The Philippines’ banking sector delivered a strong performance in Q2 2023 despite facing persistent global economic challenges. Bangko Sentral ng Pilipinas (BSP), the Central Bank of the Philippines, reported:

1. 8.4% YoY (year-on-year) increase in total assets, reaching USD 441 billion (PHP 24.4 trillion)
2. 7.9% YoY (year-on-year) increase in total deposits, reaching USD 377 billion (PHP 20.8 trillion)

The Philippines is witnessing a surge in credit card usage amid elevated inflation and rising interest rates. Consumer credit is normally used to purchase big-ticket items such as household appliances, however, Philippians are using it for consumables. This trend is risky and will likely lead to higher household debt and pose a risk to financial stability.

The Philippine banking industry is thriving in 2023. BSP along with the Digital Payments Transformation Roadmap (DPTR) aims to achieve a cashless society by 2030. The pandemic increased the usage of cashless methods of payment. Philippinos have a preference to use mobile wallets (64%), card online payments (52%), card payments at physical merchants (44%), and QR payments 31%.

The loan portfolios of the leading four banks expanded by 11.12%, rising from an average of USD 26.1 billion in Q2 2022 to USD 28.9 billion in Q2 2023, primarily due to increased commercial and consumer lending. Conversely, deposits also showed a growth of 10.69%, going from an average of USD 34.33 billion to USD 38 billion in Q2 2023. Despite the challenges posed by elevated interest rates and ongoing global economic uncertainties, it is expected that loan growth and the quality of assets will continue to demonstrate resilience.

Net revenues for the top 4 banks in Indonesia grew by 21% YoY

The top 5 banks in the Philippines grew from USD 2.24 billion in Q2 2022 to USD 2.72 billion in Q2 2023. Average net revenues stood at USD 680 million in Q2 2023.

Union Bank of the Philippines reported the highest YoY growth rate at 63%, increasing net revenues to USD 333 million in Q2 2023. This strong growth was attributed to the following factors:

1. 40% net interest income increased from USD 161 million to USD 226 million.
2. 146% non-interest income increase from USD 43 million to USD 107 million.
   1. Customer transactions increased 211% between Q2 2022 and Q2 2023.
3. Fee income increased from USD 31 million to USD 91 million, accounting for 85% of the bank’s total non-interest income.
4. The bank’s loan book expanded by 42% from USD 6.6 billion to USD 9.4 billion.

The Union Bank of the Philippines recorded the highest growth in the Philippines and APAC.

Exhibit 1: Net revenues of the top 4 Filipino Banks

Net profit for the top 4 banks in the Philippines grew by 29.26% YoY

The top 4 banks in the Philippines aggregated their net profits from USD 632 million in Q2 2022 to USD 817 million in Q2 2023.

Average net profits grew by 29.26% from USD 158 million in Q2 2022 to USD 204 million in Q2 2023.

1. Metrobank: 55.22% net profit growth
2. Banco de Oro (BDO): 53.28% net profit growth
3. Bank of the Philippine Islands: 4.11% net profit growth
4. Union Bank of the Philippines: 14.29% net profit decline

Strong Metrobank net profit growth is driven by:

1. 25% increase in the net interest income from USD 371 million to USD 465 million
   1. 79% YoY growth in interest from investments due to higher accrual income from investment securities
   2. 57% YoY growth in interest on loans due to expanding portfolio and better margins
2. 2% increase in the non-interest income from USD 105 million to USD 107 million

On the other hand, the net profits for Union Bank of the Philippines declined between Q2 2022 and Q2 2023 due to the on-time integration cost of Citibank’s portfolio. Union Bank also became the legal owner of Citibank’s consumer business on 1^st August 2022.

Exhibit 2: Consolidated net profits of the top 4 Filipino Banks

Fee income for the top 4 banks in the Philippines grew by 3.28%

Philippines banks generate most of their fee income from traditional sources. As a lot of Filipinos live and work in other Asian countries, there are a lot of cross-border remittances which contribute to the overall fee income.

