The banks always win

Big banks posted another banner year in 2018, with profits growing by a tenth at a time of higher borrowing costs and a weaker peso. Total operating income grew by 14.9% to P564.202 billion from P491.227 billion the past year, central bank data showed (BusinessWorld Feb. 11, 2019).
Much of operating income came from net interest income of P431.782 billion, which after adding net non-interest income, applying provisions for losses on loans and other financial assets, writing off bad debts and claiming recovery from charged-off other financial assets, etc., net income of the “big banks” — universal commercial banks (UKBs) — came up to P179.03 billion. Income taxes paid when including share in the profit/loss of unconsolidated subsidiaries, associates and joint ventures was 20% of total profit of P200 billion before tax.
Not bad for the 42 UKBs. The lending was brisk in 2018, increasing 14.6% to bring outstanding credit to P9.018 trillion as end-December, versus P7.867 trillion in 2017 (Ibid.). Observe that the banks’ lending rate moved up from 5.566% in November 2017 to 6.602% in October 2018 (www.ceicdata.com).
This was the time when the Bangko Sentral ng Pilipinas (BSP), set five rate increases to curb rising inflationary pressures (because of the domestic rice shortage, exacerbated by the increase in world oil prices). With the 175 basis points increase, the overnight reverse repurchase rates was brought to 4.75%, the overnight deposit rate to 4.25% and the overnight lending facility at 5.25%. (The Philippine Star Nov. 16, 2018). It was a purposeful move by the BSP to sop up excess liquidity by discouraging the availment of loans (which will increase money supply) by the increased rates.
Naturally, the banks increased their own lending rates. Quoted lending rates of commercial banks as of March 4, 2019 were, for example: Banco de Oro (BDO, largest UKB) lent at a high of 10.625% per annum, and at a low of 6.625%; Bank of the Philippine Islands (second largest UKB) lent 10.7% to 6.25%; and Citibank lent from 8.3040% down to 5.3880% (bsp.gov.ph). Note that these lending rates might have been higher in November, 2018.
But unnaturally, borrowers seemed not to balk at the increased rates. In 2018 banks enjoyed a 14.6% increase in loans giving a net interest income of P431.782 billion. Outstanding credit stood at P9.018 trillion as end-December 2018, versus P7.867 trillion in 2017 (BusinessWorld op. cit).
So many projects were already on stream with the Build, Build, Build program and collateral activities that borrowers just had to “bite the bullet”. Also, with the depreciation of the peso to critical levels nearing P54-55 to the US$, businessmen had to borrow more for the bloated costs of foreign exchange. It aggravated the situation that the country is a net importer, and so the depreciation of the peso and inflation plus (or because of?) the rice shortage brought the economy to near-crisis in 2018.
Perhaps the position of advantage of a bank in good times and in bad can tempt business opportunism. While enjoying the higher lending rates, did the banks increase their deposit rates to still enjoy a conscionable spread (net profit), if only to alleviate the plight of the Filipino in crunch time?
Savings and time deposit rates of commercial banks are featured in some blogs that cater mostly to those “investors”/savers managing their own personal finances. Many big banks advertise their rates directly. The Bank of the Philippine Islands (BPI, second largest UKB) offers 0.50% interest for its “Maxi-Saver” for a minimum maintaining balance of P25,000. If one commits to a maintaining balance of P100,000, interest will be 0.75%, while P1,000,000 will be paid 1.75% under the “Advance Savings Account with Passbook”. All still subject to 20% final withholding tax on interest earned. The BDO Optimum Savings Account pays the same interest of 1.75% for a minimum balance of only P30,000. Citibank’s peso bonus saver asks for an initial maintaining balance of P50,000 at 0.60% interest, climbing up to 1.56% as the depositor’s “total relationship account” balance tops P1 million (sample data from moneymax.ph Jan. 29, 2019).
Time deposits for P1 million and above, 360 days, range from 1.0% [BDO and Metrobank] to 1.25% [BPI], with incentivized rates for time deposits of over P1 million (sample data from philpad.com Jan. 2019). By this, we think of the poor depositor with his depreciated peso and high prices in inflation, and ask, is the banking industry feeling for the people with limited money, whose necessary activities for survival are curtailed by the tightening lack? Juxtaposed with the high borrowing rates, justified as “market driven,” there seems to be a dimming horizon for that noble social objective of our struggling economy for “financial inclusion.” In bad times, the rich get richer (for they hold more of limited resources of the economy), and the poor get poorer.
Imagine the bank spread between lending rates of around 10% and time deposit rates of around 1.0%. Even considering the low-end of lending rates of 5% versus 1% deposit rate would give from about 4.0% to 9.0% profit margin to the banks. Time was when bank spreads were watched by the regulator (called the Central Bank of the Philippines then). Discussions with contemporaries in the Financial Executives Association of the Philippines (FINEX) in the 1980s recall how corporate treasurers would chide bank account officers about making too much money on them, as these finance people would adeptly compute the bank’s profit from the transaction/loan, even imputing the bank’s reserve requirement and the cost of this; the cost of capital to the borrower and the lender; and argue on that “fair spread” of the bank which can allow a lower interest rate to the borrower. At that time, the critical spread was about 2.5-3.0 percentage points.
And so the big banks enjoy double-digit profitability, and double-digit growth, while their publics do not even enjoy inflation cover with their measly interest earnings and heavy borrowings. But it is unfair to pummel banks for their success, in these very different times. Even yields to investors in government bonds do not even cover inflation. Government 10-year bonds went down to 3.04% when inflation was raging above 6.0%! Aren’t government securities the perfect counter-balance to inflation?
Something must be wrong somewhere. And the banks just can’t be bothered. Perhaps the new BSP Governor can think of some creative “correction” on the financial market’s situation. Some moral suasion, at least — in the fashion of today’s governance?
 
Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.
ahcylagan@yahoo.com