MANILA, NOVEMBER 5, 2008 (STAR) By Des Ferriols - Philippine banks are well-positioned to weather the aftermath of the global financial crisis but regulators said profitability has declined in the first semester of this year, indicating the initial effects on bank incomes.

The Bangko Sentral ng Pilipinas (BSP) released the Philippine Financial System Report which officials said indicated that the local financial system remained on “solid fundamentals”.

The report provided an account of the performance of the banking system and other financial institutions such as non-banks with quasi-banking functions, offshore banks, and trust operations under the BSP supervision.

“Market conditions were marked by the worsening subprime crisis and the slowdown of the US economy on the back of soaring world oil prices and shortages in food supply,” the BSP said.

In the first semester, the BSP said banks had to deal with rising inflation, rising interest rates, a depreciating peso against the dollar and notable investor risk aversion, indicated by hot money outflows and a bearish stock market.

“Notwithstanding all these, key performance indicators showed the sustained strength of banks’ core balance sheet accounts,” the report said, adding that banks showed steady asset expansion, double-digit credit growth, growing deposit base, ample liquidity, continuing improvement in overall asset quality and solvency ratios well-above minimum norms.

According to the BSP, banks actually managed to register a positive bottomline, but there was a notable slowdown in terms of year-on-year growth, due to contractions in treasury gains against the backdrop of rising interest rates.

The BSP report said the annualized earning asset yield stood at 7.7 percent during the first six months, 50 basis points lower than last year’s 8.2 percent.

The BSP reported that other profitability ratios also exhibited similar declines: The annualized net interest margin down at 4.2 percent (from 4.4 percent), the annualized return on assets at 1.1 percent (from 1.3 percent) and the annualized return on equity at 9.6 percent (from 11.7 percent).

Ironically, the BSP said the 1997 crisis provided exactly the kind of preparation that the sector needed to be ready for the current financial crisis.

Following the 1997 crisis, the BSP said local banks have built up capital so that the sector is well capitalized with a system-wide capital adequacy ratio (CAR) of 15.5 percent (consolidated basis).

The BSP said there was also ample liquidity in the system with liquid assets-to-deposits ratio at 51.7 percent as of June and regulators said their initiatives to align its oversight to reflect market needs tightened the credit underwriting standards and the rationalization of the real estate lending cap of universal and commercial banks.

“The underlying fundamentals of the Philippine financial system remained sound and stable, aided by strengthened balance sheets through continuing asset cleanup and capital buildup,” the report said.

The BSP said total resources expanded modestly by 7.3 percent on the back of sustained growths in deposit liabilities (3.9 percent), capital (0.6 percent) and bank borrowings (bills payable at 35.5 percent) and unsecured subordinated debt at 21.5 percent.

Chief News Editor: Sol Jose Vanzi

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