High-tech, low-touch: Banking under the ‘new normal’

By Mark T. Amoguis, Assistant Research Head

IN THE BUSINESS lexicon, “high-tech, low-touch” refers to the process that involves high levels of automation accompanied by low-level or no personal interaction.

In the context of the ongoing health crisis, this business model takes on a literal meaning as economies contend with the behavioral changes arising from the coronavirus disease 2019 (COVID-19) pandemic.

BDO Unibank, Inc., the largest lender in the country in terms of assets, described “new normal” for the financial sector as where stringent precautionary measures will be observed in offices and branch premises; digital banking transactions through online channels are increased; enhanced procedures on fraud prevention, cybersecurity, and data privacy; and behavioral shifts and working practices.

“Our online transactions have surged during the enhanced community quarantine… as consumers realize the convenience and safety of digital banking. In this regard, the Bank intends to further tap this opportunity given rising digital adaptation as Bank clients migrate to digital platforms,” BDO said.

Bankers Association of the Philippines (BAP) Managing Director Benjamin P. Castillo said the country’s financial system has reached a “breakthrough” in using online banking services during the lockdown.

“While most banks already provide online banking channels, the ‘new normal’ encourages more utilization of digital services,” Mr. Castillo said.

“We expect more investments in online banking infrastructure whether it be improvement of apps, new online products or services, and most importantly supported by adequate cybersecurity capability. The new normal will also help boost financial inclusion in the country,” he said.

Bank of the Philippine Islands President and Chief Executive Officer (CEO) Cezar P. Consing, who said the emerging trend in banking would be that of a “high-tech, low-touch” process, said the use of digital channels will be more “pervasive” as customers will look toward doing their banking transactions at home.

“Filipinos are such wonderful ‘high-touch’ people, so this will be quite an adjustment for everyone,” Mr. Consing said.

In an e-mail to BusinessWorld, the Bangko Sentral ng Pilipinas (BSP) said physical distancing “presents an opportunity both for businesses and consumers.”

“The BSP is expecting a low-touch economy that is shifting towards e-payments immediately after the crisis eases. This has also highlighted the importance of banks to embark on digital transformation to maintain relevance and ensure operational resilience,” it said.

The central bank also quoted Governor Benjamin E. Diokno as saying that the “new economy” should be “better, safer, and technologically ready.”

“[T]he Philippine financial system, with banking system at the core, has been exhibiting safety, soundness, and resilience to be able to withstand the adverse effects and uncertainties brought by COVID-19 global pandemic based on latest available data,” the BSP said.

“Credit quality has been satisfactory amid upbeat loan growth on sound credit underwriting standards and provisioning culture. Bank capitalization, mainly comprised of common equity and retained earnings, remained well-above domestic and global benchmarks. Similarly, their strong liquidity position enabled the banks to withstand short-term liquidity shocks while providing adequate stable funding for the medium term,” the central bank said, adding profits generated from lending operations continue to be “robust.”

Financial data on universal and commercial banks (U/KBs) compiled by BusinessWorld as of the first quarter on a solo basis (head office plus branches) show capital adequacy ratio (CAR) at 18.33% and common equity tier 1 capital at 17.71%, well above the BSP requirements of 10% and 7.5%, respectively.

In terms of asset quality, the nonperforming loans (NPL) ratio — or the ratio of NPLs to total loans (gross of allowance for credit losses) and inclusive of interbank loans — went up to 1.93% as of end-March 2020, coming from 1.88% in the previous quarter and 1.53% in the comparative period last year. Nevertheless, the BSP said Philippine banks have continued to keep the NPL ratio under four percent for the last 10 years.

Profitability, as measured by return on equity (RoE) figured in at 5.17%. Meanwhile, banks’ coverage ratio — which is the ratio of the total loan loss reserves to gross NPL — was 101.94% during the quarter from 108.89% in the fourth quarter, enough to cover the entire value of bad loans held by U/KBs as loan loss reserves totaled some P193.631 billion.

