Figure 18 percent (P27.3 billion). Philippine Banking System Asset Mix and Funding Source The registered net proft is, however, 6.9 percent lower (Year-on-Year growth In Billion Pesos, As of End-Periods Indicated) than last year’s P144.9 billion on tempered trading TOTAL LOAN PORTFOLIO* gains and marked‑to‑market (MTM) losses of banks CASH AND DUE FROM BSP/OTHER BANKS on fnancial assets arising from the uptck in domestc FINANCIAL ASSETS*a/ interest rates (Figure 15). Specifcally, the decline was brought about by the decrease in non‑interest OTHER ASSETS income of 17.4 percent to P144.8 billion which partly ROPA Dec-14 Dec-13 Dec-12 ofset higher net interest income of P320.2 billion, or 16.4 percent increase from last year’s P274.9 billion (500) 0 500 1,000 1,500 2,000 (Figure 12). DEPOSIT LIABILITIES Notwithstanding trimmed net proft, net interest CAPITAL *Net Allowance for Credit Losses OTHER LIABILITIES margin (NIM) stayed at 3.3 percent refectng a/ Financial assets other than loans exclude increased income from loans and HTM assets (Figure BILLS PAYABLE Equity Investment in Subsidiaries/ 17). However, cost‑to‑income (CTI) rato picked up Associates/Joint Ventures. BONDS PAYABLE to 65.0 percent from 60.6 percent because of the deliberate move of banks to expand their branch FINANCIAL LIABILITIES HFT network as a means to not only increase deposit base (500) 0 500 1,000 1,500 2,000 and loan potental but also set up scanning posts to improve their ability to service the changing and diferentated needs of stakeholders, consequently ______increasing customer base and seizing opportunites 10 Across various subgroups, proftability indicators present that government banks were to compete in the consumer fnance market. Return the most cost‑efcient at 58.5 percent (up from last year’s 53.2 percent). Meanwhile, on assets (ROA) and return on equity (ROE) ratos cooperatve banks with a ROA of 1.7 percent and government banks with a ROE of 14.2 went down to 1.3 percent and 10.8 percent from 1.6 percent (up from previous year’s ‑3.9 percent and 14.7 percent, respectvely) provided percent and 13.3 percent, respectvely, last year due beter returns. to lower profts10. 9 Total assets of P11.2 trillion grew year‑on‑year (YoY) of interbank loans and RRP transactons with BSP by 12.0 percent (P1.2 trillion YoY). Asset expansion and other banks) which increased by 19.5 percent to was driven by credit11 actvity of P5.7 trillion which P5,271.3 billion from last year’s P4,410.1 billion. rose by 19.7 percent YoY (P934.1 billion) and acquisiton of fnancial assets12 amountng to P2.3 Industries engaged in real estate, rentng and business trillion that is higher by 15.0 percent YoY (P296.5 actvites stll had the largest TLP share14 (Figure billion). These upturn are remarkably higher than 19), ahead of fnancial intermediaton (inclusive of the levels recorded in 2013 when the banking interbank loans and RRP transactons). In partcular, system displayed ample liquidity conditons (Figure real estate’s loan intake of 17.8 percent (down from 18). Among fnancial assets other than loans, it is last year’s 18.5 percent) was higher than fnancial interestng to note that Held‑to‑Maturity (HTM) of intermediaton’s 17.0 percent (same as last year). The P829.9 billion and Held‑For‑Trading (HFT) of P322.3 other economic actvites with double‑digit percent billion registered a hefy growth of 134.0 percent shares were manufacturing at 13.8 percent (slightly YoY (P475.2 billion) and 88.8 percent YoY (P151.6 up from 13.7 percent) followed by wholesale and billion), respectvely while Available‑For‑Sale (AFS) of retail trade at 12.5 percent (down from last year’s P991.8 billion declined by 15.5 percent YoY (P341.4 12.8 percent).

Status Report on the Philippine Financial System Financial Philippine the on Report Status billion). This dynamics signals prudent stance of banks to manage the negatve impact of short‑term Prudental surveillance report by purpose on real fuctuatons in interest rates and ensure contnued estate exposures (REEs) of Universal/Commercial viability and proftability of its balance sheet. Banks (U/KBs) and Thrif Banks (TBs) presents a portolio comprised of real estate loans (RELs) at 85.4 Real estate, rentng and business actvites remained percent at P1,043.4 billion. Of the RELs, mid‑ to high‑ the largest loan recipients end residental housing projects have consistently received favourable15 fnancial support from banks The banking system’s gross total loan portolio (TLP) rather than real estate actvites used to support rose by 19.1 percent to P5,827.113 billion from last productve actvites such as factories, ofce space, year’s P4,891.9 billion. Loans are largely peso‑ warehouse and storage. The quarterly growth of denominated at 87.7 percent (marginally up from REEs, however, accelerated from a rate of 3.8 percent 87.3 percent) and short tenured with maturites as of end‑September 2014 to 5.4 percent as of end‑ ‘Up to 12 months’ at 50.1 percent (Figure 19). This December 2014 at P1,221.5 billion. refects banks’ increased exposure to higher yielding credit actvites. The components of consumer loans (CLs) other than residental RELs, i.e., auto loans, credit card Across banking groups, universal and commercial receivables and other consumer loans, also registered banks (U/KBs) made up the bulk of the banking year‑on‑year growth. Total consumer loans rose to system’s TLP at 87.8 percent while the rest of the P902.6 billion from last year’s P721.5 billion (Figure share were for thrif banks (TBs) and rural and 20). Residental RELs stll took the largest share of cooperatve banks (R/CBs) at 9.9 percent and 2.3 percent, respectvely. The banking system’s strong Figure 20 COMMERCIALloan growth BANKSECONOMIC was ACTIVITYAs evident of June in 30, core 2001 lending (TLP exclusive PagePhilippine 1 of 1 Banking System 1 Composition of Consumer Loans Figure 20 Levels in PhP Billions, Ratios in Percent Philippine Banking System As of End of Periods Indicated Loan Portfolio Structure by Economic Sector For End-Periods Indicated December 2014 December 2013 In Percent Level % Share NPL Ratio Level % Share NPL Ratio Consumer Loans 902.6 100.0 4.8 721.5 100.0 5.3 Auto Loans 230.1 25.5 4.3 186.3 25.8 4.2

DEC 2013 DEC 2014 Credit Card Receivables 164.3 18.2 8.2 157.4 21.8 9.6 P4,891.9 Billion P5,827.1 Billion Residential Real Estate Loans 398.2 44.1 3.1 320.5 44.4 3.0 Other Consumer Loans 2 109.9 12.2 7.1 57.4 8.0 10.7

1 excludes rural and cooperative banks 2 includes Salary Loans which is a separate account in the FRP effective June 2014 reports Dec 2013 Dec 2014 Real Estate, Renting & Business Activities 18.5% 17.8% ______Financial Intermediation (including IBL & RRP) 17.0% 17.0% 11 Net of Allowance for Credit Losses. Manufacturing 13.7% 13.8% 12 Wholesale & Retail Trade 12.8% 12.5% Net of Allowance for Credit Losses. Loans to Individuals for Consumption Purposes 8.4% 8.9% 13 Net of Amortzaton. Electricity, Gas & Water Supply 7.8% 8.4% 14 Transport, Storage and Communications 5.0% 4.9% For comparability, classifcaton is based on mapping of data startng June 2014 Agriculture, Hunting, Forestry and Fishing 4.4% 3.7% (using 2009 Phil. Standard Industrial Classifcaton efectve June 2014 FRP) with data Public Admin & Defense; Compulsory Social Security 2.2% 1.8% Others 10.2% 11.1% of prior periods (using 1994 PSIC, as amended).

10

Filename: Figure__Loans & NPLs by EconActShee: PBS TLP by EconActDate: 5/17/2015 Time: 8:58 AMDirectory: s:\ Banking System the consumer loan portolio at 44.1 percent, followed share of 23.1 percent) and real estate (P162.4 billion by auto loans at 25.5 percent, credit card receivables or a share of 21.4 percent) (Figure 22). at 18.2 percent, and salary loans at 6.9 percent. Compared to its ASEAN‑5 counterparts, Philippines Figure 22 stll lagged behind in terms of CL exposures at 15.9 Exposure of Banks to Top 12 Conglomerates percent of total loan portolio. Malaysia’s CL exposure (with firms classified to business lines) comes frst at 57.8 percent followed by Indonesia at As of End-September 2014 0.9% 28.3 percent, Thailand at 27.8 percent, and Singapore 3.6% 1.7% No. of at 25.7 percent. However, the non‑performing CCRs to 5.2% Firms Real Estate Activities 40 total CCRs rato of the Philippines is the highest among 7.6% Manufacturing 32 the ASEAN 5 at 7.0 percent. Financial and Insurance Activities 31 24.5% Electricity and Gas Supply 26 Trade 22 Telecommunications 9 Across banking groups, universal and commercial 12.0% Transportation 8 Water Supply 4 banks accounted for 63.4 percent of total consumer Others 27 loans while thrif banks held the remaining 36.6 23.1% TOTAL 199 percent. While non‑performing consumer loans 21.4% * Share to Total Exposure of Banks to Top 12 Conglomerates went up from last year’s level, the rate of increase in Source: Quarterly Report on Credit Exposures (CREDEX) total consumer loans was higher compared to that in non‑performing consumer loans, resultng to an NPL Banks contnue to set aside funds for MSMEs and rato of 4.8 percent, albeit beter than last year’s 5.3 agri-agra borrowers, with rural and cooperatve percent. banks’ compliance ratos far above the minimum

By counterparty exposures, bank credit is skewed Banks contnuously provide credit accommodatons towards resident private corporatons amountng to micro, small and medium enterprises (MSMEs) P2,964.4 billion with a share of 57.6 percent (Figure under R.A. No. 6977 (as amended by R.A. Nos. 8289 21) and which are involved in manufacturing (P640.5 and 9501) as funds allocated to MSMEs totaled P396.2 billion or a share of 20.3 percent), real estate (P516.0 billion, slightly up from last year’s P387.0 billion. This billion or a 16.3 percent share), and wholesale & retail resulted to the banking system’s overall compliance trade, repair of motor vehicles & motorcycles (P421.1 rato of 10.3 percent, which was above the required billion or a 13.3 percent share). Thus, U/KBs’ on‑ ten percent (8 percent for MSEs and 2.0 percent for balance sheet credit risk‑weighted assets presents a MEs) under the law. sizeable porton of loan extended to corporate sector at 69.6 percent. The system’s total credit allocaton to MEs a total of P218.0 billion led to a compliance rato of 5.7 percent. While the banking system’s funds allocated to MSEs Figure 21 Philippine Banking System totaling P178.2 billion resultng to a compliance rato Gross Loans and Receivables by Resident Counterparty of 4.6 percent, the rural and cooperatve banking (In Percent Share to Total) As of End-December 2014 3.9% 3.0% industry’s 22.5 percent MSE compliance rato far 7.1% exceeded the 8 percent statutory foor. 4.4% 0.8% 7.0% It was also able to set aside a total of P336.7 billion of loanable funds for agriculture and agrarian reform

9.7% credit under R.A. No. 10000 (the Agri‑Agra Reform 57.6% Credit Act of 2009), higher than last year’s P303.9

6.5% billion. In partcular, rural and cooperatve banks’ overall agri‑agra compliance ratos of 18.3 percent and Non-Resident Resident Private Corporations 40.2 percent were far above the required ratos of 15 Resident Individuals for Housing Purposes Resident Individuals for Consumption percent and 10 percent, respectvely. As such, despite Resident Agrarian reform/Other Agricultural Loans its minimal share in the banking system’s total loan Resident Microenterprise Government portolio, the rural and cooperatve banking industry Resident Small and Medium Enterprise

