Banks in the Philippines have a well-deserved reputation for primarily lending to large national corporations, but that is finally beginning to change. The extent of the concentration is visible mainly in data from the Bangko Sentral de Pilipinas (BSP), the central bank, on the regional distribution of lending. As of June 2015, 55% of outstanding domestic bank loans and receivables were to counterparties with addresses in the central business district of Makati, where the vast majority of nationwide companies have their headquarters. A hefty 85.4% of all bank loans and receivables outstanding at the end of 2014 were to parties in the National Capital Region, according to the BSP, a proportion that far outweighed the 36% share of 2014 GDP produced in the capital region, according to the Philippine Statistics Authority (PSA). Meanwhile, consumer lending accounted for a relatively small 17.3% share of Philippine banks’ loan portfolios as of September 2015, according to BSP. In many advanced economies and middle-income countries, including Thailand and Malaysia, the majority of bank lending is to households.

Excess Liquidity

The emerging trends do not yet look particularly impressive in the data. The share of household loans in banks’ lending portfolios has risen gradually from 16.9% at the end of 2009, while the share of bank credit to parties outside the capital region has grown from a low of 10.7% at the end of 2007 to 14.9% at the close of 2014. However, banking sector executives and officials say the changes are obvious when seen from the inside and are having a big impact on how banks do business, especially where they are investing and hiring.

Luis Reyes, head of investor relations at BDO Unibank, told OBG that excess liquidity in the banking system is driving down yields on lending to large corporations and pushing banks to expand their retail, small-business and regional lending programmes. “Despite rapid loan growth, there is still a lot of liquidity in the system coming in from overseas workers’ remittances,” he said. “The challenge is to preserve margins while we have this liquidity overhang.”

Retail Details

Retail lending has significant potential. The stock of credit to households at the end of 2014 amounted to just 7.1% of that year’s GDP, according to BSP and PSA data. That compares to household credit of 86% and 88% of GDP in Thailand and Malaysia, respectively, according to Fitch Ratings. Philippine banks’ total domestic loans and receivables at the end of 2014 came to 40.3% of GDP, according to BSP and PSA data, while the World Bank counted total domestic credit to the private sector at 39% of GDP. That was about the same as Indonesia’s figure of 40% of GDP, but far behind Vietnam at 100%, Malaysia at 125% and Thailand at 159%, according to the World Bank. The sector’s household loan portfolio increased by 25.1% in 2014, well ahead of the overall pace of lending growth of 19.4%. That was a reversal from 2013, when retail lending rose by 14.7%, under-performing the overall lending growth rate of 17%.

The fastest-growing major categories of household loans were real estate, up 25.9% in March 2015 from the previous March, and automobile loans, up 25.8% in the same period. Spending on advertising for consumer credit offers is also expanding rapidly, according to banking executives, with many banks offering give-aways and other enticements to compete for borrowers. The increase in housing and automobile loans reflects the rising number of people entering the middle class that are able to afford cars and apartments, driven especially by the fast-growing business process outsourcing (BPO) sector. According to Bernardo Villegas, an economist who chairs the Centre for Research and Communication at the University of Asia and the Pacific, the growth in real estate lending is mainly in loans to purchase small apartments by young people moving out of family homes and nearer to BPO workplaces. Real estate and automobiles are also the largest segments of the retail lending market, accounting respectively for 44% and 26% of lending to households as of March 2015, according to the BSP.

Credit card lending, which accounted for 17% of loans to households as of March 2015, rose by only 4.2% year-on-year. The slow growth was due to a push to reduce high non-performing loan ratios in the segment, which fell from a recent peak sector average of 11.6% in September 2013 to 8.3% in March 2015. The overall non-performing loan ratio for all credit extended to households has fallen steadily from more than 9% in the wake of the 2008-09 global financial crisis to 4.9% in March 2015.

Improved Profiles

Banks have been spending more to ensure they have better borrower risk profiling systems, which have traditionally been weak and one of the main obstacles holding back the expansion of lending to households, private entrepreneurs and small businesses. A major improvement is expected in 2016 with the launch of the Credit Information Corporation, a state-run credit history bureau that will facilitate information-sharing among banks and private credit bureaus. The Climate Innovation Centre has been supported by the World Bank’s International Finance Corporation. Earlier, in 2011, five large banks including BDO, Bank of the Philippines Islands, Citibank, HSBC and Metrobank partnered with the US credit agency TransUnion to establish the first major private credit bureau in the Philippines.

Small Business Support

In addition to the boost in retail lending, the search for yield is also drawing banks increasingly into the small and medium-sized business segment.

BDO’s Reyes told OBG his bank is working on developing lending offers for networks of branded franchises, sales agents and other networks of small businesses with connections to major nationwide companies. Because businesses in such networks operate similarly to each other and their incomes are tied to a nationwide company, it’s easier to understand them and predict outcomes, meaning BDO is able to develop lending programmes that serve their unique needs while reducing risks, Reyes said.

Expanding lending to small businesses without increasing sector risk remains a challenge for banks and regulators at the BSP. The small banks that have traditionally done most lending to small businesses and entrepreneurs in lower-income areas have come under pressure to boost their protections against default risk by increasing their capital adequacy ratios. In addition to its early introduction of Basel III standards, the BSP has recently added additional capital cover requirements for loans to businesses that lack strong accompanying documentation, as many small business borrowers do.

Reggie L Ocampo, president of First Macro Bank, a small neighbourhood bank in Manila, told OBG that managers of small banks in lower-income neighbourhoods are under pressure from a combination of tighter regulation and increased competition from larger banks. “Bigger banks’ profits are squeezed by lower yields and trading profits, so they are moving into what used to be exclusively our market and squeezing us,” he said.

Partnering Up

Despite the recent strong growth of retail lending, another emerging trend could shift the weight of growth back towards large corporations, albeit of a different kind. The increasing pace at which the government is bringing public-private partnership (PPP) infrastructure projects to bid is expected to boost the rate of growth of corporate lending, especially in 2016-17.

PPP projects are typically won by major conglomerates or groups of conglomerates, and they are typically financed by large, long-term loans that are syndicated out to several top local banks. As of October 2015, P201bn ($4.5bn) of PPP projects had been awarded, with another P392bn ($8.7bn) worth of contracts in bidding or pre-qualification stages, and a further P127bn ($2.8bn) in the final preparation stage before pre-qualification.

Those amounts add up to the equivalent of 13.5% of the banking sector’s overall domestic loan portfolio as of June 2015, which came to P5.2trn ($115bn), and their total exceeds net new bank lending in the 12 months to June 2015, which came to P666bn ($14.8bn). That suggests PPP projects could dramatically boost the overall growth rate of lending. Thus, even if consumer-lending growth remains very rapid, a surge in PPP loans could somewhat reduce the proportion of total loans going to households.

Reyes of BDO told OBG he expects the sector’s overall rate of lending growth to average around 20% for the next several years, supported by PPP lending. “We have enough liquidity in the banking system to sustain sector-wide growth rates of around 20%,” he said. “The infrastructure spending will also have downstream effects, trickling down to consumers and driving a broad-based increase in loan demand.”