THE BANKING INDUSTRY: AN ANALYSIS

Banks are vital for the operation of the entire financial system because they collect
deposits from consumers all over the country and make the money available for lending or
purchasing securities. The financial services business area known as "banking as a service" is
expanding quickly. By utilizing the infrastructure and capabilities of traditional banks, it enables
non-traditional players like fintechs, digital banks, and other companies to provide financial
goods and services to their clients. The banking sector has become essential for the financial
well-being of individuals, businesses, countries, and the entire world. It is now an essential
component of any country's economic development.

Banking comes under tertiary industries, which focuses on trade-related activities as well
as providing support services to primary and secondary industries. Services are provided by these
businesses. These may be considered business activities because they support trade as auxiliary
activities. Transportation, banking, insurance, warehousing, communication, packaging, and
advertising are all included in this category.

DIFFERENT TYPES OF BANKS IN THE PHILIPPINES

There are various bank types in the Philippines, each with unique features. The Bangko
Sentral ng Pilipinas (BSP) is in charge of supervising and regulating all banking institutions, and
it divides them into the following groups.

Commercial banks- They provide services like checking accounts and loans, accept deposits,
permit withdrawals, and provide products like savings accounts and certificates of deposit.
Customers of these institutions typically include both individuals and organizations.
Universal banks- Universal banks are permitted to carry out underwriting and other investment
house duties. In addition, they are allowed to invest in non-allied businesses and hold up to 100%
of the equity in thrift banks, rural banks, financial-related businesses, or non-financial allied
businesses.
Thrift banks- Savings and mortgage banks, private development banks, and stock savings and
loan associations all fall under this category. These banks concentrate on saving and investing
depositors' money while also offering medium- and long-term lending, short-term operating
capital, and both. Thrift banks' principal customers are companies involved in agriculture,
services, industry, and housing, as well as a variety of other markets and constituencies,
including people and small- and medium-sized businesses.
Rural banks- These banks are in charge of giving locals access to fundamental financial
services. They are intended to aid in the orderly and efficient promotion and expansion of the
local economy. From the purchase of seedlings through the marketing of their goods, rural banks
may assist farmers at every stage of production.
Cooperative banks- The key distinction between these banks and rural banks is who owns them.
Cooperative banks are established or owned by cooperatives or federations of cooperatives,
whereas rural banks are privately owned and operated. Farmers who are looking for financial
services and solutions may find a lot of assistance from cooperative banks.
Islamic banks- These financial institutions operate in line with Islamic law, or Shari'a. Their
goals and methods do not entail riba, or interest, which is against Sharia law. Muslim Filipinos
should have more access to banking services and products thanks to Islamic banks. Their
formation is regarded as a significant development in the BSP's goals for financial inclusion.

GLOBAL BANKING INDUSTRY

Everything has been going well in the banking industry globally since the Global
Financial Crisis that hit in 2007. Yet, another global financial crisis hit the global economy once
again and it was inevitable for the banking industry to not be hit as well. Due to the pandemic,
supply chain disruption, inflation, war, and rising interest rates, the banking industry was again
on a rough road after more than a decade of being relatively stable.

As seen in the graph, there has not been a massive decrease in banking profitability since
the Global financial crisis, not until the pandemic in 2020 and there has been a significant
decline in the return on equity of banks globally which was the lowest in many years. Despite
that, during 2022, banks are already rebounding from the pandemic as their revenue growth is
getting stronger. Globally, their revenue grew by $345 billion (Dietz et.al., 2022).
TREND ANALYSIS

Even though the world’s economy has been slowly recovering from the pandemic since
last year, there still remains uncertainty due to the war between Russia and Ukraine, and even the
recent plan of China to retaliate against the destruction of the U.S. of their balloon where this is
faintly suggesting another war. Because of this, the global supply chain may be disrupted again
and there might also be inflation and tightening of monetary policies all around the globe. With
this, the global banking industry still remains fragile and they will have to be proactive with the
different possibilities of problems occurring in the global economy (Reilly et al., 2022).
With a potential recession to occur and continuing supply chain shocks amidst the global
recovery from the peak of the pandemic, commercial banks’ net interest income should keep up
with the increasing rates of central banks all over the world. Moreover, these banks must keep
pace with the massive demand for online banking, by creating new technological solutions for
the new demands in the banking industry.

