On Nov. 26, 2020, the Bangko Sentral ng Pilipinas (BSP) introduced its Digital Banking Framework as part of its Digital Banking Transformation Roadmap — an initiative to a safe and secure digital payments ecosystem in the Philippines — with the objective of reinforcing consumer preference for digital payment options and increasing the availability of digital financial products and services.

The framework, which recognized digital banks as a new banking category, allows for a more efficient, technology-driven, and inclusive financial system.

“Digital banks operate entirely through digital platforms and electronic channels without physical branches or sub-branches. It is a distinct banking category created by the Bangko Sentral ng Pilipinas… Like other banks, digital banks adhere to a rigorous regulatory framework, reflecting their critical role in the financial ecosystem,” Angelo Madrid, President of the Digital Bank Association of the Philippines (DiBA PH) and president of Maya Bank, said in an e-mail.

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He noted that while online lending platforms focus on providing loans, digital banks offer a comprehensive range of services.

“[Digital] banks provide a full suite of banking services, including savings accounts, loans, and payment services, all integrated into a seamless, user-friendly digital experience,” Tonik Digital Bank Founder and President Greg Krasnov said in an e-mail interview.

By Aug. 24, 2022, six digital banks — UNO Digital Bank, UnionDigital Bank, GoTyme, Overseas Filipino Bank, Tonik Digital Bank, and Maya Bank — were allowed to fully operate in the Philippines.

DEVELOPMENTS AND CHALLENGES
The BSP recently announced that it will be allowing four new digital banks to enter the scene as it lifts its three-year moratorium on applications for digital banking permits imposed in 2021. New licenses will be available starting Jan. 1, 2025.

“With this limit, the BSP can closely monitor developments in the digital banking industry, obtain broader perspective as these banks mature further in their operations, as well as assess the impact of the entry of new players on the banking system,” BSP Governor Eli M. Remolona, Jr., said in a press release.

Mr. Krasnov said that digital banks licensed next year will probably be operational by 2026.

“Traditional banks are likely to be interested in [securing the available slots], either by establishing their own digital banks or investing in partnerships with fintech companies. Some might even consider converting existing licenses to digital bank licenses,” Mike Singh, chief commercial and revenue officer of UnionDigital Bank, said in an e-mail.

As a relatively new category in the financial ecosystem, digital banks now face the challenge of profitability, with only two of the six digital banks reporting profits as of March.

This, however, is not indicative of the underlying trend in the digital banking sector as they are subsidiaries of large universal banks, Mr. Krasnov explained.

“Their achievement of profitability was driven by large loan portfolio transfers from their parent institutions… Digital banking involves a significant upfront investment, both in terms of [capital] and ongoing [operational expenditures] to maintain the advanced digital bank stack. It typically takes five years for a new bank to become profitable,” he said.

Collectively, digital banks have posted a net loss of P4.11 billion, while traditional banks have an aggregate net income of P178.91 billion as of end-June, data from the BSP showed.

“Despite digital banking’s early stage, the sector is already hitting record growth milestones, a strong indicator of future profitability… The continued growth in customer base and deposits, coupled with ongoing innovations, positions the digital banking sector for sustained success and profitability in the coming years,” Mr. Madrid said.

The total assets of digital banks grew 35% year on year as of end-June to P104.12 billion from P77.13 billion, outpacing the 12.4% year-on-year asset growth of universal and commercial banks, latest central bank data showed.

Similarly, digital banks’ total loans reached P28.27 billion in the first semester, up 26.2% from P22.39 billion a year ago.

Meanwhile, big banks posted an 11.9% year-on-year increase in loans with P13.25 trillion as of end-June.

By the end of the first half, the total deposits of digital banks stood at P82.36 billion, up 32.8% from P62.01 billion a year ago. The big banks’ total deposits also grew 9.3% to P18.32 trillion — more than 222 times larger than the digital banks’.

PROS AND CONS
Existing purely in the digital space comes with its advantages and disadvantages.

“Some pros of digital banks include accessibility to banking services anytime and anywhere, lower fees and competitive interest rates brought by lower overhead costs, and innovative features like quick loan approvals and seamless digital experiences,” Mr. Krasnov said.

Karl De Galicia, a 24-year-old Filipino student in Taiwan, says the features he looks for in banks are accessibility and lower processing fees.

While he says that the features and services of digital banks are more in line with his needs, he admits to using traditional banks more frequently.

“I think digital banks are more accessible because you can cash in anywhere unlike with traditional banks where you have to line up to deposit,” he said in a Facebook Messenger chat.

“While GoTyme is more accessible, I more frequently use BDO because this is where my family sends money, and it was my established account when I left for Taiwan. I have also linked my apps to BDO because I’m more certain that I have money there,” he added.

Another advantage is the ability to implement cutting-edge technology, providing a more personalized and efficient banking experience, Mr. Madrid said.

“Digital banks have a better user-interface (UI), and I appreciate being able to check my balance anytime. Meanwhile, the online and mobile applications of my traditional bank are often out of service,” Mr. De Galicia said.

Anica Ang, 23, prefers digital banks. She prioritizes being able to pay her bills online and having access to her bank internationally.

“I think digital banks are safe. Cybersecurity challenges stem from users falling for scams rather than mistakes from the banks,” Ms. Ang said.

On the other hand, Mr. Singh cited the lack of physical branches as a challenge for digital banks in a “predominantly cash-based society.”

“[Cons for digital banks] are lack physical branches, potential security concerns, and limited customer service options,” Security Bank Corp. Chief Economist Robert Dan J. Roces likewise said.

IMPROVEMENT
“Traditional banks can learn from digital banks by embracing digital transformation more fully. This includes improving their mobile and online banking platforms to offer a more seamless and intuitive user experience,” Tonik’s Mr. Krasnov said.

“Additionally, traditional banks can adopt more flexible fee structures and competitive interest rates, leveraging their existing resources to offer value-added services that digital banks might lack, such as personalized financial advice and comprehensive financial planning,” he said.

He added that traditional banks should focus on expanding their digital reach to underserved areas via partnerships with fintech companies, or by developing their own “digital-only” products.

Mr. Madrid said that traditional banks should launch new products faster and improve existing services based on customer feedback. He stressed the importance of investing in robust mobile and online banking platforms

Meanwhile, digital banks can learn from traditional banks by enhancing customer trust and highlighting robust security measures, Mr. Roces said.

“Digital banks can learn the importance of building customer trust and maintaining a strong brand reputation, which traditional banks have cultivated over many years. This can be achieved through transparent communication, robust security measures, and consistent customer service,” Mr. Krasnov likewise said.

“Traditional banks have been around for a while and often excel in relationship banking, where bank representatives build long-term customer relationships. They have utilized their branch models to hone these relationships over time. Digital banks are adopting these learnings and taking relationship management into the digital age by going beyond bank branches, utilizing technology platforms, and ensuring security and reliability,” Mr. Madrid said.

OUTLOOK
For the digital banks here in the country, there’s no other way but to grow.

“As the digital banking industry becomes more crowded, we anticipate continued growth driven by increasing consumer adoption of the convenience and benefits offered by digital banking, including our competitive interest rates on savings and time deposits. More consumers are now leveraging these advantages compared to when the industry was first introduced,” Mr. Singh said.

“For the rest of the year, digital banks are expected to continue growing, albeit cautiously due to the challenging macroeconomic environment. They will likely focus on refining their products, working towards profitability, and expanding their customer base through targeted marketing and innovative financial products,” Mr. Krasnov said.

He added that traditional banks will diversify their digital offerings and leverage their customer base.

