BANK EXECUTIVES expect the industry to remain stable over the next two years due to strong economic growth prospects, with most lenders saying they will use financial technology to boost their operations.
Results of the Banking Sector Outlook Survey (BSOS) of the Bangko Sentral ng Pilipinas (BSP) for the second semester of 2018 — whose respondents include presidents, chief executive officers or country managers of 120 banks in the country — showed that 70.2% of respondents see the banking system remaining stable over the next two years on the back of their bullish economic outlook versus 66.7% the previous semester. Meanwhile, 28.6% of the industry leaders project stronger banks.
The survey’s respondents came from 45 universal and commercial banks (including 25 foreign lenders), 55 thrift banks, and 20 rural and cooperative banks, the BSP said in the report published Thursday, versus the 114 lenders in the previous survey.
The overall response rate for the second semester survey however declined to 69% from 96.6% in the first half of 2018. The banks that responded accounted for 91.4% of the total assets of the banking system.
According to the survey, 86.1% of respondents see the economy growing from 6-7% percent within the next two years, compared to 80.8% in the previous semester.
“Despite global uncertainties and market volatilities, banks maintain their optimism on the country’s economic prospects…,” the report read.
The projected economic growth and stability of the banking system influenced 73.8% of respondents to forecast double-digit growth in assets. However, this is lower than the 80% who expected the same in the first semester of 2018.
“The growth in assets is expected to be driven by credit expansion as 81% of the banks project a double-digit growth in their loan portfolio during the BSOS for the second semester of 2018,” the report read.
In particular, 84.4% of universal and commercial bank respondents see double-digit loan growth. Meanwhile, 41.2% of thrift banks loan growth at more than 20%, which the BSP said was “the most optimistic” outlook among lenders.
Deposits are also expected to fuel asset expansion as 72.2% of respondents also project double-digit deposit growth. More than three quarters of the smaller banks are aiming for double-digit growth in their deposit liabilities, with only two-thirds of the universal and commercial lenders targeting the same.
About 92.4% of respondents also forecast double-digit net income growth in the next two years, higher than the 83.3% who had this outlook in the first semester of 2018.
Thrift banks were the most optimistic with 97% of them projecting double-digit net income growth, while 36.4% of universal and commercial banks expect their profit to expand between 10% and 15%, and 30.3% see their earnings rising more than 30%.
“The universal and commercial banks’ net income projections are significantly influenced by new foreign bank entrants that are still setting the foundation for their strong domestic presence,” the BSP said.
FINTECH, CONSUMER LOANS
Meanwhile, in terms of products or services, majority of the heads of banks said corporate and retail banking “will remain as their top most priority,” the central bank said.
The results showed 68.8% of the respondents from domestic universal and commercial banks said consumer loans will be their “primary focus” for the next to years, while 70% of large foreign banks said they prefer to lend to the manufacturing sector.
Both subsidiary and stand-alone thrift banks also said in the second semester survey that consumer loans will have the biggest share in their lending portfolios in the next two years, while wholesale and retail trade and consumer are projected to be the top two credit markets for rural and cooperative banks.
“Based on latest available data, banks’ lending activities are mainly channeled to real estate activities, wholesale and retail trade and manufacturing sector. Added focus on consumer lending indicates banks’ objective to further diversify their loan portfolio,” the BSP said.
On the other hand, according to the BSOS, the top three strategic priorities of the banks surveyed are to “grow the bank, optimize the available technology, and protect the bank.”
“Majority of the respondents believe that there is a need to grow the bank by expanding client base, by deepening customer relationships, and by developing new products. In line with the emerging market trends and evolving client needs, the rapid pace of digital technology is considerably reshaping the financial services landscape,” the central bank said.
The report said 44 out of 83 survey respondents said they will prioritize the optimization of available technology through digital operations and customer service and will leverage on financial technology (fintech) in the next two years.
Seven out of 13 or 53.8% of respondents from local universal and commercial banks that have plans to use technology said more than 10% to 25% of their banking transactions will be conducted through the use of digital technology in the next two years, while six out of 12 respondents from foreign universal and commercial lenders said more than 50% of their transactions will utilize digital means.
“Lastly, respondents underscore the need to protect the bank as one of their strategic priorities by managing reputational and operational risks, enhancing data and cybersecurity, upholding consumer protection, as well as boosting capital and liquidity ratios.”
Respondent banks also cited four risks to their operations: institutional risk, financial market risk, macroeconomic risk and technology risk. Local universal, commercial, and thrift banks said geopolitical risks can also adversely affect their business.
The top reforms cited by banks as necessary to weathering external shocks are enhancing the risk management system, strengthening client relationships, upgrading of personnel capabilities, keeping a high level of liquid assets, and increasing capitalization.
For its part, the BSP said it expects that banks will remain stable and resilient amid rapid credit growth on the back of their strong liquidity positions.
“The expanding lending operations of banks will also drive the improvements in their profits. Nonetheless, operating costs may continue to rise as banks use additional resources to expand customer base, implement system upgrades, and pursue product innovations. Adoption of technology is expected to provide a more efficient operations of banks,” the central bank said. — RJNI