BANKING INDUSTRY IN THE PHILIPPINES

 Gross value added generated from banking institutions in the Philippines
from 2018 to 2021
According to Statista Research Department (2022), the gross value added generated from
the banking industry in the Philippines has been increasing from 2018 to 2021 even when the
pandemic hits in 2020. In 2021, the gross value added reached over one trillion Philippine pesos.

The Philippine banking system had approximately 18.25 trillion Philippine pesos in total
liabilities as of December 2021. The Philippine banking system consists of universal and
commercial banks, thrift banks, and rural banks.
 In comparison to 2018, the Philippines' deposit interest rate grew by one percentage point
in 2019. As a result, in 2019 4.08 percent was the highest deposit interest rate ever recorded in
the Philippines.
An interest rate on a deposit is the percentage of money that is profited in a financial
institution's interest-bearing account. It is essentially the money that banks and credit unions pay
someone to keep their money in their institutions.

Loans are largely given to the corporate sector.

 The share of directed loans to the agricultural sector under “Agri-Agra” law is about 7
percent of the total loans, even though banks are not fully compliant.

The main revenue source is interest income across all three types of banks.
Real estate loans are largely commercial and their share in total assets are capped at a relatively
low 20 percent by the BSP.

Banks have moderate levels of cross-border exposures and dollarization.

 Expenditures are mostly interest and administrative expenses, and salaries.

● Total assets of the Philippine banking system (PBS) grew by 7.2 percent year-on-year
(YoY) to P20.6 trillion as of end-January 2022 . This growth rate was higher than the 5.7
percent rate in January 2021.

● The asset growth was funded mainly by deposit generation and capital infusion.
 ● By banking group, universal and commercial banks (U/KBs) had the largest share of the
total assets of the PBS at 94.1 percent (P19.4 trillion), followed by thrift banks (TBs) at
4.4 percent (P904.0 billion) and rural and cooperative banks (RCBs) at 1.5 percent
(P312.0 billion2)

● Banks continued to support the credit requirements in the country even during the crisis.

The total amount of new loans granted by U/KBs for the month of December 2021 stood
at P1.0 trillion. This represents 10.0 percent of the U/KB industry’s TLP of P10.5 trillion as of
end December 2021. Loans to private corporations had the largest share of new loans granted at
73.4 percent (P764.3 billion) followed by loans to individuals at 12.7 percent (P131.8 billion).
Meanwhile, agri-agra loans and micro-, small and medium enterprise (MSME) loans had 7.3
percent share (P75.6 billion) and 4.6 percent share (P48.4 billion), respectively, of new loans
granted for the same period

Non-Performing Loans Ratio: NPL ratio measures the amount of non-performing loans as a
percentage of total loans. According to the Bangko Sentral ng Pilipinas, there is a significant
increase in non-performing loans in the Philippines compared to pre-pandemic, due to the series
of aggressive rate hikes by the BSP to tame inflation and stabilize the peso. Furthermore, Fitch
Ratings expects the NPL ratio of Philippine banks to remain steady at around 3.5 percent this
year as the adequate financial buffers of large corporate borrowers and a supportive economy
largely offset the risks.
Liquid Assets to Total Deposits Ratio measures the liquidity available to the total deposits.
According to the Bangko Sentral ng Pilipinas, the liquid assets to deposits ratio is 52.55%,
whereas it is significantly higher than the liquid assets to deposit ratio before the pandemic,
which is 46.81%. In addition, a 52.55% liquid asset to deposits ratio indicates that 52.55% of the
total deposits can quickly convert into cash. Furthermore, having high liquid assets to deposit
ratio can also stipulate the ability of banks to withstand short-term liquidity shocks.

Loans to Deposits Ratio measures the bank's lending activity vis-a-vis deposits. It indicates the
level of bank deposits that transformed into loans. According to the Bangko Sentral ng Pilipinas,
the liquid assets to deposits ratio is 71.05%, whereas it is significantly lower than the ratio during
the pandemic, which is 80.01%. A lower loan to deposits ratio suggests that Philippine banks
have financed loans by commonly using deposits rather than through international wholesale
funding. In addition, this reduces refinancing risk in the banking system because external
borrowing tends to be hard to roll over in times of uncertainty. It also reduces asset-liability
mismatch risk arising from monetary tightening in the US and currency movements.