“Both sectors will need to navigate economic challenges carefully, but the trend toward digitalization will persist, driving continued innovation and competition in the financial industry,” Mr. Krasnov said.

THE financial technology (fintech) scene in the Philippines has been booming with growth as more consumers turning to digital payment platforms to manage funds and avail financial services.

A couple of years back, it could be somehow traced to the pandemic prompting this shift of consumers adopting to digital payments and, since then, have turn to these services.

In the latest Philippines Fintech Report (https://tinyurl.com/286ryvut) published by Fintech News Philippines in partnership with Fintech Alliance PH, the country has surpassed its target of digitalizing 50% of digital payments volume based on the 2023 report on E-Payments Measurement of the Bangko Sentral ng Pilipinas.

The report highlighted that at the end of last year, digital payment transactions made up 52.8% of total monthly retail payments in the country, increasing from 42.1% in 2022.

Additionally, the report showed a thriving fintech sector in the country which is supported by robust government support, increasing digital adoption and a strong commitment to financial inclusion.

In the space of digital payments, comes the use of Buy Now, Pay Later (BNPL) services. And it’s no wonder that consumers have been attracted to these providers as they have become increasingly prevalent.

A BNPL is a payment method that enables consumers to make purchases without paying the entire amount upfront, allowing them to pay in installments over time.

The Philippine market has been proven to be a fertile ground for these kind of services with the younger generation most attracted to it.

TAPPING INTO THE PHILIPPINE MARKET
Early this year, a report (https://tinyurl.com/27v5fdq3) published by Euromonitor International revealed that since its introduction in the Southeast Asia region in 2018, BNPL has experienced a significant rise  in popularity, providing consumers with a convenient, flexible and accessible alternative to traditional financial services.

The report also underscored that the region presents promising opportunities for BNPL to expand their operations due to the significant number of unbanked and underserved individuals.

“The Philippines and Indonesia have percentages of unbanked and underserved populations of 76% and 67%, while Vietnam, Malaysia and Thailand follow closely behind with 47%, 40%, and 25%, respectively,” the report said.

By entering these markets, these providers seem an attractive option to fill in the gap for addressing the needs of unbanked and underserved consumers.

Digital Pinoys National Campaigner Ronald B. Gustilo said that consumers use BNPL platforms to purchase goods for they see them as a convenient payment option, particularly for individuals who don’t have the money to pay for the items upfront.

Personally, he does not use BNPL services and prefers to pay for items purchased using credit or debit cards or cash but is aware that many consumers patronize these services.

“BNPLs usually offer fast approval without asking for collaterals and too many requirements to avail their services,” he said in a Viber message.

He added that consumers can make purchases using BNPLs with just a minimal down payment and these are [some] reasons why consumers prefer BNPLs over credit cards and bank loans.

Additionally, he pointed out that the preference over these payment providers over the traditional loan schemes, such as credit cards and personal bank loans, underscores the current economic situation, where the needs of individuals often exceed what they earn or have saved.

YOUNGER GENERATION’S PREFERENCE
Generation Z-ers — those people born between 1997 and 2012 and who represent 32% of Southeast Asia’s population — are reshaping the retail landscape as digital natives, Erwin G. Ocampo, head of product at UnaCash, said in an e-mail.

UnaCash is a BNPL provider in the country, operated by Digido Finance Corp.

Mr. Ocampo added that their heavy reliance on smartphones for social media and online shopping has created unique consumer behavior.

As a result of their financial independence, this certain demographic prefers instant gratification and is likely to adopt digital payment platforms like BNPL.

“This generation is raised in the age of information, making them more empowered to make informed purchasing decisions,” he said.

Mr. Ocampo also highlighted that the “unique financial behaviors and preferences” of the new generation of shoppers have driven the growth of BNPLs in the country.

Anyone would want a convenient, flexible and accessible mode of payment and BNPLs appears to be the best option for that.

Another BNPL provider that tapped into the Philippine market is Neuroncredit Financing Co., Inc.’s Atome PH.

An Atome spokesperson addressed that “popularity” of BNPL to the young consumers can be traced to their experiences of life “firsts” such as job, child, home, among others and may need a way to manage monthly budgets with their salary.

But they also pointed out that given these reasons, the younger generation do not also want to miss out on things to spend such as traveling and purchasing of electronics or such.

For First Digital Finance Corp.’s BillEase’s Chief Executive Officer Georg Steiger, another BNPL provider in the country, consumers are increasingly attracted to BNPL for its transparency and the financial empowerment it offers.

“BNPL services are often available at the point of sale, making them more convenient for immediate purchases and often come with perks such as zero-interest plans and the ability to make smaller, more manageable payments over time,” Mr. Steiger said in an e-mail.

It pointed out that this flexibility is what makes younger consumers drawn to them, where in the latter value financial autonomy and prefer to avoid the long-term commitments associated with credit cards.

BNPLs OVER CREDIT CARDS
Mr. Steiger said that in BNPL services, consumers highly appreciate the clear repayment schedule, which enables them to budget effectively and make informed purchasing decisions.

Additionally, compared with the conventional credit cards which can trap users in a cycle of revolving debt if mishandled, BNPL offers a structured path to financial freedom.

“By breaking payments into manageable installments, consumers can confidently acquire essential items or indulge in desired purchases without the anxiety of hidden fees,” Mr. Steiger said.

Credit cards have been a reliable payment method, but their underlying technology can sometimes leave consumers exposed to security concerns, such as stolen card numbers or unauthorized transactions.

But with BNPLs, it provides a digital native payment solution, featuring enhanced security measures like biometrics within the app, providing peace of mind and minimizing the risk of unexpected charges.

Given these features, consumers are also likely to prefer BNPL for budget management.

Based on a study conducted by UnaCash, four in 10 Filipinos who use BNPL services always use it as a tool for budget planning and management.

It also revealed that 49.6% of respondents have heard of or used BNPL services, while 37.4% have heard about BNPL services but have not used them, which indicates the popularity and awareness of this payment method.

UnaCash’s Mr. Ocampo said that results of the study also depicted that BNPL is an effective budgeting tool.

“This itself is a strong indication that there is market potential for BNPL services in the Philippines as it serves as a tool that allows consumers to have access to certain purchases while segmenting their payment terms,” he said.

For Mr. Steiger, BNPLs are more attractive option for those who are conscious of their budget and helping new-to-credit customers develop healthy borrowing habits and discipline.

“The ability to split payments into smaller, more manageable amounts, helps consumers avoid debt traps and maintain control over their spending,” he said.

Compared with credit cards or loans, these providers provide a clear, upfront payment schedule that makes it easier for consumers to plan their finances.

RISKS AND BENEFITS
But like any other form of payment method, there are potential risks and downsides of using these services.

On the preference over the use of credit cards, Atome said that the key challenge is to provide affordable credit in a careful, risk-managed, and fiscally prudent way, from both a consumer and lender’s perspective.

Atome also underscored the difference of BNPL models from traditional credit cards.

“For BNPL, the moment a user is late with payments, we suspend the account, whereas in credit cards, you can pay minimal sum and continue using the card and get charged high interest on outstanding balance,” Atome said.

This approach prevents the user from accumulating large debts and limits credit exposure.

For UnaCash’s Mr. Ocampo, BNPLs offer flexibility and accessibility in managing finances, which in turn, empowers consumers to make larger purchases without immediate financial strain and contributes largely to credit building.

But he cautioned that responsible usage is essential to avoid potential challenges.