The top 4 banks in the Philippines grew their fee income from USD 491 million in Q2 2022 to USD 507 million (Figure 3) in Q2 2023.

Union Bank of the Philippines reported the highest fee income increase at 194.12% (USD 91 million). This increase could be due to the recent popularity of credit cards, which has led to higher non-interest income growth among banks in the Philippines.

On the contrary, BPI recorded the highest fee income decline at 38.5% (USD 125 million).

1. 45% or USD 91 million of the fee income generated by the bank in Q2 2022 was the result of a one-off gain from the sale of an asset.
2. Excluding the gain from this sale, the fee income for the bank was USD 112 million in Q2 2022.
3. Excluding the one-off gain, the bank recorded an 11.29% increase in fee income.

Exhibit 3: Fee incomes of the top 4 Filipino Banks

Net interest margins (NIM) for the top 4 banks in the Philippines increased by 59 basis points

The average NIM increased by 59 basis points from 3.91% in Q2 2022 to 4.50% in Q2 2023, higher than the APAC average of 3.16% in Q2 2023.

Banco de Oro (BDO) reported the highest NIM increase at 70 basis points, from 4% to 4.7%. Meanwhile, the Union Bank of the Philippines registered the highest NIM at 5.2%.

A key factor for these banks’ high NIMs is their high lending and low deposit rates. For instance, Metrobank reported:

1. 8.6% loan portfolio increase to USD 26 billion.
2. 9.32% deposit increase to USD 41 billion.
3. 63.74% loan-to-deposit ratio (LDR)

Despite having such a low LDR, Metrobank’s loan income stood at USD 467 million, 2.48 times higher than the interest expense on deposits at USD 188 million.

Exhibit 4: Consolidated net interest margins of the top 4 Filipino Banks

Non-performing loans (NPL) for the top 4 banks in the Philippines Banks fall by 14 basis points

The average NPL declined by 14 basis points to 2.66%, which is still above the APAC average of 1.9%. BPI and Metrobank have NPLs below the APAC average of 1.88% and 1.8% respectively.

BPI, Metrobank and BDO have also reduced their NPLs by 11 bps, 10 bps and 44 bps, respectively, between Q2 2022 and Q2 2023.

Exhibit 5: Consolidated non-performing loans of the top 4 Filipino Banks

Cost efficiency for the top 4 banks in the Philippines worsened by 12 basis points

Cost efficiency stood at 55.4% in Q2 2023, which is above the average cost efficiency of APAC at 42% in Q2 2023, indicating a lack of operational efficiency. This is further worsened considering the Philippines’ previous performance in Q2 2022 stood at 55.28%, displaying a fall in cost efficiency by 12 basis points (bps).

Although banks such as BPI, Metrobank and BDO reported improved cost efficiencies by 120 bps, 200 bps and 30 bps, respectively, only BPI has its cost efficiency below the threshold value of 50%.

Union Bank reported an increase in cost efficiency from 56% in Q2 2022 to 63% in Q2 2023. This significant increase in the bank’s cost efficiency is due to the integration and one-off expenses associated with acquiring Citibank’s consumer business.

Furthermore, the integration added USD 25 million to the bank’s operating expenses and accounted for 12% of these expenses. The bank’s cost efficiency also remained unchanged between Q2 2022 and Q2 2023 at 56% when adjusting for these one-off expenses.

Exhibit 6: Consolidated cost-efficiency ratio of the top 4 Filipino Banks

Initiatives by the top 4 banks in the Philippines

• #1 Union Bank of the Philippines

Union Digital

1. Union Digital acquired USD 170 million in deposits with a loan portfolio of USD 103 million within the first 5 months of operation.
2. The lending portfolio increase is due to a successful cross-selling program within its extensive retail customer network.
3. Union Digital aims to extend digital loans to underserved Union Bank customers using alternative credit scoring methods.