Aggregatng private corporatons under one group ______– conglomerate ‑ a total of 39 banks are exposed to 15 Classifcaton efectve June 2014) with data of prior periods (using 1994 PSIC, as the Top 12 conglomerates as of end‑September 2014. amended). As of end‑December 2014, the share of mid‑ to high‑end residental units Companies of these Top 12 borrowing conglomerates to total real estate loans to fnance residental units was at 61.2 percent and has been providing fnancial and insurance actvites (P185.8 above the 61.0 percent mark since December 2012 when the banks started to adopt billion or a share of 24.5 percent) have the largest the expanded report on real estate exposures (Memorandum No. M‑2012‑057 dated 18 December 2012). aggregate loans from banks, followed by those involved in electricity & gas supply (P175.3 billion or a

11 Figure 23 Philippine Banking System For End-Periods Indicated

GROSS NPLs and NPL COVERAGE RATIO NPAs and NPA COVERAGE RATIO DISTRESSED ASSETS RATIO

In P Billion In Percent In P Billion In Percent In P Billion In Percent 180.0 140.0 350.0 90.0 350.0 12.0 160.0 120.0 80.0 300.0 300.0 10.0 140.0 70.0 100.0 250.0 250.0 120.0 60.0 8.0 200.0 100.0 80.0 200.0 50.0 6.0 80.0 60.0 150.0 40.0 150.0 60.0 30.0 4.0 40.0 100.0 100.0 40.0 20.0 2.0 20.0 50.0 50.0 20.0 10.0

- 0.0 - 0.0 0.0 0.0 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014

NPAs NPA Reserves Gross NPLs (RHS) LLRs NPAs RLs, Performing Distressed Assets Ratio Gross NPL Ratio NPL Coverage Ratio NPA Ratio NPA Coverage Ratio was able to cater to the needs of agri‑agra as well as The distressed assets rato, as a broader measure of MSME borrowers that may be underserved by larger asset quality, likewise improved to 4.6 percent from banks. last year’s 5.6 percent rato. This came as distressed assets went down to P276.1 billion from last year’s Status Report on the Philippine Financial System Financial Philippine the on Report Status Loan quality was maintained amid total loan P282.2 billion. portolio growth Meanwhile, NPL16 ratos generally slowed down The industry maintained its loan quality amid across all industries except for agriculture, huntng, the contnued expansion in lending. Gross non‑ forestry and fshing (AFF) which inched up to 7.1 performing loans (NPLs) remained low at 2.3 percent percent from 6.0 percent in the same period last year. of the total loan portolio, beter than last year’s 2.8 An increase of P2.4 billion in NPL level was noted in percent. This improvement came about as the level AFF (Figure 25).

of gross NPLs was relatvely unchanged at P134.7 Figure 24 Non-Performing Loans Ratio billion from last year’s P134.6 billion despite the 19.5 For End-Periods Indicated percent growth of the total loan portolio (TLP) of In Percent (%) 9.0 8.0 P5,827.1 billion (Figure 23). Agriculture, Hunting, 7.0 Forestry & Fishing Loans to Individuals for 6.0 Consumption Purposes Across banking groups, universal, commercial and 5.0 4.0 thrif banks, as well as rural banks, were able to 3.0 RERBA Wholesale & Retail Trade Manufacturing keep their NPL levels low in spite of growth in total 2.0 Others* Transport, Storage & Communication 1.0 Financial Intermediation Public Administration & Defense loans. On the other hand, the loan portolio of the 0.0 Electricity, Gas & Water Supply cooperatve banking industry is deterioratng as the 2011 2012 2013 2014 * Composed of: Mining and Quarrying; Construction; Hotels and Restaurants; Education; Health and Social Work; Other Community, Social and Personal Service Activities; Private Households with Employed Persons; and Loans to Non-Residents industry’s NPL levels are increasing while its total Source: FInancial Reporting Package (FRP) loan levels are maintained at almost the same levels. The cooperatve banking industry’s loan portolio of P10.1 billion, however, represented a mere 0.2 Comparatve loan and asset quality by industry is percent of the banking system’s total loan portolio. summarized below:

Figure 25 Aside from keeping the gross NPL rato low, the Philippine Banking System banking system contnued to set aside loan loss Comparative NPL, NPA & Coverage Ratios As of End-December 2014 reserves larger than gross NPLs. In partcular, the In Percent NPL coverage rato stood at 119.8 percent as loan Gross NPL Net NPL Coverage Ratios NPA Ratio loss reserves slightly increased to P161.4 billion from Ratio Ratio NPL NPA P160.3 billion.The NPL coverage rato exclusive of All Banks p/ 2.3% 0.6% 2.3% 119.8% 77.0% general loan loss provision declined to 74.2 percent Universal and Commercial Banks 1.8% 0.3% 1.8% 142.4% 88.9% (from 79.0 percent) consistent with the decline in Thrift Banks 4.4% 2.0% 5.0% 77.0% 52.1% non‑performing loans. Rural Banks p/ 11.8% 6.0% 11.9% 56.9% 37.1% Cooperative Banks p/ 17.6% 7.4% 16.1% 63.1% 48.2%

p/ Preliminary Real and other propertes acquired (ROPA) declined to P121.1 billion from last year’s P128.6 billion, resultng to a lower non‑performing asset (NPA) level Cooperatve banks exhibited the highest NPL rato at of P255.8 billion from last year’s P263.3 billion as a 17.6 percent, albeit the subgroup has minimal impact benefcial consequence of banks’ contnued asset on the overall industry rato as its NPLs represent clean up. Accordingly, asset quality improved as the only 1.3 percent of the system’s total NPLs and 0.03 NPA rato eased to 2.3 percent, lower than last year’s percent of the total loan portolio.

2.6 percent. Furthermore, the NPA coverage rato ______strengthened to 77.0 percent due to the increase in 16 Figures are computed in accordance with the NPL defniton under Circular No. 772 NPA reserves to P197.0 billion. dated 16 October 2012 efectve 01 January 2013. 12 Financial Assets Held for Banking System Figure 26 Trading (HFT)

Philippine Banking System Financial Assets DFVPL 2,500 BY TYPE OF INSTRUMENT Financial Assets Other Than Loans 2,000 As of End-Periods Indicated Available-for-Sale (AFS) Financial Assets 3,000 1,500 BY BOOKING Held-to-Maturity (HTM) 2,500 Financial Assets 1,000 95.1% 2,000 Unquoted Debt Securities 94.5% 16.2% 33.5% Classified as Loans 1,500 500 1,000 Investments in Non- 61.6% 40.8% Marketable Equity Securities - 500 8.0% 13.1% Equity Investments in As of End-December 2013 As of End-December 2014 - Subsidiaries, Associates and As of End-December 2013 As of End-December 2014 Joint Ventures, net Debt Equity Derivatives Others

BY INDUSTRY BY COUNTERPARTY 2,500 2,500

2,000 2,000 15.0% 21.1% 12.9% 11.9% 20.4% 1,500 1,500 12.8% 1,000 1,000 64.8% 61.6% 500 66.7% 67.1% 500 0 0 As of End-December 2013 r/ As of End-December 2014 As of End-December 2013 As of End-December 2014 Private Domestic UBs Private Domestic KBs Government Banks Private Domestic Thrift Banks National Government LGUs GOCCs Foreign UBs Foreign KBs BSP Banks Corporations Foreign Subsidiary KBs Foreign-Controlled TBs Individuals Non-residents Others Others

Bank holdings of Held-To-Maturity (HTM) fnancial Growth in deposits, capital raising actvites, and assets more than doubled while Available-For-Sale shif of placements in BSP’s SDA facility to alternatve (AFS) contracted drastcally at the onset of interest instruments supported asset expansion rate hike The banking systems total deposit liabilites stood Financial assets other than loans (net of accumulated at P8,520.9 billion, 12.1 percent higher than last market gains/losses and allowance for credit losses) year’s level on contnued confdence in the banking are largely made up of government issued debt system and banks’ eforts to market innovatve securites (P2,145.4 billion or a share of 95.1 percent) deposit products that enter to the clients’ evolving and the rest were shared by derivatves at P60.0 needs such as products with facilites to link with billion or 2.6 percent and equites at P50.2 billion or investment variants. The growth though is subdued 2.2 percent. In terms of booking, AFS represented a compared to prior years. share of 44.5 percent at P1,003.5 billion followed by HTM of 36.4 percent at P822.3 billion and Held‑For‑ Growth in banking system’s assets is mostly funded by Trading (HFT) of 14.3 percent at P322.3 billion. Banks peso deposit liabilites at 83.2 percent share to total more than doubled their holdings of HTM (from a deposits and is mostly from residents representng share of only 16.2 percent in 2013) and reduced AFS 98.8 percent. Peso deposit rose by P643.4 billion or instruments (from 61.6 percent) to safeguard capital 10.0 percent to P7,087 billion. positon and portolio investments from mark‑to‑ market (MTM) losses amid rising interest rates. Furthermore, deposits were primarily held in savings Residents, specifcally domestc universal banks at 47.1 percent share amountng to P4,014.6 billion, and government banks, hold a substantal fracton followed by tme of P2,644.1 billion at 31.0 percent of portolio and direct equity investments of banks share, demand and NOW accounts of P1,756.0 billion (Figure 26). at 20.6 percent, and Long‑Term Negotable Certfcate of Deposits (LTNCD) at 1.2 percent amountng to P106 billion (Figure 27).

Figure 27 Philippine Banking System Deposit Liabilities Profile (In Percent, As of End-December 2014) By Type of Foreign Currency Deposits Demand and NOW 1.2% 3.4% Savings 20.6% By Type of Deposits Time 31.0% Demand and NOW LTNCD Savings 50.2% Time 46.4% LTNCD

47.1%

By Type of Peso Deposits By Type of Resident Demand and NOW 2.4% 10.7% 1.5% Savings 1.1% Counterparties 24.1% Time 27.2% Government LTNCD Banks 45.6% Private Corporations 32.9% Individuals Trust Department 47.3%

13 Figure 28 This profle, which remains to be retail‑based and Philippine Banking System Residual Maturity of Performing Financial Assets and Liabilities* domestcally‑oriented, denotes a stable funding (In Billion Pesos, As of End-December 2014) stream and partal insulaton against foreign currency 6,000