“While it doesn’t require traditional credit history, effective financial planning remains to avoid potential challenges. There is always a way to educate consumers to use BNPL as a tool that can become a valuable asset in modern financial management,” he said.

BillEase’s Mr. Steiger, meanwhile, listed the positive aspects of BNPLs, and why consumers would opt to use it, namely: accessibility, flexibility, and credit building.

The downsides of it, though, include impulse buying, and failure to meet payment deadlines which would result in penalties.

“Consumers may be more prone to overspending due to the perception of deferred payments, which can lead to financial difficulties if no t managed properly.”

Furthermore, he said that when applying for these services, one should consider its financial capability.

Customers should carefully assess their financial situation to ensure they can meet BNPL repayment terms without straining their overall budget.

Choosing the right BNPL provider is also crucial when one is mindful of its interest and fees to prioritize options that offer the most cost-effective solutions.

Consumers should verify the credibility of BNPL providers and ensure they are duly registered under legitimate financial institutions and licensed under government regulatory agencies.

A list (https://tinyurl.com/298jrxdc), provided by the Securities and Exchange Commission (SEC), the regulatory agency supervising the corporate sector, can help consumers choose authorized BNPL services on online lending platforms.

“When considering BNPL, it is essential to prioritize financial responsibility. Consumers must carefully evaluate their budget and spending habits to ensure that they can effectively manage installment payments,” Mr. Ocampo from UnaCash said.

ESTABLISHING BNPL FINANCIAL ECOSYSTEM
“BNPL is playing a key role in expanding financial inclusion in the Philippines, especially for those who are unbanked and underbanked. It can help improve credit building, boost economic activity, and drive competition — resulting in an overall healthy financial ecosystem,” Mr. Ocampo said.

To put it simply, BNPL offers a way to access credit and fully participate in the economy, similar to opening a door to financial opportunities that were previously out of reach.

And a good thing about it, is that it can contribute to building credit histories and by making timely payments, users can improve their credit scores over time.

“This can be a steppingstone to accessing more traditional financial products in the future, such as larger forms of loans or credit cards. It’s a way for individuals to enhance their financial standing and eventually tap into a broader range of banking services,” Mr. Ocampo said.

For Mr. Steiger, BNPL services help promote financial inclusion by providing an entry point to credit for those who may still need to qualify for traditional financial products.

“These services are often integrated with digital platforms, making them easily accessible to those who may not have access to traditional banking services.”

The bottom line, BNPL providers indeed appear to be an option to fill in the gap for addressing the needs of unbanked and underserved consumers.

For Atome, BNPLs, microlending, and insurance are expected to expand.

Additionally, they expect strategic partnerships and collaborations with traditional financial institutions and platforms to provide funding and financing, especially for user segments that are challenging to assess through traditional banking Know Your Customer processes.

Meanwhile, potential developments could include the expansion of BNPL services into new sectors such as healthcare and solar rooftop financing, Mr. Steiger said.

As BNPL continues to grow in popularity, partnerships between BNPL providers and traditional financial institutions, offering consumers a wider range of options and potentially more competitive terms may be anticipated.

“BNPL providers such as ourselves are more likely to forge strategic partnerships with retailers, banks, and other broader financial institutions to maximize our financial solutions,” Mr. Ocampo said.

He added that with significant developments underway for BNPLs, competition among these providers is expected to intensify, leading to lower fees and better terms for consumers.

But in turn, this may be beneficial as it aims for technological advancements that will bring innovations and personalized offerings based on the needs of the consumers.

GEOPOLITICAL TENSIONS, climate transition, inflation and various economic developments have led to volatility of the country’s financial market performance in the second quarter.

The barometer Philippine Stock Exchange index (PSEi) closed the second quarter at 6,411.91, down 7.1% quarter on quarter. Likewise, the index declined by 1% year on year from the 6,468.07 finish in the second quarter of 2023.

Data from Bankers Association of the Philippines showed that the peso closed at P58.61 against the dollar in the second quarter, depreciating by 4.2% from the previous quarter’s end of P56.24 to a dollar. On an annual basis, the local unit also retreated by 6.2% from P55.20 finish in the second quarter last year.

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Demand for Treasury bills auctions saw a total subscription amounting to P600.43 billion with P199 billion total offered amount in the second quarter.

The oversubscription amount of P401.43 billion was higher than the P349.19 billion in the first quarter.

Meanwhile, demand for Treasury bonds reached P611.84 billion, lower than the P1.07 trillion in the first quarter. However, this demand was higher than the aggregate offered amount of P299.21 billion in the second quarter.

At the secondary bond market, domestic yields rose by 25.97 basis points (bps) on a quarter-on-quarter average, based on the PHP Bloomberg Valuation (BVAL) Service Reference Rates published on the Philippine Dealing System’s website.

On a year-on-year basis, yields also grew by 15.18 bps.

“Globally, elevated oil and energy prices in the second quarter from output cuts in the Organization of the Petroleum Exporting Countries (OPEC)+ countries and ongoing conflicts in the Middle East region as well as the reduced, but noticeable pressures from the Russia-Ukraine conflict have led to volatility in global markets,” Union Bank of the Philippines Chief Economist Ruben Carlo O. Asuncion said in an e-mail.

Mr. Asuncion added that at the local scenery, markets were affected by the continuing effects of El Niño that persisted until late May which was followed by climate transitioning to the early onset of La Niña.

“With disrupted rainfalls and fluctuating climate conditions, pressures on agriculture prices became the leading contributors to inflation in the second quarter with food prices rising at an average 6.3% year on year. Higher inflation led to Bangko Sentral ng Pilipinas (BSP) maintaining rates at 6.5% throughout the quarter leading to lower bond prices and higher yields,” added Mr. Asuncion.

“The ongoing geopolitical tensions and the United States Federal Reserve’s monetary policy decisions have created a volatile environment for global markets, including the Philippines. The fluctuations in commodity prices have also impacted inflation rates and investor sentiment,” Security Bank Corp. Chief Economist Robert Dan J. Roces said in an e-mail.

Mr. Roces added that domestic economic conditions, particularly inflation and gross domestic product (GDP) growth, have been key drivers of market sentiment. The BSP’s monetary policy decisions, aimed at balancing economic growth and price stability, have also influenced interest rates and the peso’s value.

Preliminary data from by the Philippine Statistics Authority (PSA) showed GDP expanded by an annual 6.3% in the April-to-June period. The second-quarter print was stronger than the revised 5.8% growth in the first quarter and 4.3% in the second quarter of 2023.

For the first half, the Philippine economy growth averaged 6%, meeting the low end of the government’s target of 6-7% this year.

In the seven months to July, inflation averaged 3.7%, still within the 2-4% central bank target.

WHAT INDICATORS TO WATCH OUT FOR
Economists noted that the same indicators will continue to persist and will affect the financial market performance in the next quarter.

Mr. Asuncion said that climate conditions in the Philippines is a key development to watch for, which is expected to impact agricultural production due to increased flooding, damaged crops leading to low crop output and higher prices of agricultural produce.

“Rainy season will also impact other sectors such as tourism and potentially increase government spending in construction of public infrastructure and works,” Mr. Asuncion said.

Mr. Asuncion also added that geopolitical conflicts in the Middle East combined with OPEC+ members cutting oil production will continue to pressure oil and energy prices upward.

Maybank Investment Banking Group senior economist, Zamros Bin Dzulkafli, said that, on the foreign exchange front, focus would continue to be on pace of the US Fed easing and the US election uncertainty.