BAP’s Mr. Castillo said the banking sector’s profitability will be affected mainly due to the slowdown of the economy due to the pandemic and credit accommodations extended to borrowers.

“While the banking industry remains stable, sufficiently capitalized and with sound financial ratios, the health crisis is expected to impact the banks’ earnings and RoE,” he added.

Chamber of Thrift Banks (CTB) Executive Director Suzanne I. Felix was optimistic on the resilience of thrift banks: “[W]e believe the industry (thrift banks included) can surmount the challenge since thrift banks are well capitalized, and ample provisions for loan losses and liquidity should help overcome/mitigate the challenges posed by a difficult economic environment moving forward, combined with necessary regulatory support.”

“[O]ur member banks have come up with operational resilience standards to address operational challenges posed by the COVID-19 pandemic, and continue to inform their customers of the availability of services and operating hours, providing the necessary customer support,” Ms. Felix said.

Bigger banks share this outlook, even as they expect profitability to take a hit this year as pandemic woes persist.

“We posted a 19% increase in net profits in the first quarter to P2.2 billion, but we are cautious about the profits outlook for the full year as the economic fallout spreads. We are resetting our revenue outlook and focusing our priorities on managing loan stress and customer expectations,” said China Banking Corp. (China Bank) Executive Vice-President and Chief Finance Officer Patrick D. Cheng.

“The pandemic has upended all projections, but the good thing is, with the efforts of the BSP and the banking industry in general… we entered the crisis period well capitalized and prepared for shocks,” he added.

Security Bank Corp. President and CEO Sanjiv Vohra said the bank is on a healthy financial position.

“While we entered this challenging period from a position of strength, we do expect the credit environment to remain challenging for the balance of this year as the economy restarts following quarantine protocols ease,” Security Bank’s Mr. Vohra said.

With this, Mr. Vohra identified four key opportunity areas for the bank to work on: improving the capacity and capability of their contact centers; refreshing their collections framework; speeding up the delivery of their retail digital platform; and upgrading the cash portal for their wholesale clients.

“We are learning as we go along. We are just trying to stay ahead of the curve, anticipating and preparing for any challenges,” he said.

BPI’s Mr. Consing expects the bank’s profitability to be down this year as it is taking higher loan provisions in anticipation of an increase in NPLs.

“I think nonperforming loans won’t peak until late next year. We have always been well provisioned for loan losses, but the extent of the economic downturn that we are seeing now tells us that we should be prepared for a significant increase in loan defaults,” Mr. Consing said.

RELIEF
To mitigate the pandemic’s adverse impact on the effect, the BSP has implemented measures to promote the continued access to credit and financial services.

On top of bringing borrowing costs to record lows since the BSP shifted to an interest rate corridor in 2016, the BSP has cut the reserve requirement ratio of big banks by 200 basis points on March 24, releasing P180-200 billion in additional liquidity that can be used to support lending activities.

The central bank also deferred the implementation of revised risk-based capital framework for stand-alone thrift, rural, and cooperative banks, reduced the minimum liquidity requirement (MLR) to 16% from 20% until the end of the year to help stand-alone smaller banks to meet the credit and liquidity needs of their clients, and relaxed know-your-customer requirements to facilitate the delivery of welfare funds to beneficiaries.

“[T]he… reduction of stand-alone thrift banks’ MLR… is expected to release an additional P9.52 billion, which the industry can use to foster greater financial inclusion and economic growth for its main target market, which are the MSME (micro, small, and medium enterprises) and consumer sectors,” CTB’s Ms. Felix said.

Among other regulatory relief measures put in place include temporarily raising the single borrowers limit; relaxing the conditions on the use of the BSP’s rediscount facility; and staggering the booking of allowance for credit losses for loans extended to affected borrowers.

GOING DIGITAL
If there’s any silver lining to this “new normal,” it is the increasing use of digital platforms in banking transactions.

