Amando M Tetangco, Jr: Assessment of the thrift banking system
Keynote address by Mr Amando M Tetangco, Jr, Governor of the Central Bank of the Philippines, at
the Annual National Convention of the Chamber of Thrift Banks, Baguio City, 17 March 2006.
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Good morning!
I send my warmest greetings and congratulations to the membership of the Chamber of Thrift Banks
(CTB) on the occasion of your National Convention, the high point of the annual celebration of the
Thrift Banking Week.
You have chosen the theme of responding to the challenges ahead. As both banking supervisor and
monetary authority, we welcome your cooperative and constructive approach to the many issues
confronting the banking system. Indeed, we continue to face many challenges ahead even as we have
also made considerable progress.
Assessment of the thrift banking system
As I survey the thrift banking system today, I believe it has proven its resilience in the face of all the
many challenges.
In 2005, total resources of the industry grew by a very respectable 13.3 percent. Deposit level also
continued to post double-digit growth of 16.8 percent, indicating strong confidence in the industry.
Meanwhile, the industry remained adequately capitalized with capital adequacy ratio (CAR) averaging
at 16.8 percent as of end-June 2005. This is well above the prescribed minimum ratio of 10 percent
and more than double the international benchmark of 8 percent.
Non-performing loans (NPL) ratio favorably declined to 8.9 percent as of end-December 2005 from
11.0 percent last year and from a peak of 13.4 percent at end-September 2002. Likewise, NPA ratio
went down to 12.5 percent from 15.9 percent last year.
The industry's strengthening balance sheet also reflected a steady increase in the loss provisioning for
bad assets. The industry posted a better NPA coverage ratio of 23.4 percent at end-December 2005
from 17.2 percent the previous year. However, this is still much lower than the 42.1 percent total NPA
coverage ratio in universal/commercial banks. The whole banking industry should actually be striving
for at least 50 percent coverage. And the best way to do that is to rapidly get rid of your remaining
non-performing assets that continue to impose a drag on your performance. Indeed, your profitability
remained marginal with return on equity and return on assets ratios at just 0.2 percent and 0.03
percent, respectively. As an industry, thrift banks continued to be the least profitable.
BSP reform agenda
The BSP is determined to pursue a banking reform agenda to shield the banking system against
critical threats that may undermine its stability and integrity.
Specifically, we are intensifying the reform process aimed at addressing core aspects of banking
operations and enhancing the regulatory framework for the effective conduct of banking supervision.
First of all, we must bear in mind that high NPAs are a fundamental threat to the safety and soundness
of the banking system. We must therefore act decisively to remove this threat.
So far, we have been successful in trimming down the stock of NPAs in the banking system especially
through asset disposition under the Special Purpose Vehicle Law (SPV) Law. Consequently, both NPL
and NPA ratios of the banking system are currently at record lows.
The imminent approval of a two-year extension of the SPV Law by congress will boost the momentum
for further disposal of banks' NPAs. I hope the industry will now more aggressively utilize this
opportunity. This is the last chance.
In a related development, the Monetary Board (MB) also recently approved the guidelines that would
allow banks to enter into Joint Venture Agreements (JVA) with property developers to provide an
additional channel for banks to reduce their NPA holdings by helping convert bad assets into readily
marketable or income producing assets.
However, to prevent abuses, certain safeguards were adopted. In the first place, all JVAs under the
program are subject to prior MB approval. Only pre-existing non-performing assets are eligible under
the program to guard against potential moral hazard. Banks are also prohibited from providing funds to
the joint venture either as a loan or capital contribution. However, banks may extend financing to JV
partners or to buyers on arms length commercial basis. Lastly, banks are not allowed to recognize
income out of the properties they contributed to the joint venture regardless of the agreed valuation of
said properties in the JVA. They are only allowed to recognize income upon receipt of the proceeds
from the sale of the developed properties. Proper accounting is also required.
Moving on, we also continue to seek closer alignment of existing regulations with international
standards to make regulatory policies more responsive to the growing competitiveness and
sophistication of the financial services industry.
In particular, we are focusing on strengthening corporate governance, risk management, and capital
adequacy in our banks. This will be complemented with effective and efficient enforcement.
In pursuit of this objective, we have recently issued major regulations covering:
•
The new Financial Reporting Package (FRP);
•
The guidelines on supervision by risk;
•
The guidelines on information technology (IT) risk management; and
• The amendments to the fit and proper rule
• The prompt corrective action framework.