exchange rate fuctuatons. It is also indicatve of 5,000 sustained depositor confdence in banks. Retail Short Term Medium Term Long Term 4,000 17 Other Assets and domestc funding sources are normally less Financial Assets Other Than Loans 3,000 Loans and Receivables Under Repurchase Agreements sensitve to sudden changes in the conditon of bank’s Loans and Receivables Due from BSP/Other Banks operaton and cheaper source of funds. The banking 2,000 Bills Payable Other Liabilities system also has a positve funding gap (diference Due to H.O./Branches/Agencies Abroad - (Phils.) between deposits and loans) of P2,693.8 billion as 1,000 Deposit Liabilities there is 1.5x more peso deposit for every one peso 0 Up to 1 mo. Over 1 mo. to 3 Over 3 mos. to Over 1 Yr. to 3 Over 3 Yrs. to 5 Over 5 Yrs. to Over 15 Yrs. loan. mos. 12 mos. Yrs. Yrs. 15 Yrs. *Peso,ForeignRegularandForeignOfficesAccounts.Loansand receivables represents 53.9 percent of total assets, Due from BSP/Other Banks at 23.8 percent, and Financial Assets Other than Loans at 16.4 percent while deposit liabilities accounts for 91.7 percent of total liabilities. However, there was an observed slower increase not and Due from BSP/Other Banks by P77.1 billion or 3.0 only in the amount (up by only 12.1 percent as of percent decline YoY to P2.5 trillion. Nevertheless, end‑December 2014 to P8,520.9 billion from 36.7 the reduced placements in BSP’s SDA facility further percent to P7,603.5 billion as of end‑December 2013) pushed up liquidity in the banking system which Status Report on the Philippine Financial System Financial Philippine the on Report Status of deposits but also in the number of accounts and subsequently found its way to alternatve investment depositors partcularly, in savings deposits (number instruments such as fnancial assets and loans. of accounts grew by only 5.0 percent as of end‑2014 to 42.6 billion from 685.3 percent to 40.6 billion as of The current funding structure of the industry suggets end‑December 2013; number of depositors increased that banks’ balance sheet have negatve gaps by only 6.8 percent to 35.1 billion from 1,176.8 recorded in the short‑term at tme buckets of ‘up percent to 32.9 billion as of end‑December 2013). to 3 months’ based on the residual maturity profle The number of savings deposit accounts with a size of net performing assets and liabilites (Figure 28). of P5,000.01 to P10,000 posted substantal decline Although it broodly indicates that there are more of 8.0 percent (down from a growth of 13.4 percent liabilites repricing faster than assets of up to 3 to P3.0 billion) to P2.7 billion year‑on‑year (YoY). The months, the existence of such maturity mismatches relatvely constant median savings deposit interest should not necessarily denote high liquidity risk rate of universal and commercial banks (U/KBs) at exposure because risk management practces18 such 0.250 percent, thrif banks (TBs) at 0.500 percent, as contngency funding/liquidity plan and limits on and rural and cooperatve banks(R/CBs) at 1.000 the nature and amount of risk have been set up to percent remain constant from previous year’s level control risk19. amid rising yield of other investment instruments, which kept depositors to stay in the sidelines and Banks maintained ample liquidity in 2014 as liquid patently watch for beter return opportunites assets‑to‑deposits rato eased to 55.6 percent, albeit given that the fnancial market that is stll faced with lower than last year’s level of 59.5 percent. Similarly, greater volatlity. cash and due from banks‑to‑deposit rato declined to 29.0 percent from 33.5 percent. The sofening of Apart from deposits, total capital accounts overall liquidity was atributed to banks’ extension funded 12.2 percent of total assets. Following the of credit to productve actvites as loans‑to‑deposit implementaton of Basel III and revised minimum rato rose to 68.4 percent from 64.3 percent last year. capital requirements in 2014, banks shored up capital to meet the required capital standards and further strengthen their operatons for regional competton. Banks’ capital level can ride out asset quality stress

In partcular, the other source of funds for banks’ Universal and commercial banks capital bufer was at operatons such as capital stock of P610.0 billion 16.2 percent on a consolidated basis and 15.2 percent (hike of P68.4 billion, or 12.6 percent YoY), retained on a solo basis (Figure 29). This remains above the earnings of P517.8 billion (up by P77.3, or 17.6 BSP regulatory requirement of 10 percent and the percent), and Other Comprehensive Income of P3.8 Bank for Internatonal Setlements (BIS) standard of billion (increase of P15.9 billion, or 131.1 percent) 8 percent. Philippines’ CAR is among the highest in further reinforced asset expansion. The positve mark ASEAN‑520. posted by OCI was brought by the surge in unrealized ______gains from AFS fnancial assets which rose by P19.5 17 Bank for Internatonal Setlements.Liquidity Risk – An Introducton. www.fsiconnect. billion to P9.4 billion (192.1 percent YoY). Banks’ org moderated appette for SDAs, following the issuance 18 As cited in the Manual of Regulatons for Banks of BSP Memorandum No. M‑2013‑021 dated 17 May 19 Source: Manual of Regulatons for Banks Volume No. 2 Appendix 4. 2013 restrictng access of trust departments/enttes 20 As of end‑December 2014, Indonesia’s CAR is at 18.7 percent, Singapore at 15.9 to the SDA facility (also down by P499.7 billion to percent, and Malaysia at 15.4 percent. Thailand is at 16.9 percent as of end‑September P487.4 billion, or 11.6 percent), led to reduced Cash 2014. Source: IMF Financial Soundness Indicator.

14 Banking System Figure 29 domestc banks in antcipaton of ASEAN banking Universal and Commercial Banks

Capitalization Trends: Consolidated basis* integraton which is seen to usher the entry of new (Ratio in percent, levels in billion pesos, as of end-periods indicated) foreign banks whose capital may be bigger than (LHS) As of end-December 2014 (RHS) those of local banks. 1000 CAR = 16.2% 20 900 CET1 = 13. 6% 18 800 16 Of-Balance Sheet Actvites Expanded 700 14 600 12 500 10 400 8 300 6 Higher trade‑related accounts and bank guarantees 200 4 100 2 transactons pushed up of‑balance sheet actvites 0 0 of banks. Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 *U/KBs' regulatory capital prior to end-March 2014 is Tier 1 Capital (LHS) Tier 1 Ratio (RHS) based on Basel II Of-balance sheet assets of banks posted positve Total Conso CAR (RHS) BSP minimum required CAR (RHS) framework. year-on-year growth

Capitalization Trends: Solo basis* (Ratio in percent, levels in billion pesos, as of end-periods indicated) The banking system’s total contngent accounts (of‑balance sheet) stood at P6,292.3 billion, 10.7 (LHS) As of end-December 2014 (RHS) 900 CAR = 15.2% 20 percent higher than year ago’s level of P5,681.6 800 CET1 = 12.5% 18 700 16 billion (Figure 30). Selected of balance sheet assets 600 14 of banks consisted of derivatves instruments (42.4 500 12 10 400 8 percent), trust department accounts (40.2 percent), 300 6 200 4 commitments (12.2 percent), bank guarantees (3.4 100 2 0 0 percent) and trade related accounts (1.8 percent). Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Sep-14 Dec-14 Trust department accounts will be discussed *U/KBs' regulatory capital Tier 1 Capital (LHS) Tier 1 Ratio (RHS) prior to end-March 2014 is separately in a stand‑alone secton of the report. based on Basel II Total Solo CAR (RHS) BSP minimum required CAR (RHS) framework. Figure 30

Philippine Banking System: Comparative Assets Common Equity Tier 1 (CET1) on consolidated For End-Periods Indicated, In Billion Pesos and solo bases of 13.6 percent and 12.5 percent correspondingly were also higher than the BSP threshold of 6 percent and BIS standard of 4.5 End-December percent while the 2.5 percent capital conservaton 2014 2013 YOY Change (%) bufer (CCB) was surpassed at 7.6 percent and 6.5 percent on consolidated and solo bases, respectvely. On Balance Sheet 11,158.6 9,961.6 12.0 Compared to last year’s rato, this year’s CAR is Off Balance Sheet* 6,292.3 5,681.6 10.7 21 lower despite higher total qualifying capital (TQC) *Includes trust assets of bank (P2,529.5 billion) but discussed separately in a stand-alone section. of P1,098.3 billion was mainly driven by capital raising actvites (issuances of common shares) and unrealized gains in Available‑for‑Sale (AFS) debt The expansion was driven mainly by the increased securites. Increased lending actvites raised risk‑ derivatves actvites and trust related transactons weighted assets22 to P6,784.1 billion from P5,839.5 of banks which both reported a year‑on‑year billion at end‑2013 and pulled down industry CAR expansions of 17.4 percent and 1.9 percent, ratos. respectvely. Strong global demand for locally produced goods The full implementaton of Basel III capital standards resulted in positve outurn in trade-related on 01 January 2014 have translated to relatvely contngent accounts lower capital levels but it strengthened the system’s capital base partcularly its CET1 rato which The banking system’s total trade‑related contngent represents the highest quality of bank capital and accounts stood at P110.7 billion, 24.8 percent higher thereby, enabling banks to withstand unexpected than last year’s level of P88.7 billion on account of losses in tmes of market stress. It also improved strong global demand for locally produced goods. the economic viability and compettveness of

______

21 Total qualifying capital was P1,030.8 billion as of end‑December 2013 on a consolidated basis. On a solo basis, at P928.7 million as of end‑December 2014 and P865.3 billion as of end‑December 2013. 22 On a consolidated basis. P6,099.1 billion as of end‑December 2014 and P5,244.9 as of end‑December 2013 on a solo basis.

15 Figure 31 universal and commercial banks. Total commitments Merchandise Exports and Imports, and rise at P769.3 billion or 15.7 percent growth year‑ Balance of Trade on‑year and were mostly issued by universal and For End-Periods Indicated commercial banks. The increased credit extended In US$ Millions (LHS) In Percent (RHS) 2000 60 to households for family and other personal 50 expenditures which expanded to P469.3 billion or 1000 40 6.4 percent from P440.9 billion last year contributed 0 30 to the huge increase in accounts under the item 20

-1000 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 10 “others”. Credit card lines accounted for 61.0 percent

-2000 0 of total commitments. -10 -3000 -20 Notonal value of derivatves rose on the back -30 -4000 -40 of improved market sentment on positve -5000 -50 macroeconomic and banking data Balance of Trade (US$ million, lhs) Merchandise Exports (y-o-y growth, rhs) Merchandise Imports (y-o-y growth, rhs) Source of Data: National Statistics Office (NSO) Total notonal value of derivatves transactons recorded at P2,666.0 billion or 17.4 percent higher Trade‑in goods was at a defcit amountng to US$2.1 P2,270.5 billion last year on the back of relatve Status Report on the Philippine Financial System Financial Philippine the on Report Status billion due to level fuctuatons of both merchandise weakening of the local currency against the US exports and imports (Figure 31). dollar. On trend, the more sophistcated and bigger universal and commercial banks captured the lion’s As to Philippine exports performance by country in share of the local derivatves market. 2014, Japan (including Okinawa) accounts for 22.5 percent to total exports. It remained as the country’s Foreign exchange contracts stll had the largest top destnaton of exports with revenue amountng share of the local derivatves market at P1,746.6 to $13.919 billion or 10.8 percent of total export billion or 65.5 percent. Year‑on‑year, foreign earnings, followed by the United States of America exchange contracts improved by 17.8 percent. (including Alaska and Hawaii) at $8.722 billion or Other derivatves in the Top 3 were interest rate 15.5 percent and People’s Republic of China at contracts at P914.3 billion or 34.3 percent and credit $8.034 billion or 4.8 percent. derivatves at P5.1 billion or 0.2 percent.

The bulk of the total trade‑related contngent Meanwhile, reforms on the over‑the‑counter accounts of the banking system was accounted for by (OTC) derivatves market have been equated to foreign commercial leters of credit (LC) outstanding that of establishing the identfed infrastructures – at P84.5 billion or 76.4 percent from P69.6 billion exchanges, trading platorms, central counterparty or 78.5 percent last year. These were foreign LCs and trade repositories – as the minimum standard. of universal and commercial banks which held 99.6 Thus, the agenda may be seen as enhancing the percent of the banking system’s total foreign LCs. process and governance of their use so that the The rest, in descending order, went to export LCs regulator can address the issues of risk management, at P11.7 billion or 10.6 percent, shipside bonds and transparency and contagion. airway bills at P11.3 billion or 10.2 percent, and domestc commercial LCs confrmed at P3.2 billion The Philippines, however, is “less actve” in OTC or 2.8 percent. derivatves market but nonetheless value the benefts that this product line can provide. In these Stand-by leters of credit held the lion’s share of “less actve” jurisdictons, the market volume is bank guarantees relatvely limited and the array of available OTC derivatves are the more basic ones. The challenge Bank guarantees stood at P216.8 billion, 24.2 faced by the “less actve” jurisdictons is the difculty percent higher than year ago’s level of P174.5 of establishing the desired infrastructure in the face billion. Bank guarantees are either stand‑by LCs or of limited opportunites to tap existng scale (i.e., outstanding guarantees issued. Stand‑by LCs made market depth and turnover) and scope (i.e., breadth up 91.4 percent of total bank guarantees. Most of of available instruments) economies. bank guarantees were accounted for by universal and commercial banks which contnued to hold the lion’s share of bank guarantees at P216.1 billion or 99.7 percent Credit card lines represent a large porton of total bank commitments

Total commitments rise at P769.3 billion or 15.7 percent year‑on‑year and were mostly issued by

16 Trust and Other Fiduciary Services Trust and Other Fiduciary Services

Overview Figure 32 For the trust industry, the second half of 2014 was Trust Assets per Type of Institution characterized by greater liquidity (62.5 percent YoY As of End-December 2014 growth) and resource recovery (5.8 percent YoY 1.1% growth). On the asset side, support came mostly 4.9% from fnancial assets, partcularly equites while pre‑ 9.9% need and employee beneft trust accounts buoyed the accountabilites side.