With weeks in lockdown, consumers have started to shift to digital transactions out of necessity. According to the BSP, there has been a “noticeable uptick” in the onboarding of digital-only accounts and the use of electronic fund transfer facilities such as InstaPay and PESONet. At the same time, the value and volume of cheque transactions and ATM withdrawals declined.

“[I]t will be worth monitoring whether such trend continues as community quarantines are eventually lifted,” the central bank said.

BSP data showed combined number of transactions done via these platforms from January to May reached 53.28 million, 4.5 times higher than the 11.86 million transactions recorded last year.

The value of PESONet transactions jumped 76.1% year on year to P794.22 billion in January-May from P451.08 billion last year. For InstaPay, transaction value ballooned 330.4% to P267.98 billion during the same period from last year’s P62.27 billion.

PESONet and InstaPay were among the priority automated clearing houses established under the National Retail Payment System.

InstaPay, which is designed for urgent and small value transactions, enables an account holder to transfer money up to P50,000 a day, instantly credited to a recipient account in any of the 45 participating financial institutions — 32 senders and receivers as well as 13 receivers-only — as of end-May.

PESONet, on the other hand, is designed for high-value transactions and an electronic alternative for transferring funds via checks. It has no transaction limit per day but crediting to the recipient account is on the same banking day if the send transfers money within the cut-off time set by 58 financial institutions as of end-May this year.

The BSP noted banks that can expand their digital capabilities can bring innovations that provide better credit assessment and lower servicing costs to MSMEs.

“For instance, they can use data analytics to accelerate lending decisions. Specifically, machine learning algorithms can guide them with more accurate credit assessment and lending decisions.”

As economic output is expected to decline this year, consumers are expected to reduce expenses on non-essentials. For the BSP, “digitally-enabled” banks would have an edge as they are likely to form partnerships with retailers.

“With their insights on consumer spending patterns, they will be able to direct consumers towards promotions on their partners’ platforms. Analytical tools and platforms may provide personalized information that may influence consumers to change their spending and savings habits,” the BSP said.

RISKS
Nevertheless, there remained “emerging risks” that banks should look out for.

“A prospect global recession beyond COVID-19 may exert pressure to the current quality of bank loan portfolio. This may be seen from the increase of NPLs and banks’ availment of staggered booking for credit losses as a form of regulatory forbearance…,” the BSP said.

The central bank also noted “operational risk” as another risk area.

“Given that BSP-supervised financial institutions (BSFIs) play a crucial role in the financial system and economy as a whole, it is important to ensure that their operations can withstand the effects of major disruptions. Thus, we required BSFIs to have a comprehensive business continuity management process as an integral part of their operational risk management system,” the BSP said.

The BSP also intensified the monitoring of the liquidity positions of banks as some clients chose to withdraw their deposits.

“BSFIs have generally exhibited strength on their liquidity position, guided by the BSP’s liquidity risk management framework. This prepared them for the liquidity shock brought by the COVID-19 pandemic, with buffers sufficient to absorb the recent and further potential liquidity shocks,” it said.

Increased online presence also makes banks susceptible to cyberattacks.

“Since online banking transactions are surging during this pandemic time, cybersecurity threats are likewise expected to escalate,” BAP’s Mr. Castillo said.

“The National Privacy Commission, the BSP, and BAP have been reminding the transacting public to be vigilant and discerning over the links they are clicking. Equally important is for account holders to avoid giving personal information like account numbers, credit card information, online banking login details like usernames and passwords, and One-Time PINs,” he added.

The BSP also noted an increase in phishing activities in other countries since the start of the year.

“The phishing emails initially appear to provide information on how a person can protect himself/herself from COVID-19. Some even contain legitimate statements/advice from public officials or valid sources but loaded with hidden spyware,” the BSP said.

Security Bank said it has intensified cybersecurity by installing more cybersecurity tools.

“We also prioritized educating our employees and clients on prevention and protection from cyber threats,” Mr. Vohra said.

BPI’s Mr. Consing said that despite banks carrying out awareness campaigns against cyber threats, customers can still get careless. “It’s an ongoing effort,” he said.