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Thursday, May 17, 2012

With P1.63 trillion in idle deposits, commercial banks must lend more

By TONY LOPEZ

Philippine commercial banks, numbering 36, had a great year in 2011.

Their combined profits hit a new record – P70 billion, up 45 percent from P48.9 billion in 2010. The commercial banks account for 65 percent of the P108 billion total profits of the entire financial system – which includes savings banks, thrift banks, insurance companies – in 2011.

Return on equity (ROE) of commercial banks in 2011 rose to 10.23 percent, up from 8.24 percent in 2010. That means for 100 pesos of money put in by stockholders, they got P10.23. That’s more than six times what the banks pay their depositors on the average – which is two percent, less the 20 percent withholding tax, or 1.6 percent. Put another way, for every peso the banks got from their depositors, they generated six pesos in net income.

No wonder, our bankers are among the Philippines’ richest people – Henry Sy Sr of BDO and China Bank, Lucio Tan of Allied Bank and PNB, George SK Ty of Metrobank, the heirs of Mercedes McMicking of Bank of PI, the Aboitiz family of Union Bank, to name some.

Half of 2011’s P70-billion banking industry profits were hauled in by the Big Three – Bank of PI with P12.822 billion, Metrobank P12.39 billion and BDO P10.5 billion. The three account for 41.4 percent of the system’s nearly P7 trillion resources – BDO 17.75 percent, Metrobank 13.71 percent, and BPI 11.94 percent.

For the first time, deposits of commercial banks reached P5.075 trillion (P5,075 billion), up from P4,370.8 billion in 2009 and P4,816.93 billion.

Yet, the banks dispensed much less in loans – P3.42 trillion, leaving P1.63 trillion in idle cash stashed in some unknown vaults – like those in the central bank, earning very little interest but which are 100 percent safe.

You know in 2011, the Aquino administration failed to spend P142 billion in programmed infra money and economic growth went down by almost half, from 7.6 percent in 2010 to 3.7 percent last year.

Can you imagine the economic boom we will experience – and the jobs that will be created — if that idle money – P1.63 trillion (or 1,630 billion pesos) is unfrozen and released to the economy – to users of funds like individuals and consumers and corporations?

The government has 17 Public-Private Partnership Projects in the pipeline. The projects need P200 billion in financing. Bangko Sentral should take aggressive steps to force the banks to release those funds.

How? By making it unprofitable for the banks to warehouse the P1.63 trillion with the BSP. How? By lowering the interest rate or the yields on these deposits with the BSP.

Of course, there will be the usual ek-ek about the danger of releasing so much money into the system – like galloping prices because so much money chasing so few goods will raise prices.

But inflation is a much better bitter pill to swallow than having record poverty (one of every four Filipinos) and record hunger (26 million Filipinos)

To be sure, in 2011, loans grew dramatically, by P528.05 billion or 18.25 percent to P3,421.99 billion (P3.42 trillion). The 18.25 percent rise is three times the 5.78 percent gain in deposits, indicating the banks ramped up their lending. But this is not enough. After an 18 percent increase in loans, there remains P1.63 trillion in idle money with the BSP hoarded by the banks.

This 2012, the Year of the Dragon, signs are that the banks will again chalk up record figures in level of assets, deposits, loans and capital. And very likely, even bank profits will also reach new peaks.

This amazing positive outlook comes amid the backdrop of a recession in Europe where the euro zone is in danger of breakup; a slowdown in the United States and China, major markets for the Philippines; the return of fear and flight to good assets following JP Morgan Chase’s massive $2 billion losses in derivatives in London.

Strong consumer confidence, the Bangko Sentral’s low-interest policy, huge inflows of remittances, robust loan demand and an upbeat economy are helping Philippine banks on their way to a third consecutive year of heady growth.

“Interest rates will remain at levels consistent with the inflation target,” assures Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr.. “This requires regular monitoring of developments, both domestic and foreign, that can impact on inflation.”

“The low interest rates have prompted a strong demand for housing,” reports Sen. Manuel Villar whose Vista Land and Landscapes property conglomerate has become the biggest housing developer.

“Rather than put money in banks and earn very low yields, families are buying residential houses and condos which have better price appreciation and are a better investment,” says Villar, the first Filipino brown billionaire points out.

Jose Pardo, the chair of the Philippine Stock Exchange and the Philippine Savings Banks, credits reforms initiated by the BSP a few years back for the strength of the banking system.

“While banks may complain of over-regulation, most banks as a result have managed risks well, practically avoiding investment in derivative products,” Pardo elaborates.

Despite headwinds from Europe, the US and the conflict with China, “the outlook for this year and the next for the banking industry remains bullish,” says China Bank President Peter Dee. “An upbeat investor sentiment could support double-digit loans growth by Philippine banks although the bigger corporates may turn to the capital markets for their term funding needs.”

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