Bonds.PH

1. Bonds.PH is the first banking mobile app in the Philippines to leverage blockchain technology for distributing retail treasury bonds (RTBs).
2. Investors can conveniently buy and sell risk-free treasury bonds worldwide using this app, eliminating the need to visit a bank.
3. In collaboration with the Philippine Depository & Trust Corp (PDTC) and fintech firm Hashstacs, the bank issued the Philippines’ first digital bond using distributed ledger technology (DLT).

API Marketplace

1. Union Bank is the first bank in the Philippines to offer banking-as-a-service via its API marketplace.
2. It has assisted over 100 partners with 78.7 million transactions totalling USD 10.81 billion (PHP 597 billion).
3. The marketplace has 200 API products and 500 API endpoints.
4. Collaborations with e-commerce giants like Shopee and Lazada Philippines provide direct cash-in services and quick account linking to major e-wallets and e-commerce wallets for efficient top-ups and deposits.

• #2 Bank of the Philippine Islands

Exhibit 7: Comprehensive employee training programs

Be Well is an umbrella wellness program that targets the holistic well-being of employees through:

1. Webinars on physical, emotional, and mental health topics conducted bi-monthly
2. A magazine show called “Be Well On Air”, produced by each business unit, covers various wellness topics to foster camaraderie and allow employees to showcase their various talents.

BizKo

1. BizKo is an online banking platform for sole proprietors, freelancers, professionals, partnerships, and startups.
2. This subscription-based service is cost-effective and doesn’t require a maintaining deposit balance, offering a wide array of digital solutions, including:
   1. Invoicing for customers
   2. Payment collection
   3. Fund transfers to suppliers and employees
   4. Financial report generation
   5. BizKo achieved 24,000 downloads and 10,500 enrolled users as of year-end 2022.
3. BizKo facilitated over 40,000 transactions amounting to PHP 1.32 billion, with a noticeable increase in usage, growing from 19 transactions per day at the beginning of the year to 250 by the end of 2022.

VYBE

1. BPI’s digital wallet and rewards platform introduces interoperable payments via QR Ph, enabling secure payments.
2. Offers a user-friendly platform for clients to access and redeem rewards points from various BPI products.
3. Serve as an acquisition tool in the future towards business growth and financial inclusion due to its affordability and accessibility.

• #3 Metrobank

Financial education initiatives

1. Wealth Insights – The platform is designed for high-net-worth clients. It offers public market news and exclusive premium content, including in-depth, actionable investment articles from financial experts and third-party partners like CreditSights.
2. Metrobank Wealth Manager – The online tool, accessible through Metrobank Online, empowers clients to self-manage their wealth and diversify their portfolios. They can conveniently access investments, review their treasury holdings, explore new investment opportunities, and schedule discussions with investment experts.
3. Earnest – This app is designed for novice investors, offering easy-to-grasp investment lessons and uncomplicated articles presented jargon-free.
4. Moneybility – A comprehensive financial education platform designed to enhance the financial resilience of Filipinos. It covers various money management topics, including budgeting, debt management, insurance, and investing.

• #4 BDO

BDO Pay

1. BDO Pay is the nation’s pioneering bank-endorsed mobile wallet, unifying a customer’s CASA, debit, and credit card accounts into one wallet. This empowers customers to engage in digital transactions and swiftly oversee financial matters.
2. Expanding access to non-BDO clients enhances the market outreach of BDO Pay, particularly within the unbanked population.

The Philippines’ banking sector is set for a promising 2023

The country’s strong economic growth will persist in the coming years, providing a solid foundation for loan growth and asset quality within the industry. Additionally, the anticipated trajectory of rising interest rates, driven by the Bangko Sentral ng Pilipinas (BSP) to combat inflation, is expected to bolster net interest income for banks.

To learn more about how Malaysian Banks performed in Q2 2023, click here.

To learn more about how Indonesian Banks performed in Q2 2023, click here.

To learn more about how Indian Banks performed in Q2 2023, click here.

To learn more about how APAC Banks performed in Q2 2023, click here.