“Our base case scenario remains for a US soft landing and so we expect the US Fed to ease rates gradually with 50 bps of cuts this year. This in turn should continue to support a downward trend for dollar/peso. However, we note that there could be bumps along the way as US data may not necessarily decline in a straight line,” said Mr. Dzulkafli said in an e-mail.

“Remittances are likely also to be higher in the final quarter of this year due to the festive season and that should give some support to the peso. The trade balance would likely remain in deficit amid the country’s weaker export base and import dependency and therefore, the external position should stay as a negative factor for the currency. Our year end forecast for dollar/peso stands at P56.00,” added Mr. Dzulkafli.

Cash remittances in the first semester period jumped by 2.9% year on year to $16.25 billion from $15.8 billion. The BSP expects cash remittances to grow by 3% this year.

In June, the value of exports slumped by 17.3% to $5.57 billion from $6.73 billion a year ago, the first double-digit decline since November 2023. Year to date, exports rose by 3% to $36.41 billion.

On the other hand, the value of imports declined by 7.5% year on year to $9.87 billion in June from $10.67 billion in the same month a year ago. For the first six months, imports slipped by 2.5% to $61.41 billion.

For the first six months of the year, the trade deficit narrowed by 9.5% to $25 billion.

INTEREST RATE CUT
For the first time in almost four years, the Monetary Board last August reduced the target reverse repurchase (RRP) rate by 25 bps to 6.25% from the over 17-year high of 6.5%. Rates on the overnight deposit and lending facilities were also lowered to 5.75% and 6.75%, respectively.

“We forecast that the BSP will continue to cut rates to a cumulative 50 bps to end at a 6% overnight RRP by yearend, and a potential additional 25 bps (total of 75 bps for 2024) is something we think the BSP would definitely consider. Nonetheless, a further 100 bps in 2025 to 5% is what we are also expecting,” Mr. Asuncion said.

Philippine National Bank economist Alvin Joseph A. Arogo said that if headline inflation returns to the target range starting August and the US Fed starts its own easing cycle in September, he anticipated that the BSP’s next move will be another 25 bps cut on Oct. 17.

“As a baseline view, we also believe that the monetary authorities will pause in December to allow the initial rate reductions to work their way through the economy and avoid spiking up inflation pressures. However, another 25 bps of easing is possible if inflation undershoots expectations, the peso strengthens further, and/or the third quarter GDP shows continued weakness in components not linked to government spending,” Mr. Arogo said in an e-mail.

Mr. Arogo forecasts end-of-year RRP rate remain at 6% for 2024 and 5% for 2025.

Mr. Roces said that a rate cut by the US Fed could lead to a weaker US dollar, which would generally benefit the Philippine peso and trade.

“However, it could also increase inflationary pressures if imported goods become more expensive. The BSP will want to carefully assess the potential impact of a weaker dollar on domestic inflation and the economy before making any adjustments to its monetary policy.

In a recent annual economic conference speech, US Fed Chair Jerome H. Powell signaled a start to interest rate cuts, saying further cooling in the job market would be unwelcome and expressing confidence that inflation is within reach of the US central bank’s 2% target.

After more than a year of holding interest rates at 5.25%, the highest level in more than two decades, officials finally have enough confidence to change their stance by cutting rates at their Sept. 17-18 meeting.

“US Fed and local policy rate cuts from 2024-2026 (by a total of about -2.25) would further spur greater business and overall economic activities, faster GDP growth and development in terms of further reduction in borrowing costs and further increase in the demand for loans for consumers, businesses, governments, and other institutions,” Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort, said in an e-mail.

FIXED-INCOME MARKET
Mr. Asuncion: Based on historical data and Autoregressive Integrated Moving Average (ARIMA) models, we have projected that August’s headline inflation will fall above 4% year on year with September slowing to 3.8% year on year. We forecast that 2024’s year-end inflation will be 3.7%. With inflation expected to slow in the coming months and BSP cutting rates, there will be a decrease in the yield on fixed-income securities.

Mr. Ricafort: For the coming months, barring external risk factors, local inflation could stabilize at 3%-3.5% levels, local policy rates could go down to 4%-5% levels from 2025-2026, local interest rate benchmarks would go down further by another 0.50-1.00 or even more from current levels from 2025-2026, as the US Fed would cut rates by a total of about -2.25 from 2024-2026 (that could matched locally by the BSP).

Mr. Dzulkafli: Expectations of US Fed easing but no major downturn are conducive to higher yielders including the Philippines government bonds. The 10-year RPGB yields may consolidate after a strong rally, then trade on high beta vs the US Treasury.

EQUITIES MARKET
Mr. Asuncion: During second quarter, PSEi index closed at 6,700.49, 6,433.10, and 6,411.91, with July closing at 6,619.09. The PSEi have been upward trending since August, with this week opening at 6,889.87 reflecting the market’s expectations for further rate cuts. Based on historical prices and expectations for a cumulative 50-bp cut this year, the PSEi would increase to close at yearend of 7,200-7,400.

Mr. Ricafort: The local stock market posted huge gains recently after the peso exchange rate remained among the strongest versus the US dollar in more than 4.5 months or since April 2024; also after mostly stronger local GDP, employment, bank loans, and other economic data recently, as well as mostly better corporate sales and earnings reports by some listed companies/conglomerates that fundamentally support higher valuations; after local monetary officials still reiterated possible -0.50 local policy rate cut for the rest of 2024.

Mr. Dzulkafli: We expect that equities market would rally in light of rate cuts that could support economic growth. Lower lending cost could boost both corporate expansion and consumer spending.

FOREIGN EXCHANGE MARKET
Mr. Asuncion: For the remainder of the third quarter, we expect exchange rates to favor the peso owing to increased expectations of a more aggressive US Fed rate cut of 75-100 bps compared to BSP’s rate cut of 25 bps recently. Based on historical prices and ARIMA models, we forecast dollar/peso to close at P56.63 by yearend 2024. The strength of the peso will persist. However, import season (usually strong in 2H historically) may counter this strength.

Mr. Ricafort: Going forward, the performance of the US dollar/peso exchange rate would be partly a function of intervention as consistently seen over the past two years; amid the need to better manage inflation and inflation expectations to fulfill the price stability mandate that would also require stability in the peso exchange rate, which affects import prices and overall inflation.

Mr. Dzulkafli: USDPHP may rebound from current levels as markets expectation of 100 bps of Fed cuts are pared back. The Fed is likely to only gradually ease amid a US soft landing. More concerns about US election uncertainties also look to possibly weigh in, too.

LISTED BANKS grew in the second quarter as bank lending continued to grow despite high interest rates.

Loans might even grow more thanks to lower borrowing costs, but banks’ net interest margins could potentially take a hit in the medium term, analysts said.

The Philippine Stock Exchange index (PSEi) dropped by 7.1% quarter-on-quarter basis at the end of the second quarter of 2024, a turnaround from the 7% growth in the first quarter. Year on year, PSEi slipped by 0.9%. 

This was reflected by the financials subindex, which included the banks, as it inched down by 5.4% last April-to-June period. This was a reversal from the 17% growth in the previous quarter.

Year on year, the subindex increased by 4.2%.

Despite this, the second quarter saw nine out of 15 listed banks’ stock prices grow on a quarter-on-quarter basis. The Philippine Trust Co. led with a 39.8% increase in its share price from P85.00 in the first quarter, followed by Philippine National Bank (PNB, 11.4%), Asia United Bank (10.2%), and China Banking Corp. (9.6%)

On the other hand, five listed banks saw their share prices decrease in the second quarter.