The growth in resources was however marred by a marginal decrease in proftability as expenses grew faster than fees and commissions while the later 84.1% reported as slight decline during the review period. UNIVERSAL BANKS COMMERCIAL BANKS Financial Insttutons with Trust Licenses Stable THRIFT BANKS INVESTMENT HOUSES Total number of fnancial insttutons with trust licenses remained at 42 with the 17 universal banks their deposits in banks. In contrast, TBs took a more with trust licenses accountng for a lion’s share of the conservatve stance by doing the exact opposite, that total trust assets at 84.1 percent (P2,297.3 billion). is, they pulled back on fnancial assets and increased A distant second were the nine commercial banks deposits in banks and special deposit accounts with 9.9 percent (P271.9 billion) of the total trust (SDAs). resources; at third were the six investment houses, which accounted for 4.9 percent (P133.7 billion); and A slight reducton in net income is posted at year lastly, the 10 thrif banks (TBs) with trust licenses, end which held 1.1 percent (P30.1 billion). Despite the growth in trust assets, net income from However, when it came to handling these resources, trust slid lower to P4.6 billion, 14.7 percent (P0.8 there were two opposing approaches applied by billion) less than last year as expenses grew to the universal and commercial banks (U/KBs) as well P4.9 billion or by 13.1 percent (P0.6 billion) during as the non‑bank fnancial insttutons on one hand the same period. In partcular, allocated indirect and the TBs on the other. U/KBs and non‑bank expenses went up to P1.2 billion (50.0 percent) fnancial insttutons increased their exposure in from last year. Meanwhile, fees and commissions fnancial assets while they simultaneously reduced went down to P9.5 billion from P9.7 billion or by

Figure 33 Asset Mix by Financial Institution For End-Periods Indicated 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Dec-14 Dec-13 Dec-14 Dec-13 Dec-14 Dec-13

Universal and Commercial Thrift Banks NBFIs Banks

UKBs TBs NBFIs Dec-14 Dec-13 Dec-14 Dec-13 Dec-14 Dec-13 Cash and Due from banks 14.2 15.0 18.1 14.5 0.8 1.4 Deposits in Banks 19.2 20.9 19.1 14.2 2.6 3.0 Financial Assets, net 52.0 49.1 52.1 67.2 77.7 75.9 ROPA (net) 1.8 1.9 2.1 2.2 18.4 19.4 Equity Investments (net) 2.8 3.0 0.7 1.1 0.0 0.1 Other assets ...... Loans, net 9.9 10.1 7.9 0.9 0.4 0.1

. . . Less than 0.05 percent 17 Figure 34 Trust System Asset Mix For End-Periods Indicated

Dec 2014 Dec 2013 P2,733.0 billion P2,582.2 billion Status Report on the Philippine Financial System Financial Philippine the on Report Status Dec 2014 Dec 2013 Financial Assets, net 58.8% 55.7% Deposits in banks 20.3% 22.3% Cash and due from banks 15.0% 16.0% Equity investment, net 2.9% 3.2% Loans 2.9% 2.8% ROPA 0.0% 0.0% Other Assets 10.4% 10.7%

2.6 percent (P0.3 billion) due to a reducton in the In the end, fnancial assets hit P1,455.8 billion, an fees being collected in the efort to regain interest in improvement of P155.3 billion (11.9 percent) over trust accounts. This then resulted to lower fees and last year. On the other hand, the trust industry’s commissions generated per trust asset at 0.3 percent deposits in banks slid to P502.2 billion, 3.3 percent compared to 2013 when the same rato stood at 0.4 (P16.9 billion) lower than P519.1 billion in 2013 as percent. funds migrated to investments with higher returns like the aforementoned equites. Financial assets spur asset growth Pre-need and employee beneft trust accounts gain At end‑2014, trust industry resources was at P2,733.0, favor from investors higher by P150.8 billion (5.8 percent) from last year, a complete reversal of 2013’s P578.4 billion decline. On the accountabilites side, as mentoned, pre‑need This came following renewed interest in equites, and employee beneft trust accounts led the growth. indicatng less risk aversion and greater preference However, while trust accounts were this year’s main for higher yield as the stable macroeconomic drivers, its growth rate has slowed down to 10.6 environment and generally low interest rates lent percent from 40.9 percent in 2013 as the infux of themselves to such behavior. Moreover, the strong funds to trust accounts, partcularly, unit investment performance of the stock market owing to favorable trust funds tapered of afer Memorandum No. corporate earnings, investment grade status of the M‑2013‑021 that limited the access to SDAs already Philippines and easing infatonary pressures fueled took efect beginning 1 January 2014. It is also worth preference for equites. In fact, equites’ share of net notng that in contrast to last year when 52.8 percent fnancial assets rose to 42.3 percent (P616.0 billion) (P820.1 billion) of agency accounts emigrated to other compared to only 33.0 percent (429.1 billion) in 2013. types of accounts (P367.8 billion to UITFs), some In the trust industry balance sheet, this translated even outside of the trust industry, agency accounts to a major contributon to the accumulated market increased to P768.7 billion or by 5.0 percent (P36.5 gains of fnancial assets, which stood at P119.5 billion), indicatng the return of some of the funds to billion by year‑end, a P35.6 billion (42.5 percent) the trust industry. increase over last year’s P83.9 billion and a complete reversal of the P44.6 billion decline of the same in Meanwhile, despite the implementaton of the 2013 when there were concerns regarding the US Foreign Account Tax Compliance Act (FATCA), which economy, partcularly on the uncertainty over the imposed additonal operatonal requirements on potental slowdown in the US Fed’s stmulus program foreign custodian banks, custody business in the and partal shutdown of the US government. trust industry remained relatvely stable at P224.6 billion, up by 1.5 percent (P3.2 billion) from last year.

18 Trust and Other Fiduciary Services

Figure 35 Asset Mix by Total Managed Fund For End-Periods Indicated

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Dec-14 Dec-13 Dec-14 Dec-13 Dec-14 Dec-13 Dec-14 Dec-13 TRUST AGENCY OTHER FIDUCIARY SPECIAL PURPOSE

Trust Agency Other Fiduciary Special Purpose Dec-14 Dec-13 Dec-14 Dec-13 Dec-14 Dec-13 Dec-14 Dec-13 Cash and Due from banks 23.9 26.6 0.0 0.0 2.1 1.7 - 0.2 Deposits in Banks 19.2 15.0 17.4 28.0 17.7 23.1 0.3 0.1 Financial Assets, net 53.2 54.2 74.7 65.8 16.8 16.1 0.2 0.2 Loans, net 0.8 1.3 6.9 5.5 0.1 0.1 77.6 84.3 Equity Investments (net) 0.5 0.5 0.1 0.1 14.5 14.2 - - ROPA (net) ...... - - Other assets 2.3 2.4 1.0 0.7 48.7 44.9 21.8 15.3

. . . Less than 0.05 percent

Trust and agency accounts are channeled to fnancial 61.6 percent propelled by the increase in liquid assets assets to P1,709.3 billion, 7.5 percent (P119.3 billion) more than last year, although there was a marginal The breakdown of asset mix by total managed fund, decline in cash and due from banks owing to the assets held for trust and agency accounts were mostly limited accessibility of SDAs. in fnancial assets at 53.2 percent and 74.7 percent, respectvely. In comparison, assets in other fduciary Trust deposits recover from last year as bank were mostly in other assets while special purpose deposits slow down funds were mostly in loans due to the nature of these insttutons. All in all, while there have been changes Even afer trust deposits of banks with trust licenses in the proporton of assets that were held, there once again started to pick up afer postng a decline were no drastc shifs in preferences. at end‑2013, the trust‑to‑deposit rato of said banks for 2014, which stood at 38.5 percent remained to be Greater liquidity but with lesser share of cash and lower than the 42.3 percent24 registered in 2013. This due from banks occurred as the growth in peso deposit of banks with trust licenses at 15.8 percent contnued to outpace Trust and Other Fiduciary Services contnued to the growth in peso trust assets at 5.3 percent. exhibit liquidity strength with liquid assets‑to‑total accountabilites rato inched to 62.5 percent from ______24 Revised. Figure 36 Peso Domestic Deposit Liabilities (Net of Trust Deposits) of Banks with Trust Functions vs. Trust Assets

In P Billion In Percent 4,500.0 230.0 4,000.0 3,500.0 180.0 3,000.0 130.0 2,500.0 2,000.0 80.0 1,500.0 30.0 1,000.0 (20.0) 500.0 - (70.0) 2005 2006 2007 2008 2009 2010 2011 2012r 2013r 2014

Deposit Liabilities (LHS) Trust Assets (LHS) % Growth Deposits (RHS) % Growth Trust (RHS)

19 Foreign Currency Deposit Units (FCDU) Overview FCDU system sustained positve botom line

Banks authorized to engage in FCDU25 operatons The operatons of FCDU banks remained proftable. (“FCDU banks”) contnued to register positve Net proft stood at US$869.4 million, 3.9 percent performance on improved market sentment and (US$32.7 million) higher over last year’s due to the strong macroeconomic fundamentals. The FCDU robust 15.1 percent growth in non‑interest income assets expanded by 17.8 percent year‑on‑year (Figure 37). The substantal increment in partcular supported by double‑digit credit expansion as banks was atributed to the US$41.2 million trading gains maximize potental returns through a more actve which was a 155.9 percent turnaround from the FCDU loan window. FCDU net proft stayed in the US$74.7 million trading loss incurred same period in

Status Report on the Philippine Financial System Financial Philippine the on Report Status positve territory at US$869.4 million with a modest 2013. By revenue streams though, net interest income year‑on‑year growth of 3.9 percent which benefted stll accounted for 62.3 percent (US$683.0 million) of mostly from trading profts (US$115.9 million) and total operatng income while non‑interest income gains on fnancial assets designated at fair value represented the remaining 37.7 percent (US$412.8 through proft and loss (US$46.1 million). million).