SWOT ANALYSIS OF THE BANKING INDUSTRY IN THE PHILIPPINES

STRENGTHS: o Stable and growing economy:

- The Philippine economy has been
growing steadily over the past years, driven by
domestic consumption, investments, and
overseas remittances. This provides a stable
environment for the banking industry to operate.

o Large unbanked population:

- Despite the growth of the banking
industry, a significant portion of the Philippine
population remains unbanked. This presents an
opportunity for banks to expand their customer
base and increase their revenue.

o Diversified products and services:

- Banks offer a wide range of products and
services, from loans and mortgages to savings
accounts and investments. This diversification
can help banks weather economic downturns.
WEAKNESS: o High concentration of assets:
- The Philippine banking industry is
highly concentrated, with a few large banks
holding a significant portion of the assets. This
can limit competition and innovation in the
industry.

o Limited access to financing:

- Small and medium-sized enterprises
(SMEs) often face limited access to financing
from banks. This can hinder their growth and
development, as well as limit the growth of the
banking industry.

o Vulnerability to economic cycles:

- Banks are often affected by economic
cycles, and a downturn can lead to a decrease in
demand for loans and other financial services.

o Reliance on technology:
- Banks are becoming increasingly reliant
on technology, which can make them vulnerable
to cyberattacks and other technology-related
issues.
OPPORTUNITIES: o Rising digital adoption:
- The COVID-19 pandemic has
accelerated the adoption of digital banking
services in the Philippines. This presents an
opportunity for banks to expand their digital
offerings and improve the customer experience.

o Increasing demand for sustainable finance:

- There is a growing demand for
sustainable finance in the Philippines, driven by
the need to address environmental and social
challenges. This presents an opportunity for
banks to develop sustainable finance products
and services.

THREATS: o Competition from fintech companies:

- Fintech companies are disrupting the
banking industry by offering innovative and
convenient financial services. This can pose a
threat to traditional banks.

o Increasing regulatory requirements:

- Regulatory requirements are becoming
more stringent, which can increase costs and
limit innovation. (source: "Banking Industry
Report," Deloitte)

o Economic uncertainty:
- Economic uncertainty, such as trade
tensions and geopolitical risks, can impact the
banking industry and decrease demand for
financial services.

Table 1: SWOT Analysis

 PESTLE ANALYSIS

POLITICAL FACTORS ECONOMIC FACTORS

1. The banking industry appears to be 1. The banking industry and economy

extremely powerful, but it is vulnerable are tied. The income of the people
to a greater giant: the government. will tell how much the bank can
access.
2. Government regulations have an impact
on the banking industry. Banking 2. Inflation affects the currency and its
industries are subject to government value. Investors, especially foreign
intervention at any time, making the investors will consider the currency
sector politically susceptible. before providing the funds.

SOCIO-CULTURAL FACTORS TECHNOLOGICAL FACTORS

1. The Lifestyles of people are constantly 1. Teenagers, online business owners

changing. Instead of having too much and OFW use mobile banking. They
cash in their wallet, nowadays, they can send, withdraw money with just
prefer credit or debit cards. a tap on their mobile phones.

2. Most people are now financially 2. ATMs are open where customers can
literate. They seek to find assistance for withdraw money without actually
loans related to business, homes and going into the bank.
academics.

ENVIRONMENTAL FACTORS LEGAL FACTORS

1. With the use of mobile banking, debit 1. The banks gather client data and their
and credit cards it decreases the usage specifics. They are unable to share
of paper. any of the consumers' personal
information due to privacy and
2. Customers who are far from the actual consumer rules. Banking transactions
bank can save gas from going back and with domestic and foreign consumers
forth. They can just use mobile banking must adhere to tight legal
and ATMs machines. requirements.

2. The international organizations that

oversee financial institutions all
around the world, also have rules and
regulations that the banks must abide
by. A banking institution could be
banned for breaking the country's
rules and regulations.

Table 2: PESTLE Analysis

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