Union Bank of the Philippines led the losers with a 23.7% decline in its share price quarter on quarter, followed by BDO Unibank, Inc. (-17%), Philippine Bank of Communication (-16.8%), Security Bank Corp. (SECB, -8.3%), and Rizal Commercial Banking Corp. (-1.1%).

Moreover, the share price of the Philippine Business Bank steadied at P8.90 apiece in the second quarter.

“The performance of listed banks in second quarter was shaped by a high-interest rate environment that supported net interest margins (NIMs), modest loan growth, stable asset quality, ongoing digital transformation efforts, and external factors like currency fluctuations,” Luis A. Limlingan, head of sales at Regina Capital Development Corp., said in an e-mail.

Last August, the Bangko Sentral ng Pilipinas (BSP) cut the interest rates by 25 basis point (bps) to 6.25% for the first time in nearly four years, marking the start of what BSP Governor Eli M. Remolona, Jr. referred to as “calibrated” easing cycle amid an improving inflation and economic outlook.

Prior to the cut, the central bank kept its policy rate at an over 17-year high of 6.5% for six straight meetings following cumulative hikes worth 450 bps between May 2022 and October 2023 to combat inflation.

PNB Research traced the listed bank’s performance during the second quarter to loan growth.

“Compared to the single-digit expansion that they saw last year, the big 3 banks all posted loan growth in the low to mid-teens. This allowed them to keep net interest income growth at double digits despite stable NIM,” PNB said in an e-mail.

Outstanding loans by universal and commercial banks, net of reverse repurchase (RRP) placement with the central bank, climbed by 10.1% year on year to P12.09 trillion in June, latest data from the BSP showed.

This was the fastest loan growth expansion since the 10.2% growth in March 2023.

Likewise, the gross total loan portfolio of these big lenders increased by 11.9% to P13.25 trillion as of end-June from P11.84 trillion a year ago.

As of end-June, interest income of the big banks grew by a fifth to P645.47 billion from P538.34 billion last year.

The aggregate net income of universal and commercial banks, meanwhile, increased by 5.3% to P178.91 billion as of end-June from P169.92 billion last year.

Provision for credit losses by these big banks reached P42.84 billion in the first half, up by 26.7% from P33.81 billion a year ago.

The big banks’ NIM — a ratio that measure banks’ efficiency in investing their fund by dividing annualized net interest income to average earning asset — increased to 4.04% in the second quarter from 3.74% recorded in the same period a year ago.

BANK STOCK PICKS
Analysts said that market players should track the developments in banks loans’ growth of the listed banks in the near term amid the policy rate cut of the BSP.

“Investors should continue to monitor banks’ loan growth amid the policy rate decisions of the BSP. Although the central bank recently cut the RRP (reverse repurchase) rate by 25 bps, the banks are confident that they can maintain stable NIM. Moreover, the relative lower cost of borrowing can spur additional loan growth,” PNB Research said.

Meanwhile, Japhet Louis O. Tantiangco, research manager at Philstocks Financial, Inc., said that market players should look into how the banks would capitalize on the lowered borrowing cost.

“While the policy easing will bring interest rates down, it would also make borrowing more enticing which would mean more transaction volumes for the banks, all other things being equal. The lower interest rates will also mean easier debt servicing which in turn could lower our banks’ nonperforming loans,” Mr. Tantiangco said in an e-mail.

“BPI and SECB stood out amongst other banks after reporting very high loans growth of 18-19% which is faster than industry loan growth and their peers,” Kervin Laurence Sisayan, head of research at Maybank Securities Research-Philippines, said in an e-mail.

For Mr. Limlingan, BDO excelled with robust growth in interest and non-interest income, which is supported by its broad branch network and digital strengths, while BPI benefited from small medium enterprises loans and strong corporate banking.

RATE CUT
With the recent reduction of the interest rate, analysts said it may lower the lending margins and interest income.

Mr. Remolona already signaled that they could cut the policy rates by 25 bps again within the year. The Monetary Board’s remaining policy-setting meetings this year are scheduled on Oct. 17 and Dec. 19.

BDO Securities Corp. First Vice-President and Head of Research Abigail Kathryn L. Chiw said that rate cuts are seen to potentially limit net interest income growth and trim lending margins, which may incite some profit taking in banking stocks.

“The impact of rate cuts to margins may also be compensated for by stronger loan growth and lower provisioning costs, as borrowing costs and nonperforming loans risks go down,” she said in an e-mail.

On the other hand, Mr. Limlingan said that while lower rates might reduce interest income, banks diversified revenue, solid digital platforms, and strong retail focus could mitigate its impact.

“Expected BSP rate cuts could compress NIMs but may boost loan demand, particularly in interest-sensitive sectors,” he said.

On the other hand, PNB Research said that if the central bank decides to implement further rate cuts in the future, it may start affecting the banks’ NIMs.

“For the rest of the year, we expect that those banks that are able to continually grow their business while controlling expenses would be the ones more favored by investors,” PNB Research said.

NOT ALL are qualified for bank loans.

But the need for financial assistance is ever present for some people. And to address these financial needs, some individuals prefer to use lending apps.

Frankie Garcia, 52, a manager at an information technology company, and Ruby, 23, a working student, are among those who turn to loan apps when they need money.

Mr. Garcia said that people borrow money due to urgent needs, limited budgets, and sometimes delayed salaries or incentives.

In his case, he applied for loans in multiple lending apps, but these apps charge much higher interest rates than banks.

Despite this, he opted to use these platforms due to their minimal requirements, easy access, and fast approval and disbursement of loan amounts.

The same goes for Ruby, who finds instant loans from lending apps less time-consuming compared with bank loans or traditional lending.

She also appreciates its minimal requirements and convenience.

However, sometimes this proves otherwise.

Robert Dan J. Roces, chief economist at Security Bank Corp., said that online lending platforms in the country have been growing alongside the increasing popularity of online commerce.

“However, while they offer quick and convenient credit, the higher interest rates, attributable to the ease of accessibility, can lead borrowers into debt traps,” he said.

He suggested that it is important for regulators to find a balance that promotes innovation through measures like interest rate caps and transparent disclosures, while also safeguarding consumers through financial literacy campaigns.

REGULATORY COMPLIANCE
According to the Securities and Exchange Commission (SEC), the regulatory agency supervising the corporate sector, there are 140 recorded online lending platforms (OLPs) in the country which are allowed to operate and be used for online lending.

The list (https://tinyurl.com/298jrxdc) helps borrowers in making informed decisions by ensuring that they choose authorized OLPs.

These platforms are required to comply with its Memorandum Circular (MC) No. 19 series of 2019, mandating the (1) disclosure of necessary information in their advertisements and OLPs; (2) registration of all their OLPs as business names; and (3) reporting to the SEC of all their existing and/or prospective OLPs within the prescribed period.

Noncompliance or submission of false or fraudulent information may result in fines, suspension of lending activities, or revocation of the certificate of authority to operate as a financing or lending company.

“The continuous rise or operation of unregistered OLPs can largely be attributed to the lack of consumer understanding regarding the significance of borrowing from platforms that are registered and licensed and the need to cater to their financial needs,” SEC said in a Viber message.

Given this, the SEC actively monitors the lending companies, encouraging responsible lending practices and fair competition among platforms through clear guidelines and oversight to ensure consumer safety and transparency.

It prioritizes consumer education programs to enhance borrowers’ financial literacy and decision-making abilities.

The SEC explained that compared with conventional lending, digital lending platforms — or OLPs — cater to a wider range of borrowers by providing quicker and easier access to loan applications.

“Although both digital and traditional lenders are subject to regulatory scrutiny, the laws governing online lending are continually changing,” the SEC said.