Banks with FCDU authority declined due to industry Meanwhile, the FCDU system’s net interest income consolidaton of US$683.0 million was slightly lower by 0.9 percent (US$5.8 million) from last year’s level mainly due As of end‑2014, there were 77 banks, consistng of to the 10.8 percent increase in interest expense. 36 universal and commercial banks (U/KBs), 29 thrif Further analysis of the FCDU system‑wide balance banks (TBs), and 12 rural and cooperatve banks (RCBs) sheet indicate that FCDU banks’ increased interest with FCDU authority. This is lower by two banks expense may be traced to higher interest payments as from end‑December 2013 due to the placement of FCDU deposit liabilites similarly rose by 22.7 percent the Rural Bank of Lingayen, Inc. under receivership to US$31.8 billion on the back of strong infows of and the merger of The Real Bank with Banco de Oro. remitances from Overseas Filipinos (OFs) while During the same period, the later acquired Citbank potental earnings from FCDU assets were somewhat Savings Bank and renamed it as BDO Savings Bank. tempered as cash and due from banks posted a A total of 33 banks, all of which are UKBs, has an substantal growth of 22.7 percent (US$1.7 billion) to expanded FCDU authority26. Banks engaged in FCDU US$5.8 billion. Accordingly, net interest margin (NIM) operatons accounted for 11.9 percent of the 648 sofened to 1.8 percent from 2.6 percent as average operatng banks27 in the Philippines. savings deposit rate and lending rate both declined

Figure 37 FCDU Net Profit/(Loss) Trend FCDU Net-Interest Income and Non-Interest Income For End-Periods Indicated For end-periods indicated

In US$ Millions In Percent In US$ millions 1,200.0 80.0% 1,000.000 160.0% 66.2%

1,000.0 60.0% 800.000 120.0% 800.0 40.0% 80.0% 600.000 18.5% 14.4% 15.1% 600.0 9.5% 20.0% 40.0% 14.3% 1.9% 3.0% -2.9% 400.000 400.0 -5.5% -5.1% 0.0% 0.0% -16.4% 200.000 200.0 -27.0% -20.0% -40.0% -34.8% 0.0 -40.0% - -80.0% June Dec June Dec June Dec June Dec June Dec June Dec June Dec June Dec June Dec June Dec June Dec June Dec June Dec June Dec 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014

Net Profit or Loss S-O-S Trend Net Profit or Loss Net-Interest Income Non-Interest Income S-O-S Trend Net-Interest Income S-O-S Trend Non-Interest Income

______25 Prepared in compliance with Foreign Currency Deposit Act (Republic Act No. 6426). 26 Banks, which on account of net worth, resources, past performance and other pertnent criteria, have been given an expanded FCDU authority are exempted from the 15 percent optonal deposit requirement with the BSP. They may also extend foreign currency loans to any domestc enterprise without limitatons regarding maturity and marketability. Said loans are likewise eligible for purposes of 100 percent asset cover requirement. 27 Refers to head ofce only. Inclusive of branches, the Philippine banking system has 10,361 banking units.

20 FCDU to 0.6 percent and 5.5 percent from 0.8 percent and accounted for 8.3 percent (up from 7.9 percent in 2013) 5.8 percent, respectvely. Return on assets (ROA) rato of total assets of all trust enttes. These resources eased to 2.3 percent from last year’s 3.3 percent. This were channeled mostly to portolio investments (44.3 broadly indicates that FCDU banks preferred higher percent) and loans (39.7 percent). liquidity over proftability during the review period. Other components of asset mix were cash and due On the other hand, non‑interest expense of US$183.7 from banks at 14.0 percent (larger than last year’s 11.7 million grew by 5.0 percent from last year largely due percent) and other assets at 2.0 percent (lower than to the increases in compensaton/fringe benefts (15.7 last year’s 3.0 percent) (Figure 39). percent) and taxes and licenses (12.9 percent). On a per bank basis, BDO was stll the largest of the All in all, FCDU operatons became more efcient with FCDU banks in terms of asset size with a 19.4 percent improved cost‑to‑income (CTI) rato of 16.8 percent (US$8.1 billion) share, trailed by Bank of the Philippine from last year’s 17.1 percent. Islands and Metrobank, respectvely, with at almost the same share of 9.1 percent (US$3.8 billion), Citbank, Asset expansion contnued on the back of steady NA with 7.5 percent (US$3.1 billion), and RCBC with a credit growth share of 6.4 percent (US$2.7 billion) rounded up the Top 5. These banks represented 51.5 percent (US$21.5 Total assets stood at US$41.7 billion, 17.8 percent billion) of the total FCDU system’s assets. higher than last year’s level of US$35.4 billion. On average, FCDU assets expanded annually by 9.9 By banking group, universal and commercial banks percent since the 2008 Global Financial Crisis. Despite (U/KBs) held the largest FCDU share at 97.5 percent the fuctuatons in levels, its long‑term28 trend also (with the top 5 U/KBs holding 51.5 percent), followed showed a general uptrend. FCDU assets accounted by thrif banks (TBs) at 2.5 percent and rural and for 16.6 percent of total assets of the banking cooperatve banks (R/CBs) at almost nil percent share. system. Meanwhile, FCDU assets of trust enttes only Figure 38 Total FCDU portolio investments stood at US$18.4 FCDU System Assets and Liabilities billion and 7.2 percent higher than last year’s level. For For end-periods indicated the specifc portolio investments of FCDU banks, these In US$ millions were mostly extended to residents at 61.4 percent while the remaining 38.6 percent were exposures 40,000 12.0% of banks to non‑residents that include multlateral 35,000 8.0% agencies. The specifc compositon of investments 30,000 in debt securites which accounted for 63.7 percent 25,000 4.0% 20,000 (US$11.7 billion) of total portolio investments were in

15,000 0.0% debt papers issued by domestc counterpartes such

10,000 -4.0% as: (1) Natonal Government at 48.7 percent (US$8.9 5,000 billion), (2) Philippine non‑bank corporates at 13.7 - -8.0% June Dec June Dec June Dec June Dec June Dec June Dec June Dec percent (US$2.5 billion), and (3) Philippine banks 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 at 1.3 percent (US$0.2 billion). The remaining 36.3 ASSETS LIABILITIES percent (US$6.7 billion) were in securites issued by S-O-S Trend Assets S-O-S Trend Liabilities non‑residents.

______28 Estmated using a Hodrick‑Prescot flter to smoothen the growth series.

Figure 39

FCDU Asset Mix For End-Periods Indicated Cash and Due Cash and Due from Banks from Banks 11.7% 14.0%

December 2014 December 2013 Financial US$35.4 billion Financial US$41.7 billion Assets, net Assets, net 44.3% Loans, net 47.1% Loans, net 38.2% 39.7%

Other Other Assets 2.0% Assets 3.0%

21 Meanwhile, FCDU loans reached US$12.5 billion, In terms of asset quality, the non‑performing loan higher by 19.3 percent from last year’s level of US$10.5 and non‑performing asset (NPL/NPA) ratos of the billion. Per economic industry, manufacturing FCDU system remained ideal at 0.2 percent and 0.1 (25.5 percent), electricity, gas and water (16.5 percent, respectvely. Loan loss provisioning was stll percent), fnancial and insurance actvites/fnancial strong as NPL/NPA coverage ratos setled at 492.7 intermediaton (11.2 percent), real estate actvites percent and 485.2 percent, respectvely. (4.8 percent) and informaton and communicaton (4.2 percent) contnued to be the major FCDU loans In terms of funding and liquidity, deposit liabilites benefciaries (Figure 40). stll funded the majority of total FCDU resources at 76.3 percent (higher than last year’s 73.2 percent), followed by bills payable at 11.3 percent (lower Figure 40 than last year’s 12.8 percent), due to banks at 4.7

FCDU Loan Portfolio Structure percent (lower than last year’s 7.1 percent), bonds by Economic Sector payable, net at 3.8 percent (lower than last year’s Other Sectors 13.9% Manufacturing 4.0 percent), capital accounts at 2.7 percent (higher 25.5% than last year’s 1.8 percent) and other liabilites

Status Report on the Philippine Financial System Financial Philippine the on Report Status at 1.7 percent (higher than last year’s 1.1 percent) (Figure 41). Resident depositors accounted for the Others December 2014 23.9% 97.5 percent share of total deposit liabilites while US$12.5 billion the remaining 2.5 percent share was sourced from Electricity, Gas, non‑resident depositors. Water Supply Information and 16.5% Communication 4.2% Liquid assets‑to‑deposits rato (inclusive of ROPs) Real Estate Financial narrowed at 76.4 percent from 80.4 percent last Activities Intermediation 4.8% 11.2% year. Meanwhile, liquid assets‑to‑deposits (exclusive of ROPs) slightly increased at 54.9 percent from 52.2 By borrower, merchandize exporters had the highest percent last year. Loans‑to‑deposits rato remained FCDU loan intake at 22.0 percent (US$2.7 billion) of almost the same at 52.4 from last year’s 52.6 total FCDU loans. Other big tcket borrowers in the percent. Overall, the compliance rate of banks with Top 3 include public utlites at 14.2 percent (US$1.7 100 percent FCDU asset cover requirement and the billion), and producers/manufacturers at 6.4 percent 30 percent FCDU liquidity cover requirement was (US$784.9 million). well satsfactory at 68.8 percent and 75.3 percent, respectvely.

Figure 41

FCDU Liability Mix

For End-Periods Indicated Capital Capital Other Other Accounts Accounts Liabilities Due to HO Liabilities 1.8% 2.7% Due to HO 1.1% 4.7% 1.6% Bonds Payable 7.1% 3.4% Bonds Payable 4.0% Bills Payable 11.3% Bills Payable 12.8% December 2014 December 2013 US$40.5 billion US$34.8 billion

Deposit Liabilities Deposit Liabilities 76.3% 73.2%

22 Foreign Bank Branches and Subsidiaries Foreign Bank Branches and Subsidiaries Overview Figure 43 Foreign Bank Branches (FBBs) and subsidiaries (total Foreign Bank Branches and Foreign Bank Subsidiaries of 1929) contnued to perform well in 2014. Total Country of Origin resources grew on the back of funds generated from due to head ofce/branches/agencies‑abroad of foreign bank branches as well as capital accounts and America 15.8% contnued growth in deposit liabilites. 3 banks Parallel to these, FBBs and subsidiaries stayed Asia-Pacific 57.9% Europe proftable as net proft posted a positve level of 11 banks 26.3% P6.8 billion on account of increases in net interest 5 banks income. This was lower than last year’s level due to the acquisiton of Citbank Savings Bank by BDO 19 FBBs and subsidiaries Unibank, Inc. December 2014

Funding came mostly from deposit liabilites at 78.6 By bank category, 14 FBBs and two subsidiaries are percent of the total liabilites to P638.6 billion of with universal / commercial banking license while FBBs and subsidiaries and were mostly in peso (61.9 the remaining three subsidiaries are with thrif percent). These banks also experienced good asset banking license. quality and sustained build‑up of capitalizaton. Meanwhile, the number of branches and other Under the implementng rules and regulatons (IRR) ofces slightly went down to 133 from 137 last year of R.A. No. 10641 (An Act Allowing the Full Entry of due to reducton in the number of branches and Foreign Banks in the Philippines, Amending for the other ofces of foreign bank subsidiaries. Purpose Republic Act No. 7721), additonal foreign banks can now apply in the Philippines either as Most FBBs and subsidiaries in the Philippines are a branch or as a wholly‑owned subsidiary. It also banks from the Asia‑Pacifc region with 57.9 percent allows foreign banks to acquire up to 100 percent30 share (11 out of 19 banks). FBBs and subsidiaries of the votng stock of an existng domestc bank. from Europe came second with 26.3 percent (fve In additon, it allows foreign banks to control up to banks) and from America with 15.8 percent (three a combined 40 percent31 of the total assets of the banks). As of November 2014, there are 10 global banking system. systemically important banks (G‑SIBs) FBBs and subsidiaries out of the 30 G‑SIBs that are operatng Most FBBs and subsidiaries originated from the in the Philippines (Source: Financial Stability Board). Asia-Pacifc Region In additon, three banks were acquired by foreign There were 19 FBBs and subsidiaries composed of the entty/individual investor/s in 2014 and these are: four FBBs originally granted access into the country Palawan Bank (Palawan DB), Inc. with 24.6 common prior to the 1994 liberalizaton, the 10 FBBs under shares and 100 preferred shares (acquired by Duclos R.A. No. 7721, and the fve foreign subsidiaries that SDN, BHD – Malaysian); Malasiqui Progressive SLB entered via R.A. No. 7721 (Figure 42). with 27.7 common shares (acquired by Messrs. Eleazar B. Sagun and Rizal C. Suelen – Americans); and Sugbuanon Rural Bank, Inc. with 40.0 common Figure 42 shares (acquired by Bridge Philippines Investments – Foreign Bank Branches and Foreign Bank Subsidiaries Incorporated in Singapore). As of End-December 2014 Composition ______29This excludes Citbank Savings Bank (acquired by BDO Unibank, By Bank Category Foreign Bank Branch Subsidiary Inc. and renamed Banco De Oro Savings Bank, Inc. on 31 July 2014. Universal and Commercial Bank 14 2 Meanwhile, Tong Yang Savings Bank was included in the list. However, including mBank Philippines (A Thrif Bank) Inc., and Microfnance Thrift Bank 3* Maximum Savings Bank, Inc., total will be 21 FBBs and subsidiaries. *This excludes Citibank Savings Bank (acquired by BDO Unibank, Inc. and renamed Banco De Oro Savings Bank, Inc. on 31 July 2014. Meanwhile, Tong Yang Savings Bank was included in the list. However, including mBank Philippines (A Thrift Bank) Inc., and Microfinance Maximum Savings Bank, Inc., total will be 21 FBBs and subsidiaries. 30 This is an increase from the 60 percent cap under the previous law (R.A. No. 7721). By Entry Mode R.A. 337 R.A. 7721 31 This is 10 percentage points higher than the previous 30 percent 1. Foreign Bank Branches 4 10 limit. 2. Foreign Bank Subsidiaries* ----- 5