The new FRP effectively amends the Manual of Accounts (MOA) and revises the reportorial
requirements for banks, in accordance with the provisions of the new Philippine Financial Reporting
Standards (PFRS)/Philippine Accounting Standards (PAS). To the extent possible, we have also
integrated into the new FRP the requirements of the Basel 2 Capital Adequacy Framework. The new
FRP will greatly promote an enhanced level of financial transparency and also facilitate an enhanced
off-site surveillance of banks and other financial institutions under our jurisdiction.
Banks are constantly exposed to various risks because of the increasingly complex financial setting.
Rather than constrain product innovation and operational flexibility, we would rather espouse the
adoption of appropriate internal risk management mechanisms to ensure that banks and other
financial institutions continue to operate in a safe and sound manner. It is for this purpose that we
have set out the guidelines on supervision by risks under Circular No. 510. Mainly, these guidelines
specify BSP's expectations on how banks and other financial institutions should manage their risks.
These are also designed to provide guidance on how the risk-focused supervision will be applied to
these risks.
Meanwhile, the guidelines on I.T. risk management are intended to communicate to the banking
industry BSP's expectations on how technology-related risks should be viewed in the context of bank
risk management. We all know how pervasive information technology has become in our banking
business. These guidelines will aid in effectively identifying, measuring, monitoring and controlling
banks' technology risk exposure.
Building on previous initiatives to raise corporate governance standards, we recently came out with a
stricter "fit and proper rule" encompassing all directors and senior officers of banks. This is to ensure
that officials tasked to manage banks and other financial institutions possess the integrity and
competence required for the job.
Very recently, the monetary board approved the Prompt Corrective Action (or PCA) framework. This
basically communicates to the industry how the BSP will deal with potential problems in bank
operations at a very early stage hopefully to forestall more serious problems from arising that would
necessitate more drastic and painful measures. The key triggers for the initiation of PCA include
substandard capital adequacy ratios and poor Camels performance. Whenever PCA is initiated, banks
will be required to put forward an action plan to immediately correct the situation. The action plan will
be in a memorandum of understanding to be executed between the bank board of directors and the
BSP.
To promote healthy competition in the banking system and allow your greater flexibility to respond to
market opportunities, we have also allowed the partial lifting of the moratorium on bank branching
primarily to facilitate the expansion of financial services in underserved areas.
Likewise, we have opened up outsourcing possibilities and allowed an increasingly wide array of
treasury, consumer and wealth management products.
All told, you can expect many more meaningful changes in the banking industry this year and in the
coming years as we gear up for the full adoption of international best practices. I hope you will not see
the recent changes as just more rules to cramp your style. On the contrary, by shifting to more
strategic regulation of corporate governance, risk management, and capital adequacy, we hope to
give banks much greater flexibility to pursue businesses that are consistent with their skill, risk
appetite, and capital position. Banks that are well-managed and well-capitalized will be fully liberated
to pursue their corporate objectives in this evolving environment. In contrast, banks that are poorly run
and undercapitalized will find themselves severely under pressure both from the market and the
regulator.
We are also continuing our advocacy efforts in Congress for the passage of key legislative measures.
Among others, we are seeking approval of the amendments to the BSP Charter which will make the
BSP a more effective monetary authority and banking regulator. Another vital piece of legislation is the
Credit Information System Act which will pave the way for the establishment of a truly comprehensive
credit information system in the country. This is expected to lower the cost of credit, provide greater
access to credit in general, and reduce the dependency on collateral-based lending.
Taking the long view, what is the significance behind all these developments in the banking system?
How are they going to affect the thrift banking industry?
Essentially, these developments would alter the overall banking landscape. The change will be
influenced mainly by the accelerated consolidation process in the banking system that is expected to
take place within the next 3 years as a result of a combination of regulatory enhancements and the
exacting standards posed by an increasingly complex financial environment.
The enhanced competition would naturally favor the stronger, more capable banks and financial
institutions. On the other hand, the smaller banks would do well to harness their core expertise in
order to better serve their respective market niches.
The highly global and complex banking scenario leaves no room for complacency for all banking
industry players. To survive, thrift banks must enhance their financial strength, conform to sound
corporate governance practices and boost their competitive advantage by honing excellence in
specific target markets.
Concluding remarks
I would like to end my keynote speech by calling on all member institutions of the chamber to remain
supportive of our policies and reform initiatives. The reform agenda that I have outlined to you today is
a work in progress.
In the past, you have taken a proactive role in the pursuit of genuine reforms in the thrift banking
system. Now is the time to reaffirm that commitment. There is a lot of work ahead of us, but with vision
to guide us and with steadfast action, we can be assured of success in achieving our shared goal of
building a stronger, more competitive banking system.
Thank you very much and more power to all of you!