According to the regulator, there are various reasons why people would opt to use lending apps even if some platforms charge exorbitant interest rates.

These digital lending companies offer quick approval and fund disbursement, which is crucial for addressing emergency financial needs.

Also, these lending apps have less stringent standards which allows them to serve borrowers with limited credit history who are not qualified for regular bank loans.

“As its core, digital lending platforms differentiate themselves by leveraging automation and proprietary algorithms to streamline the decision-making process,” Ryan Carlos T. Pahignalo, data protection officer at Digido Finance Corp., said.

Digido is part of the Singapore-headquartered UnaFinancial Group (formerly Robocash Group).

Compared with traditional lending in which process executions take longer, interaction between the lender and borrower is significantly cut when it comes to digital lending.

Mr. Pahignalo mentioned that lenders offering credit options, such as digital lending apps, cooperatives, and banks, use different scoring and risk models.

As a result, they vary in terms of interest rates, amount of credit provided, and methods of disbursement.

UPSIDES AND DOWNSIDES
Borrowers apply for loans at conventional lending institutions and encounter lengthy processes and waiting times, uncertainty, personal inquiries, credit checks, and extensive documentation requirements. What is supposed to be a quick transaction may turn out to be a challenging process for borrowers.

“Employing the point of view of borrowers, services of digital lending platforms are advantageous to them because human interaction is reduced to bare minimum,” Mr. Pahignalo said.

In digital lending apps, procedures are already digitally streamlined to make it seamless for the borrower. And borrowers feel they are in control and dignified knowing they can access credit even with limited documentation available.

Digital platforms provide quick processing timeframes, allowing borrowers to apply for loans online anytime and from any location. However, without appropriate security measures, borrowers using online platforms risk identity theft and data breaches, SEC said.

Regulatory uncertainty raises concerns about consumer protection and compliance.

For Digido’s Mr. Pahignalo, borrowers may perceive digital lending as impersonal, significantly reducing human interaction.

“Platforms may make errors in processing loan applications due to some inherent technical limitations, especially when data submitted is inaccurate, of poor quality, or cannot be verified with available technical resources and tools,” he said.

HIGH INTEREST RATES
For working student Ruby, she avoids lending apps that charges with high interest rates for it is costly.

This was also the case for Mr. Garcia who said that at first, some lending apps’ advertisements were misleading and interest rates were high.

He advised that when choosing a lending platform, one should consider factors such as low interest rates, long repayment terms, and high loanable amount, as well as its minimal requirements and fast approval.

For various reasons, people often opt to use lending apps instead of traditional bank loans, even if some platforms charge higher interest rates, the SEC said.

The regulator highlighted that it is important for borrowers to be aware of the risks associated with different lending arrangements and that regulatory oversight is crucial in addressing these concerns and ensuring consumer protection.

SEC also said that it seeks to enable borrowers to make informed financial decisions and protect themselves from potential risks associated with varying interest rates by promoting consumer education and awareness.

“When choosing a preferred lender, we advise borrowers to carefully consider all available options and ensure they understand all costs associated with a loan,” Mr. Pahignalo said.

He also added that interest rates are just among many factors to consider but it is not the ultimate measure.

“Interest rates are always risk-based and can be a good indicator of risks, financial position of the borrower as viewed by the creditors, and/or liquidity of the debt,” Mr. Pahignalo said.

REGULATORY MEASURES
But not all lending platforms provide “comfort” and have a good corporate reputation. In some cases, borrowers appear to fall trapped by illegal and predatory lending apps.

The SEC uses several strategies to stop predatory lending activities and safeguard borrowers in the lending sector.

Among these regulatory measures are the implementation of Financial Products and Services Consumer Protection Act (RA 11765) and its rules and regulations, the licensing and monitoring institutions to ensure transparency of their loan products and overseeing their compliance with laws and regulations.

“Institutions that violate the law may face fines, penalties, or license suspension or revocation as enforcement measures,” the regulator said.

For Digido’s Mr. Pahignalo, he said that regulators have been active in cracking down unauthorized and abusive online lending activities.

“The [central bank] has implemented measures to protect borrowers against predatory lending practices while encouraging a vibrant and dynamic credit market,” Mr. Pahignalo said.

The SEC said that giving regulatory advice is one way to assist lending platforms in adhering to compliance standards and conducting business openly and legally.

“By fostering competition and innovation in the lending sector and providing capacity-building initiatives to improve platform operators’ competencies, the SEC fosters market development,” SEC added.

The regulator also works with consumer advocacy organizations, business associations, and governmental organizations to address issues and gather input as stakeholders is crucial in these efforts.

CREDIT BEHAVIOR
“Consumers’ attitudes toward credit applications are influenced by things including need, ability to pay back debt, and knowledge of alternative options,” SEC said.

To understand the borrowing habits of Filipinos, one should consider the socioeconomic factors and personal preferences that influence their credit decisions.

For Mr. Pahignalo, as inflation surges and stagnating salaries continually affect ordinary Filipinos, especially low-income earners, it is reasonable to expect that demand for formal credit will continue to rise across all socioeconomic segments.

Based on Digido’s data, borrowers apply for loans primarily as supplementary capital for small to medium business, assistive funding for bills, education, medical expenses, and tech upgrades.

“The period of online loans being primarily used for emergencies is over,” Mr. Pahignalo said. “Regardless of the underlying reasons of the borrower, we always espouse to them our belief in responsible borrowing.”

In a survey by consumer finance firm Digido, it showed that formal credit options have been more accessible for Filipino consumers in 2023.

By type of formal credit, personal loans were the highest formal credit choice, followed by BNPL (Buy Now, Pay Later), credit cards and then business loans.

The report also showed other data like the application process of credits and the behavior of borrowing from both formal and informal sources, among others.

“Aside from high perception of access, data from our commissioned survey is indicative of customers’ sustained trust of formal credit options — personal loan services in particular — for various use cases,” Mr. Pahignalo said.

He also added that borrowers who turn to informal sources may face higher interest rates from unregulated entities and be vulnerable to predatory lending and abusive collection practices.

“This signals to us that the consumer lending industry needs to continue efforts to mainstream the availability and viability of accessible formal credit options such as duly registered digital lending platforms,” he said.

For the Bangko Sentral ng Pilipinas (BSP), the formal credit market in the Philippines remains dynamic and multifaceted with banks, nonbank financial institutions and government lenders providing credit-related services to the diverse financial needs of Filipinos.

The BSP added that most Filipinos obtain loans from banks, which are the main credit providers in the domestic economy.

Banks offer a wide range of loan products through traditional and digital platforms, with flexible payment terms and market-driven interest rates for individual borrowers.

The central bank also added that other retail credit providers include nonbank financial institutions such as lending corporations, microfinance institutions, credit cooperatives, and government lenders.

“The latest results of various BSP surveys also point to increasing consumer loan demand driven by income and employment,” the central bank said.

There is an extensive list and wide range of credit providers in the country; one must pick or apply for a loan that aligns with their interest and needs and with the ability to repay on time.

AMIDST the rise in online financial crimes, the Bangko Sentral ng Pilipinas (BSP) taps into heightened consumer protection through a draft framework that mitigates risks posed by BSP-supervised entities (BSI).

Based on the latest data from the Philippine National Police Anti-Cybercrime Group, it logged 6,408 cybercrime events from Jan. 1 to May 15, down by nearly a third from 9,361 events in the same period last year.

Swindling or online scams topped the list with 2,797 incidents, followed by 1,278 illegal access cases, and 527 counts of computer-related identity theft.