23 Figure 44 Lower operatng income and rise in non-interest Foreign Bank Branches and Foreign Bank Subsidiaries expenses led to higher cost efciency rato Comparative Net Profit In Php Billions The combined efect of the 9.3 percent decline in 14.5 total operatng income and the 4.1 percent growth in 12.5 non‑interest expenses contributed to the increase in 10.5 operatonal efciency rato of FBBs and subsidiaries. 8.5 6.5 The cost‑to‑income rato rose to 69.0 percent from 4.5 60.1 percent. 2.5 Figure 47 0.5 Foreign Bank Branches and Foreign Bank Subsidiaries -1.5 Cost-to-Income Ratio 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 In Percent Foreign Bank Branches Foreign Bank Subsidiaries 100.0

80.0 Net profts of FBBs and subsidiaries stayed proftable due to increases in net interest income 60.0 40.0 Status Report on the Philippine Financial System Financial Philippine the on Report Status The operatons of FBBs and subsidiaries stayed 20.0 proftable due to increases in net interest income by 0.0 P1.0 billion or 3.2 percent to P31.6 billion. However, 2007 2008 2009 2010 2011 2012 2013 2014 FOREIGN BANKS AND SUBSIDIARIES non‑interest income went down (due to decrease DOMESTIC U/KBS Pre-R.A. 7721 in trading income) by P6.2 billion or 24.2 percent to Post-R.A. 7721 P19.4 billion from last year’s P25.6 billion. FX Subsidiaries

Trading income was pulled down by marked declines Domestc banks bested their foreign counterparts in from realized gains arising from foreign exchange terms of providing beter returns to shareholders as transactons amountng to P1.9 billion (81.7 percent) indicated by sofened ROA/ROE ratos. In partcular, and unrealized gains of marked‑to‑market fnancial the FBBs and subsidiaries’ ROA rato is 0.7 percent instruments amountng to P4.6 billion (95.9 percent). (as against the 1.3 percent for both domestc banks and total banking system) while ROE registered at 3.7 Figure 45 percent (as compared with the domestc banks’ 12.0 Foreign Bank Branches and Foreign Bank Subsidiaries percent and total banking system’s 10.8 percent). Composition of Non-Interest Income As of End of Periods Indicated Figure 48 In Percent 100% Foreign Bank Branches and Foreign Bank Subsidiaries

80% Comparative Return on Assets and Return on Equity

60% End-December 40% Return on Assets Return on Equity

20% (in %) (in %) 2013 2014 2013 2014 0% FBBs and Subsidiaries 1.2 0.7 8.6 3.7 2007 2008 2009 2010 2011 2012 2013 2014 FBBs 1.3 0.7 9.1 3.8 Fee-based income Trading Income Other income Subsidiaries 0.8 0.4 5.1 2.8 Domestic Banks 1.7 1.3 14.0 12.0

These movements are signifcant considering fnancial assets accounted for 21.3 percent of FBBs and subsidiaries sustained good performance total assets at end‑2014 and non‑interest income in 2014 represented 38.1 percent of total operatng income. The marginal expansion in net interest income of 3.2 Total resources posted at P1,033.8 billion (‑0.4 percent also failed to boost proft growth during the percent) from previous year’s P1,037.7 billion due review period. to declines both on funding and asset side. On the funding side, peso deposits and bills payable posted Figure 46 Foreign Bank Branches and Foreign Bank Subsidiaries Y‑o‑Y growth declines of 1.0 percent and 19.3 percent, Composition of Operating Income Figure 49 For End of Year Indicated Foreign Bank Branches and Foreign Bank Subsidiaries 2013 2014 2013 2014 2013 2014 60 Comparative Market Share and Asset Growth Rate 50

40 End-December 30 Total Assets Market Share Growth Rate

20 (in Php Billion) (in %) (in %) 2013 2014 2013 2014 2013 2014 10 Foreign Bank Branches 895.1 900.4 86.3 87.1 6.3 0.6 0 Foreign Bank Subsidiaries 142.6 133.4 Foreign Bank Foreign 13.7 12.9 29.9 -6.5 Total Branches Subsidiaries Total 1,037.7 1,033.8 100.0 100.0 9.0 -0.4 Net Interest Income Non-Interest Income 24 Foreign Bank Branches and Subsidiaries respectvely. Furthermore, on the asset side, loans and Figure 51 cash and due from banks also recorded Y‑o‑Y growth Foreign Bank Branches and Foreign Bank Subsidiaries declines of 11.6 percent and 8.7 percent, respectvely. Loan Portfolio Structure by Industry Sector For End-Periods Indicated Meanwhile, asset expansion was led by existng foreign bank branches, which shot up by P11.1 billion (2.0 percent). Bank entrants under R.A. No. 7721 were negatve in growths Y‑o‑Y.

DEC 2013 DEC 2014 Despite being composed only of four banks, existng P519.2 Billion FBBs maintained their control over the group’s assets, P459.0 Billion accountng for 55.6 percent (P574.8 billion) of the total. The 10 FBBs grabbed 31.5 percent (P325.6 billion) share and foreign bank subsidiaries held the remaining 12.9 percent (P133.4 billion). Dec 2013 Dec 2014 Figure 50 Financial Intermediation (including IBL & RRP) 40.1% 33.5% Foreign Bank Branches and Foreign Bank Subsidiaries Manufacturing 14.8% 19.1% Loans to Individuals for Consumption Purposes 15.5% 17.9% Share in the Total Assets of the Philippine Banking System Real Estate, Renting & Business Activities 6.8% 8.4% Wholesale & Retail Trade 6.3% 8.2% Rural and Coop Banks Thrift Banks Rural and Coop Banks Electricity, Gas & Water Supply 1.9% 2.4% 1.9% Thrift Banks 1.9% 7.3% 7.6% Transport, Storage and Communications 1.9% 2.4% Foreign Foreign Agriculture, Hunting, Forestry and Fishing 4.3% 1.9% Banks Banks Domestic 10.4% Domestic 9.3% Public Admin & Defense; Compulsory Social Security 0.0% 0.0% Universal Universal Others and 8.3% 6.4% and Commercial Commercial Banks Banks 81.2% 80.3% this actvity was less than last year’s 40.1 percent (P208.1 billion). Manufacturing ranked a far second P9,961.6 Billion P11,158.6 Billion with 19.1 percent (P87.5 billion) followed by loans to December 2013 December 2014 individuals for consumpton purposes (i.e., credit card receivables, auto loans, salary loans, other consumer Under R.A. No. 10641, it allows foreign banks to loans) at third with 17.9 percent (P82.0 billion). control up to a combined 40 percent of the total assets Manufacturing ranked a far second with 19.1 percent of the banking system. This is 10 percentage points (P87.5 billion) followed by loans to individuals for higher than the previous 30 percent limit. The share consumpton purposes (i.e., credit card receivables, of FBBs and subsidiaries to the assets of the Philippine auto loans, salary loans, other consumer loans) at banking system went down to 9.3 percent from 10.4 third with 17.9 percent (P82.0 billion). percent, which is below of the 40 percent (under R.A. No. 10641) ceiling prescribed under Secton 3 of R.A. Meanwhile, the year‑on‑year growth in consumer No. 7721 for foreign banks. loans of FBBs and subsidiaries was mostly on account of the 41.0 percent (P4.4 billion) hike in auto loans to Assets mostly channelled to loans P15.0 billion and 4.1 percent (P0.5 billion) increase in residental real estate loans to P12.6 billion. Credit Total assets of FBBs and subsidiaries posted at card receivables and Other consumer loans posted P1,033.8 billion or 9.3 percent of the banking system’s decreases of 2.8 percent (P1.5 billion) to P52.2 total assets of P11,158.6 billion. Operatng funds were billion and 37.0 percent (P6.0 billion) to P10.1 billion, largely channelled to loans32 at 44.4 percent of total respectvely. assets (down by 11.6 percent or P60.1 billion to P459.0 billion) and fnancial assets, gross, (other than loans) Figure 52 at 21.3 percent of total assets (up by 63.7 percent or Foreign Bank Branches and Foreign Bank Subsidiaries P85.8 billion to P220.4 billion). Components of Consumer Loans As of End-December 2014

Meanwhile, FBBs and subsidiaries’ total loan portolio Salary Loans* (TLP) represented 7.9 percent of TLP of the banking system from 10.6 percent at end‑2013. Auto Loans Lending showed moderate concentraton to the fnancial Credit Card intermediaton sector Receivables

Residental Real TLP went down by P60.1 billion (11.6 percent) to Estate Loans P459.0 billion from P519.2 billion year‑on‑year. Loan Others portolio of FBBs and subsidiaries is 7.9 percent of the - 40.0 80.0 120.0 160.0 200.0 240.0 280.0 320.0 360.0 400.0 440.0 system TLP. Domestic U/KBs and TBs Foreign Bank Branches and Subsidiaries By economic actvity, most of the loans released went * Salary loans was formerly included under Other consumer loans. Latest reporting of old format was until 31 March 2014. to fnancial intermediaton (inclusive of IBL), cornering ______33.5 percent (P153.6 billion). The concentraton of 32 Refers to total loan portolio, gross. 25 Portolio investments held the lion’s share of total to head ofce/branches/agencies‑abroad which is investments included in other liabilites. This amounted to P50.8 billion at end‑year 2014, albeit lower than last year’s Total investments (fnancial assets, net of portolio P120.9 billion by 58.0 percent and accounted for and direct investments) accounted for 21.5 percent 14.9 percent (up from 13.5 percent last year) of total of FBBs and subsidiaries’ total assets. Year‑on‑year, it liabilites. rose by P85.7 billion or 62.8 percent to P222.3 billion from last year’s P136.6 billion due to accumulated FBBs and subsidiaries sustained build-up of capital market proft. Portolio investments substantally held 99.0 percent or P220.1 billion (from 98.4Figure The capital accounts of FBBs and subsidiaries percent or P134.6 billion) of total investments. expandedFBBs and Subsidiaries by 52.9Philippine percent Banking System (P76.6 billion) to P221.5 2010 21.3 16.0 Meanwhile, the remaining 1.0 percent share went to2011 billion from 22.0 P144.9 16.7 billion last year. The build‑up direct equity investments in subsidiaries, associates2012 largely came 22.2 from 17.3FBBs’ assigned capital which went 2013 22.9 16.5 and joint ventures. 2014 p/ up by 121.4 17.3percent 15.4 to P60.3 billion and 46.9 percent to P140.0 billion, respectvely. FBBs and subsidiaries registered lower liquidity ratos but stll at manageable levels Figure 54

Status Report on the Philippine Financial System Financial Philippine the on Report Status Foreign Bank Branches and Foreign Bank Subsidiaries The cash and due from banks‑to‑deposits rato Capital Adequacy Ratio (Solo) fell to 52.2 percent from 56.6 percent year‑on‑ As of End of Periods Indicated In Percent year on account of recorded decline in due to HO/ 30.0 branches/agencies‑abroad of FBBs of 58.0 percent. Nevertheless, the increase in growth in fnancial 25.0 assets expanded the liquid assets‑to‑deposits rato 20.0 to 86.6 percent from 77.4 percent. Both indicators 15.0 refect ample liquidity maintained by foreign banks 10.0 given the capability of branches of foreign banks 5.0 - to generate funds from their due to head ofce/ 2010 2011 2012 2013 2014 p/

branches/agencies‑abroad account. FBBs and Subsidiaries Philippine Banking System p/ preliminary Funding principally came from deposit liabilites On 1 January 2014, the Philippines implemented Funding came mostly from deposit liabilites at 61.8 the Basel III capital framework on all universal and percent of total assets (down by one percent or commercial banks (U/KBs) and their subsidiary P6.5 billion to P638.6 billion) and other liabilites at banks/quasi‑banks. Since FBBs are established 13.9 percent of total assets (down by 33.0 percent either as a UB or KB, the Basel III framework was or P71.1 billion to P144.0 billion). Deposit liabilites then enforced upon these banks as well. FBBs account for 78.6 percent of the total liabilites of and subsidiaries remained solvent with a capital FBBs and subsidiaries and were mostly in peso (61.9 adequacy rato (CAR) of 17.45 percent on a solo basis percent). as of end‑December 201433. This rato is almost twice the BSP’s minimum requirement of 10 percent Strength was mostly drawn from peso demand and and the internatonal benchmark of 8 percent. Both NOW deposits as it provided a combined boost of the Common Equity Tier1 (CET1) and Tier1 capital P12.7 billion (6.8 percent). ratos posted at 16.77 percent which is more than twice the minimum requirement of 6.0 percent and For FBBs and subsidiaries, another source of funding 7.5 percent, respectvely. other than deposit liabilites came from their due ______33 Preliminary data.

Figure 53 Foreign Bank Branches and Foreign Bank Subsidiaries Balance Sheet Structure For End-Periods Indicated

Major Accounts 2010 2011 2012 2013 2014

Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% Cash and Due from Banks 24.0% 33.3% 29.5% 35.2% 32.2% Financial Assets, net (Other than Loans) 15.9% 15.3% 17.3% 13.0% 21.3% Interbank Loans Receivable (IBL) 8.6% 6.3% 6.9% 7.0% 5.6% Loans, net 46.9% 40.4% 42.8% 41.6% 37.4% Equity Investments, net 0.1% 0.1% 0.2% 0.2% 0.2% ROPA, net 0.1% 0.1% 0.1% 0.1% 0.1% Other Assets 4.3% 4.4% 3.2% 2.9% 3.2%

Total Liabilities and Capital 100.0% 100.0% 100.0% 100.1% 100.0% Financial Liabilities Held for Trading 4.0% 3.1% 3.3% 1.4% 1.4% Financial Liabilities Designated at Fair Value through Profit or Loss 0.0% 0.0% 0.0% Deposits 56.6% 55.9% 50.6% 62.2% 61.8% Bills Payable 4.9% 4.5% 1.7% 1.8% 1.4% Other Liabilities 20.0% 21.7% 29.7% 20.8% 13.9% Capital Accounts 14.5% 14.8% 14.7% 13.9% 21.4% 26 Foreign Bank Branches and Subsidiaries

FBBs and subsidiaries stll had beter asset quality under Secton 1 of R.A. No. 7721 (Appendix III), compared to domestc counterparts salient features of which include:

FBBs and subsidiaries stll had beter loan and asset Atract foreign investments and serve as channels for quality than domestc banks. Their non‑performing the fow of funds and investments into the economy to loan (NPL) rato stood at 2.1 percent, albeit up promote industrializaton from last year’s 1.4 percent compared to domestc banks’ 1.8 percent (down from 2.0 percent) and FBBs and subsidiaries sponsored/partcipated in non‑performing asset (NPA) rato of 1.0 percent various economic and trade actvites where business (up from 0.8 percent) vis‑à‑vis domestc banks’ 1.9 potentals of the country were showcased and percent (down from 2.2 percent). NPL coverage rato disseminated to atract additonal investments as of foreign banks stood at 147.1 percent (down from well as strengthen tes with other countries. They last year’s 190.0 percent rato) while that of domestc also initated dialogues and meetngs with the public banks was at 141.5 percent. Meanwhile, the NPA and private sector both here and abroad. coverage rato of FBBs and subsidiaries stood at 139.8 percent (from 179.6 percent last year) while Moreover, guidebooks on investment and business domestc banks was recorded at 85.8 percent. opportunites in the Philippines were published in print and online; these were and made available to a Huge increase in derivatves transactons pulled-up FBBs wide stratfcaton of clients. and subsidiaries’ of-balance sheet actvites Encourage, promote and maintain a stable, compettve, To augment revenues, FBBs and subsidiaries also efcient and dynamic banking and fnancial system engaged in of‑balance sheet transactons. Said transactons rose by P203.0 billion (14.8 percent) to FBBs and subsidiaries contnued to develop and P1,578.9 billion from P1,375.9 billion. Nevertheless, implement banking/fnancial technology and support these contngent accounts were 152.7 percent (up systems on both the front‑end and the back‑end from previous year’s 132.7 percent) of FBBs and to enhance service delivery and ensure customer subsidiaries’ total resources. satsfacton.

Derivatve instruments, accounted for 73.3 percent of Contribute to the alleviaton of unemployment in the the total contngent accounts. Their notonal amount country rose by P157.5 billion (15.7 percent) to P1,158.2 billion. The volume of foreign exchange contracts, As of end‑2014, the number of Filipino personnel which accounted for 59.5 percent of total derivatves employed by 19 FBBs and subsidiaries stood at 6,779 instruments of FBBs and subsidiaries, increased by or 98.3 percent of the total workforce. 24.1 percent to P688.6 billion. Filipino ofcers and employees of the 1934 FBBs Commitments, which contributed 21.6 percent of and subsidiaries operatng in the country atended a total contngent accounts, climbed by P27.1 billion total of 1,675 courses/seminars/trainings. Of which, (8.6 percent) to P341.4 billion owing to the hike in 1,629 were held in the country and were mostly credit card lines and other commitments by 6.9 conducted by local organizatons. The remaining 46 percent to P204.7 billion and 11.3 percent to P136.7 courses/seminars/trainings were held abroad. Topics billion, respectvely. of these trainings were mostly about current trends/ developments on banking operatons and new Bank guarantees, which accounted for 4.3 percent banking services and products. (P67.1 billion) of total contngent accounts contributed a P15.1 billion increase, drawing roughly the whole amount from standby leters of credit even Provide a wider variety of fnancial services to Philippine as outstanding guarantees slid by 0.5 percent. enterprises, households and individuals The remaining balance of P12.2 billion (0.8 percent) In 2014, FBBs and subsidiaries reported that they came from trade‑related contngent accounts. This have fnanced loans amountng to USD 0.5 billion and was higher by P38.8 billion from last year’s level due have facilitated USD 1.8 billion loans to support the to increases in domestc and foreign commercial fnancing needs of local residents, companies and leters for credit outstanding. Export leters of credit the Philippine government. The bulk of these loans and shipside bonds/airway bills increased by P3.3 benefted major corporatons in the country. billion and P0.6 billion, respectvely. Overall, the subgroup remained commited in their eforts to support the policy objectves provided

______34 This excludes mBank Philippines (A Thrif Bank) Inc., Microfnance Maximum Savings Bank, Inc. and Citbank Savings Bank (acquired by BDO Unibank, Inc. and renamed Banco De Oro Savings Bank, Inc. on 31 July 2014. Meanwhile, Tong Yang Savings Bank was included in the list.

27 Non-Bank Financial Institutions with Quasi-Banking Functions (NBQBs)

Overview Figure 55 Non-Bank Financial Institutions with Quasi-Banking Functions (NBQBs) NBQBs are non‑bank fnancial insttutons (NBFIs)35 Cost-to-Income Ratio authorized by BSP to borrow funds from 20 or more For End-Periods Indicated

lenders for their own account through issuances, In P Billion (LHS) In Percent (RHS) endorsement or assignment with recourse or 25.0 60.0 Status Report on the Philippine Financial System Financial Philippine the on Report Status acceptance of deposit substtutes for purposes 50.0 of re‑lending or purchasing receivables and other 20.0 obligatons. Only NBQBs and those without 40.0 quasi‑banking functon but are either subsidiaries or 15.0

afliates of banks are subject to BSP supervision. 30.0

10.0 NBQBs posted a lower net proft driven by the 20.0

decline in non‑interest income. The year‑on year 5.0 increase in loans, net and cash and due from banks 10.0 contributed to the industry’s asset growth which is 0.0 0.0 largely funded by bills payables. NBQBs remained 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

adequately capitalized with the growth in capital Operating Income (LHS) Operating Expense (net of bad debts and provisions) (LHS) Cost-to-Income (RHS) stock and retained earnings. Operatng expenses slightly increased to P11.5 billion from last year’s P11.4 billion, driven by the increase NBQBs’ overall network remained constant in provisions for probable losses. Accordingly, cost‑ to‑income (CTI) rato (Figure 55) rose to 40.1 percent, The total number of NBQBs’ remained the same from with the decline in total operatng income by P2.8 last year, with an overall network of 75 consistng of billion (12.9 percent YoY). Meanwhile, NBQBs’ return 12 head ofces and 63 other ofces or branches. The on assets (ROA) and return on equity (ROE) stood at 12 operatng NBQBs in the country comprised of fve 3.6 percent and 14.9 percent, respectvely. investment houses (IHs), six fnancing companies (FCs) and one other non‑bank with quasi‑banking Resources mainly channelled to loans and functon. This number represented only 0.2 percent investments of the total 5,989 NBFIs supervised/regulated by the BSP. Meanwhile, of the 12 operatng NBQBs, eight Total resources of NBQBs of P189.6 billion accounted are linked to universal and commercial banks (three for 35.8 percent of the P529.8 billion total assets of IHs and fve FCs). the NBFIs supervised by BSP. The NBFIs total assets represented only 3.7 percent of the P14,260.9 billion NBQBs’ overall net proft declined due to sofer non-interest revenues Philippine Financial System’s total resources. NBQBs total assets was higher by P12.3 billion (6.9 percent growth YoY) on account of P15.8 billion or 21.5 The NBQB industry posted a net proft of P6.5 billion percent year‑on‑year increase in loans, net and P3.6 at end‑December 2014, which accounted for 24.3 billion or 13.9 percent increase in cash and due from percent of the NBFIs net proft. This is P9.8 billion banks. (59.9 percent decline YoY) lower recorded from previous year driven by the P4.7 billion drop in non‑ NBQB assets are mainly channelled to loans, net (P89.0 interest income, as trading income and other income billion) and investments (P56.8 billion), respectvely fell by P3.2 billion and P2.2 billion, respectvely. In (Figure 56). The tempered trading actvites of NBQBs partcular, the P3.7 billion (84.8 percent YoY) losses resulted to the decline in investments, net, by 9.6 from trading government securites resulted to lower billion which was mainly driven by the decrease in trading income. investments of IHs with QB. ______35 NBFIs are fnancial insttutons that do not have a full banking license but facilitate bank‑related fnancial services such as investment, risk pooling, contractual savings and market brokering. 28 NBQBs Figure 56 Non-Bank Financial Institutions with Quasi-Banking Functions (NBQBs) Asset Mix For End-Periods Indicated

Cash and Due Cash and Due Equity from Banks, Equity from Banks, Investments, 15.6% Investments, 14.7% net, 29.9% net, 37.4%