Given the rise of financial cybercrimes, the BSP had made it its goal to improve user safety through a draft circular of a new consumer protection framework.

The Financial Consumer Protection and Market Conduct (FCPMC) supervision framework of the BSP intends to uphold the provisions of the Republic Act No. 11765, or the Financial Products and Services Consumer Protection Act (FCPA).

These provisions are the consumer protection standards of conduct, namely disclosure and transparency, protection of client information and assets, fair treatment, effective recourse mechanism, and financial education and awareness.

The FCPA also allows the BSP to conduct assessments of BSI’s financial consumer protection compliance separately from prudential regulations compliance.  The FCPMC is thereby responsible for putting actionable steps to the approach outlined in FCPA.

By implementing the framework, BSP-supervised Financial Institutions (BSFIs) will be evaluated on their adherence to the standards of conduct, their management of services and products, and their relationship with the users.

“It will specifically look at aspects of a BSI’s business operations that could potentially result in financial loss or other harm to financial consumers,” the BSP said in an e-mail.

THE FRAMEWORK
The process of the FCPMC supervision framework takes a three-step approach: impact assessment, risk assessment, and supervision.

The framework starts with gauging the market conduct of the BSFIs. Covering all financial institutions under the supervision of the BSP, the framework aims to target institutions that have a higher impact on its consumers.

A BSI’s market conduct is graded as low, moderate, above average, or high based on parameters including the size of retail operations and complexity of financial products offered, dependency on third parties or agents, number and profile of retail client base, and volume and types of consumer complaints.

An institution with a higher impact grade merits higher supervision intensity.

However, the central bank said that since the FCPMC Impact Grade of a BSI will form part of the BSP’s examination process and supervisory outputs, it will be covered by Section 27 of the New Central Bank Act (RA No. 7653, as amended by RA No. 11211).

This provision would protect the BSIs as it prohibits the BSP from revealing information relating to the condition or business of any institution.

The risk assessment step looks at how harmful an institution can be (known as the FCPMC Risk Profile) based on its impact and whether the BSI has mitigated these risks.

This step requires institutions to build a Consumer Protection Risk Management System (CPRMS) that should identify, measure, and address the risks of the institution to the consumers.

The institutions’ CPRMS are then regulated by the BSP via quality assessment that gauges their adherence to the standards of conduct outlined by the BSP Circular No. 11765.

This risk-based supervisory intensity approach expands the general consumer protection standards outlined by Circular No. 1048 or the BSP Regulations on Financial Consumer Protection.

Circular No. 1048 was the founding mandate on which the FCPMC framework was built.

The act was the first to require BSIs to have a CPRMS in place, but it did not have system monitoring from the BSP.

Hence, the risk-based supervision of the FCPMC was a leap from the broad focus of the Circular No. 1048 regarding consumer protection principles and compliance as it would require institutional adherence to specific metrics.

Both impact and risk assessment are periodically updated, and the risk-based supervisory intensity, as defined by the activities that the BSP would follow in monitoring the BSI, may change accordingly to the assessments.

Supervisory activity can be any of the following as the BSP sees fit: FCPMC-focused market surveillance and monitoring, FCPMC-focused onsite examination of individual BSI, FCPMC-focused offsite supervision of individual BSI, and FCPMC-focused thematic risk assessment of a group of BSIs.

ADVANTAGES AND LIMITATIONS
With these planned changes, Security Bank Corp. Chief Economist Robert Dan J. Roces expects that the introduction of the FCPMC framework is a crucial step towards creating a more transparent and consumer-centric financial landscape.

“The framework will address the inherent complexities and information asymmetries that often lead to consumer exploitation and erode trust in the financial system,” Mr. Roces said in a Viber message.

Since the BSP intends to establish market conduct supervision as separate from prudential supervision, it also creates a comprehensive risk-based monitoring system for both systemic risks and consumer protection.

Despite this, the central bank foresees that “at the onset of the framework’s implementation, [there would be a] lack of granular, transactional, and consumer-focused data and information may limit in-depth, evidence-based assessment of consumer protection-related risks.”

Moreover, although constant monitoring would ensure that banks and institutions incorporate these risk protection systems as part of their organizational practices in the long run, it also creates a greater burden on BSIs to meet higher security and safety requirements in the short run.

Due to the monitoring system, there is also a risk of excessive oversight that might stifle the banks’ innovation.

Implementing CPRMS would also require significant resources that would strain both BSP’s and BSI’s resources.

Increased regulatory compliance burden, training costs, and the need for better technological infrastructure are only some of the expected challenges during the transition period.

These limitations are among the normal “birth pains” that are expected when enforcing a milestone law such as the FCPA, the BSP said.

However, by meeting the standards of the new framework, institutions can create a trustworthy profile that protects users from the impacts of their processes.

This creates a bridge that BSIs can utilize to build stronger client relationships.

For the BSP, the framework will not alter the current supervisory approaches but builds upon them by “[providing] a methodology through which consumer protection issues are surfaced and given equal importance [as that of] prudential risks.”

FINANCIAL SAFETY
“Swindling and financial crimes are on the rise because of how easy it is for the wrong people to get a hold of user information,” Daniel B. Benito, a manager at a business process outsourcing (BPO) company, said.

Mr. Benito was one of the 4,000 cases of illegal access cases in the country.

“It came as a complete shock since that money was allotted for my bills and savings, having it gone left damage to my mental stability that time,” Mr. Benito, said reminiscing the events that happened a year ago.

He added that it began when someone who claimed to be from the bank called and said that his card was up for renewal.

The person knew the details of his account and only needed his confirmation and an OTP. Given the number of things he was juggling at that moment, the possibility of it being a scam did not occur to him.

A few days later, while withdrawing from his account, he noticed that his balance was lower than it should be and learned that his savings money was taken out of his bank.

After a series of customer service processes, in the end, he was unable to retrieve his money as the banks said that it was due to his own “negligence.”

For Mr. Benito, decreasing the risks of fraud starts by informing the users of the products and the current dangers that arise.

“I charged what happened to me as a learning experience but if I had been advised earlier that there are scam calls such as that, I would have been able to avoid it,” he said.

With the aid of the FCPMC framework, this can be attained as it mitigates “finance-related crimes and fosters collaboration between regulators and financial service providers,” Security Bank’s Mr. Roces said.

The BSP, on the other hand, said that while the framework does not focus on specific cybercrimes, it is designed to determine risks that are most detrimental to consumer welfare and ensure that BSIs are well-equipped with systems and controls to mitigate such risks.

“Protection of consumer assets against fraud and misuse is among the standards of conduct that the framework assesses,” the BSP said.

In this standard of conduct, BSIs are expected to implement fraud risk management mechanisms, enable multi-factor authentication, and provide timely transaction notifications, among others.

“These are considered essential in detecting and curtailing fraudulent or unauthorized transactions,” BSP added.

Despite the role of the framework, Mr. Roces emphasized that the success of the framework relies on consumers taking an active role in safeguarding their interests and staying informed and assertive in exercising their rights.

Similarly, the central bank said that a big role remains on the users since they are “the first level of defense against threats to the safety and integrity of financial accounts and personal information.”

BEYOND FRAMEWORK
With the FCPMC in place, this ensures that the banks and institutions’ role in consumer safety is met.

However, it does not eliminate the risks of financial crimes especially when the fault lies with the users.

As Mr. Roces said, “Taken together, regulators, financial institutions, and consumers can create a more robust and equitable financial ecosystem that will support economic growth.”

It is only through the successful collaboration of these three that the framework will thrive. The role of users in the framework lies in their use of resources that FCPMC would offer.