December 2014 December 2013 P189.6 billion P177.3 billion

ROPA, net, 0.4%

Other Assets, ROPA, net, 5.9% 0.4% Loans, net, Loans, net, Other Assets, 41.4% 48.2% 6.1%

to the growth in NPAs and gross assets. The NPA NBQBs loan and asset quality remained coverage rato improved to 58.5 percent from year’s manageable 57.5 percent driven by the P0.7 billion increase in allowance for NPAs. Distressed assets rato The total loan portolio (TLP) of NBQBs stood at P94.2 marginally increased by 0.2 percentage points to 5.9 billion while non‑performing loans (NPL) of P4.5 percent from 5.7 percent last year. This is due to the billion was higher by P1.2 billion (35.0 percent growth denominator efect resultng from the increase in YoY) from last year’s P3.3 billion. This accounted for lending surpassing the increase in distressed assets. 12.8 percent of NBFIs’ total NPLs. The year‑on‑year growth in NPLs and TLP resulted to slightly higher Growth in bills payable and other liabilites NPL rato of 4.7 percent from year ago’s 4.4 percent supported asset expansion (Figure 57). The NPL coverage rato narrowed to 67.6 percent as the growth in NPLs surpassed the increase The growth in NBQBs total assets was largely funded in LLRs. by bills payable, of which 74.8 percent are deposit substtutes. Bills payable remained as major source NBQBs’ non‑performing assets (NPA) rato of 2.8 of funds of NBQBs with 60.1 percent share to total percent went up from year ago’s 2.3 percent due source of funds (Figure 58). The industry’s total

Figure 57 Non-Bank Financial Institutions with Quasi-Banking Functions (NBQBs) For End-Periods Indicated NPLs and NPL COVERAGE RATIO NPAs and NPA COVERAGE RATIO DISTRESSED ASSETS RATIO

In P Billion In Percent In P Billion In Percent In P Billion In Percent 5.0 160.0 6.0 70.0 6.0 8.0 4.5 140.0 60.0 7.0 4.0 5.0 5.0 120.0 6.0 3.5 50.0 4.0 4.0 3.0 100.0 5.0 40.0 2.5 80.0 3.0 3.0 4.0 30.0 2.0 60.0 3.0 2.0 2.0 1.5 20.0 40.0 2.0 1.0 1.0 1.0 10.0 1.0 0.5 20.0 - 0.0 - 0.0 0.0 0.0

NPLs (LHS) LLRs (LHS) NPAs (LHS) NPA Reserves (LHS) NPAs (LHS) RLs, Performing (LHS) NPL Ratio (RHS) NPL Coverage Ratio (RHS) NPA Ratio (RHS) NPA Coverage Ratio (RHS) Distressed Assets Ratio (RHS)

29 Figure 58 Non-Bank Financial Institutions with Quasi-Banking (NBQBs) Funding Mix For End-Periods Indicated

Capital Capital

Accounts, Accounts, 23.5% 24.4%

December 2014 December 2013 P189.6 billion P177.3 billion Other Liabilities, Bills Other Bills 16.4% Payable, Liabilities, Payable, 60.1% 14.5% 61.1% Status Report on the Philippine Financial System Financial Philippine the on Report Status

liabilites of P145.1 billion was higher by P10.8 billion 71.0 percent while liquid assets‑to‑bills payable rato on the account of year‑on‑year increase in bills declined to 69.3 percent from 79.7 percent. Most payable by P7.6 billion and other liabilites by P3.1 of FCs and IHs with QB are also linked to universal billion. and commercial banks which can cushion the NBQB industry whenever liquidity problems arise but Growth in other liabilites supported and bills regulators should remain watchful of the industry’s payable asset expansion increasing leverage.

The growth in NBQBs total assets was largely funded The industry’s total capital accounts which comprised by bills payable, of which 74.8 percent are deposit 23.5 percent of funding grew to P44.5 billion driven substtutes. Bills payable remained as major source by the increase in capital stock (P1.0 billion) and of funds of NBQBs with 60.1 percent share to total retained earnings (P1.3 billion) of FCs with QB. source of funds (Figure 58). The industry’s total NBQBs’ total capital accounts‑to‑total assets rato of liabilites of P145.1 billion was higher by P10.8 billion 23.5 percent was slightly lower vis‑à‑vis the previous on the account of year‑on‑year increase in bills year due to the increase in total assets surpassing the payable by P7.6 billion and other liabilites by P3.1 increase in total capital accounts. billion.

NBQBs maintained ample liquidity and adequate capitalizaton

The NBQB industry maintained ample liquidity despite credit expansion, as gross loans‑to‑bills payable rato rose to 82.6 percent from last year’s

30 NSSLAs Non-Stock Savings and Loan Associations (NSSLAs)

NSSLAs posted higher earnings due to increase Overview in net interest income

Non‑stock savings and loan associatons (NSSLAs36) The NSSLA industry posted a net proft of P14.1 billion, are non‑stock, non‑proft corporatons engaged in which account for 52.6 percent of the total NBFI’s the business of accumulatng member’s savings proft of P26.9 billion. Operatng income increased to for lending to households by providing long‑term P21.5 billion, which can be atributed with the 28.0 fnancing for home building and/or development and percent growth in net interest income. Meanwhile, for personal fnance. the growth in net interest income was driven by the P4.1 billion surge in interest income. The industry’s asset expansion driven by higher Operatng expenses stood at P6.1 billion, up by loans was largely funded by increments in capital 53.2 percent driven by the increase in provisions contributons from its members as well as growth for probable losses. The cost‑to‑income (CTI) rato in peso deposits. The increase in operatng income (Figure 59) declined to 15.7 percent due to the 22.7 driven by the growth in net interest income percent increase of operatng income. Meanwhile, contributed to the industry’s higher net proft. the return on asset (ROA) and return on equity (ROE) Although, non‑performing loan (NPL) coverage rato stood at 7.1 percent and 9.2 percent, respectvely. improved brought about by the increase in loan loss reserves, the industry must be able to overcome its NSSLA industry assets contnued to expand loan quality deterioraton as a result of increasing non‑performing loans. Total NSSLAs resources of P204.4 billion comprised 38.6 percent of the P529.8 billion total resources of BSP‑supervised NBFIs, which in turn, accounted NSSLAs overall network slightly increased for 3.7 percent of the Philippine Financial System’s total resources of P14,260.9 billion. This is higher NSSLAs overall network stood at 199 with 71 head compared to last year’s total assets of P130.0 billion ofces and 128 branches/other ofces. The additonal (Figure 60). other ofce of NSSLAs contributed to an increase in the overall network of NSSLAs from 198 last year. The current asset mix of NSSLAs broadly indicates The 71 operatng NSSLAs accounted for only 1.2 of the industry’s traditonal business model. Loans37 percent of the total 5,989 operatng NBFIs under the (P151.2 billion) maintained the lion’s share of the supervision/regulaton of BSP. industry’s assets with 74.0 percent share. Meantme,

Figure 60 Figure 59 Non Stock Savings and Loan Associations (NSSLAs) Non-Stock Savings and Loan Associations (NSSLAs) Cost-to-Income Ratio Asset Mix For End-Periods Indicated For End-Periods Indicated

In P Billion (LHS) In Percent (RHS) 25.0 20.0

18.0 Equity Cash and Due Equity Investments, Cash and Due 20.0 16.0 ROPA, net, from Banks, ROPA, net, Investments, net, 9.1% from Banks, 0.1% 11.3% 0.1% net, 9.7% 14.0 11.0% Other Assets, 15.0 12.0 Other Assets, 5.5% 5.8% 10.0

10.0 8.0

6.0 December 2014 December 2013 5.0 4.0 P204.4 billion P130.0 billion 2.0

0.0 0.0 2010 2011 2012 2013 2014 Operating Income (LHS) Operating Expense (net of bad debts and provisions) (LHS) Loans, net, Cost-to-Income (RHS) Loans, net, 74.0% 73.4%

______36 NSSLAs are among the non‑bank fnancial insttutons being supervised by BSP pursuant to Republic Act No. 8367, otherwise known as the Non‑Stock Savings and Loan Associaton Act of 1997. 37 Loan entry for NSSLAs are stll based on CSOC reportng format

31 Figure 61 Non-Stock Savings and Loan Associations (NSSLAs) For End-Periods Indicated NPLs and NPL COVERAGE RATIO NPAs and NPA COVERAGE RATIO DISTRESSED ASSETS RATIO

In P Billion In Percent In P Billion In Percent In P Billion In Percent 18.0 160.0 20.0 120.0 20.0 16.0 16.0 140.0 18.0 18.0 14.0 100.0 16.0 16.0 14.0 120.0 12.0 14.0 12.0 14.0 100.0 80.0 10.0 12.0 12.0 10.0 80.0 10.0 60.0 10.0 8.0 8.0 8.0 60.0 8.0 6.0 6.0 40.0 6.0 6.0 4.0 40.0 4.0 4.0 4.0 20.0 2.0 2.0 20.0 2.0 2.0 0.0 - - 0.0 - 0.0

NPAs (LHS) Distressed Assets Ratio (RHS) NPLs (LHS) LLRs (LHS) NPAs (LHS) NPA Reserves (LHS) NPL Ratio (RHS) NPL Coverage Ratio (RHS) NPA Ratio (RHS) NPA Coverage Ratio (RHS)

cash and due from banks, investments, net, real and Growth in capital and deposit liabilites

Status Report on the Philippine Financial System Financial Philippine the on Report Status other propertes acquired and other assets accounted supported asset expansion for 26.0 percent of NSSLAs’ total assets. The growth in NSSLAs total assets was mainly funded NSSLAs’ NPLs rato dropped amid the increase in by capital accounts and deposit liabilites with 76.8 NPL levels percent and 19.0 percent share to NSSLAs overall funding source (Figure 62), respectvely. Total capital The industry’s gross NPLs increased by P3.1 billion expanded to reach P156.9 billion infuenced by the (22.3 percent YoY) to P17.0 billion which represents P44.2 billion increase in capital contributons from 48.7 percent of the total NBFIs’ NPLs. Total loan members and P13.9 billion growth in undistributed portolio (TLP) of P167.8 billion which accounted for earnings. Moreover, peso deposit liabilites also 50.2 percent of the NBFIs total TLP also grew by P65.3 grew to P38.8 billion (up by P15.5 billion) while billion (63.7 percent YoY growth). other liabilites exhibited a 30.3 percent year‑on‑year growth. The year‑on‑year growth in total loan portolio (TLP) which surpassed the growth in NPLs resulted to a lower NSSLAs maintained ample liquidity and adequate NPL rato of 10.1 percent (Figure 61). Meanwhile, capitalizaton the NPL coverage rato widened to 97.9 percent from last year’s 50.8 percent with the growth in loan loss The industry’s liquid assets‑to‑deposits rato remained reserves (LLRs). ROPA‑to‑gross assets rato slightly high at 107.7 percent while cash and due from banks‑ rose to 0.2 percent from last year’s 0.1 percent. to‑deposits rato stood at 59.7 percent. Total capital accounts‑to‑total assets rato was slightly higher NSSLAs’ non‑performing assets (NPA) rato dropped at 76.8 percent from year ago’s 76.0 percent. This to 7.8 percent from last year’s 10.2 percent, driven by rato measures the extent of leveraging during the the 61.2 percent year‑on‑year increase in gross assets. period and determines how much capital is needed to The notable increase in NPA reserves resulted to NPA cushion against potental risks confrontng the NSSLA coverage rato of 95.8 percent. NSSLAs’ distressed industry. The rato remains high as the industry’s assets rato fell to 10.3 percent from last year’s 13.6 funding source primarily comes from its members’ percent resultng from the P3.3 billion increase in capital contributon and undistributed proft from distressed assets. operatons.

Figure 62 Non-Stock Savings and Loan Associations (NSSLAs) Funding Mix For End-Periods Indicated

Deposit Deposit Liabilities, 19.0% Liabilities, 18.0%

Bills Payable, Bills Payable, 1.3% 2.5%

Other liabilities, Other liabilities, December 2014 December 2013 2.9% 3.5% P204.4 billion P130.0 billion

Capital Capital Accounts, 76.8% Accounts, 76.0%

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