“While the myriad of BSP rules and regulations already require BSIs to protect our deposits and investments, [users] must also exercise our responsibilities as protectors of our accounts and finances,” the BSP said.

Bank lending, for example, entails a risk that must be managed by both users and institutions.

Credit risk management, one of the many roles a CPRMS would undertake, handles lending risks.

Credit risk management ensures that appropriate policies, risk strategies, and processes are informed to the lender prior to the credit granting.

Despite the presence of a credit risk management system and the availability of lending services in banks, there remains a rise in lending apps as of late which may lead to greater risks for users.

“It is just easier and more convenient to loan in apps and personally I find it less risky than bank credits which I am not familiar with,” Unice C. Alimurung, a secondary school practicing teacher, said in an e-mail.

When asked about the risks she perceives in banks, she nodded at interest rates.

“I tried to take a loan in [my] bank once and the interest rate was confusing to me. The yearly repricing on a home loan I was looking at also made me scared at the surprises I might have by next year as rates go higher,” she said.

She pointed out that it is also harder to bounce back from credit ratings than to just loan from a new app hence making her shy away from bank lending.

Once FCPMC is enacted, banks will be under higher supervision with their informative campaigns regarding services such as lending. However, even with this in place, users will not be able to know the information available without their initiative.

“The [FCPMC] framework would help of course in ensuring that we are protected but I think it still comes down to how much [users] know and are willing to know,” Ms. Alimurung said.

Hence, for Mr. Roces, the framework’s enactment may empower consumers to make informed decisions by ensuring access to accurate information.

“As more digital financial services continue to evolve, the FCPMC framework will be important in protecting consumers and promoting financial inclusion,” he said.

“In the long run, the ultimate intent of the framework is a system where all BSIs practice ‘doing good’ to consumers because it is already ingrained in their DNA,” the BSP said.

The central bank said that as of end-May 2024, the draft framework is under revision, considering meritorious comments received from internal and external stakeholders, consistent with the BSP’s policy making process.

UNION BANK of the Philippines (UnionBank) was the first listed bank in the country which secured a digital banking license for its unit, UnionDigital Bank, two years ago.

UnionBank, the banking arm of the Aboitiz Group, believes that setting up another digital bank unit is the more strategic plan, making the bank to “pause and re-create the ideal digital bank that will run differently having a different set of engines.”

The digital bank turned out to be the second engine growth for UnionBank.

With a mission to drive financial inclusion, the bank is dedicated to extend financial services to underserved communities by capitalizing on technology and decades of alternative data from the UnionBank ecosystem.

Since UnionDigital Bank’s launch in 2022, the bank has been focusing on serving the needs of the underserved communities by offering digital deposit and lending products and continue supporting the needs of these customers with additional products over time.

To know more about UnionDigital, BusinessWorld reached out to further explore what the digital bank can offer in the market, and other ventures they plan to have in the Philippines.

What follows contain excerpts of that interview.

As one of the six digital banks in the Philippines and the first and only digital bank backed by a universal bank, what advantages does UnionDigital have against other digital banks in the country?

As a subsidiary of UnionBank, we leverage on our parent’s legacy. UnionDigital draws on the strong heritage and extensive expertise of UnionBank, ensuring reliability and trust in its services.

UnionDigital is the second engine of growth for UnionBank dedicated to financial inclusion. As a digital bank, UnionDigital is uniquely positioned to extend financial services to underserved communities.

Our mission is to improve financial accessibility for underbanked Filipinos who traditionally have limited access to banking services.

We achieve this by:

Making banking services available to the unbanked, thus integrating them into the financial system.

Offering accessible credit solutions to those typically overlooked by traditional banks.

UnionDigital also has the competitive advantage of tapping an extensive customer base through the Aboitiz Group ecosystem.

What security measures have you developed to prevent illicit online banking activities? What are the tools that the Bank uses to protect its clients from fraud and anti-financial crime?

Our dedication to security is fundamental, deeply embedded in our corporate ethos through the principle of Security by Design.

This approach ensures that security measures are integrated seamlessly into every aspect of our banking operations.

We are also moving toward adopting the Zero-Trust Security Framework, a robust security model based on the principle of “Never trust, always verify.”

This model strengthens our protocols for managing data access, further securing our systems against unauthorized use.

UnionDigital builds on the requirements of the regulatory environment and is proactive in monitoring both security and fraud systems.

This ensures not only protection internally, but also and most importantly, for our customers.

According to the Bangko Sentral ng Pilipinas (BSP), digital banks are unprofitable due to higher nonperforming loan ratio at around 21%, compared to the banking sector’s 3.4%. As one of the digital banks in the country, how will you improve the loans you extended and improve your loan collection mechanism?

We continue to leverage data and analytics to gain insights into customer behavior, allowing us to tailor our loan offerings effectively.

For example, we analyze transactional data to understand the needs of our customers better.

Our strong underwriting models are continually improved as we gain more insights into our target customers.

We collaborate closely with other digital banks through the Digital Banks Association of the Philippines, sharing learnings on financial inclusion, particularly in lending to the underbanked segment.

At UnionDigital, the collection process is crucial not only for financial viability but also for maintaining customer relationships. We utilize various tools for collection, including automated systems and our partner agencies.

The central bank earlier said only two digital banks posted a net profit in 2023 and the sector posted a combined net loss. What does UnionDigital need to do to become more profitable in the medium term? For the long term?

UnionDigital is one of the two digital banks that posted net profit in 2023.

Leading market share in loans and deposits

• We closed 2023 with 49% market share in loan portfolio, while in deposit, we ranked second among digital banks with a 25% share.

• 2023 also marked a significant milestone as we achieved profitability, showcasing growth in revenue by 13 times to over P5 billion.

UnionDigital will be further expanding access to credit

Expanding our market reach and enhancing our product offerings will be pivotal.

Advancing our strategy for a deeply integrated “Super Embedded” App.

Concentrate on deepening customer relationships and fostering financial inclusion through our community approach and embedded banking.

• This approach is designed to integrate our services seamlessly into the digital lives of our customers, providing personalized and accessible banking experiences.

• By strengthening our fintech capabilities and leveraging strategic partnerships within the Aboitiz Group ecosystem, we are poised to maintain our competitive edge and foster sustained growth.

What are your plans for the rest of the year? What products and services do you plan to offer in the market, and how would you differentiate these offerings from those provided by other digital banks?

We will continue to expand our services to the underserved through our loan offerings and very competitive deposit rates. UnionDigital will also be tapping new communities.

There will be new products and features on the app, including an enhanced portfolio of loan options and the introduction of virtual cards.

As early as last year, the BSP has been thinking of lifting the moratorium on the grant of new digital banking licenses to allow more digital banks to operate in the country. How would UnionDigital adapt to remain competitive amid the threat of new players?

This environment encourages existing digital banks, including us, to continuously enhance our offerings, streamline user experiences, and adopt new technologies to remain competitive.

For UnionDigital, the evolving landscape represents both challenges and opportunities. The entrance of new players could pressure existing digital banks to innovate more quickly and efficiently to retain and grow their customer base.

However, it also presents an opportunity for us to differentiate ourselves by leveraging on our existing strengths, particularly our solid foundation with UnionBank as our parent company and the expansive network within the Aboitiz Group supporting us.  

For us, the key to success will lie in our ability to adapt to the changing industry dynamics, invest in technology and innovation, and maintain a customer-centric approach.

This will not only help us navigate the challenges but also seize the opportunities presented by the expansion of the whole Philippine digital banking ecosystem.

What do you think are the biggest risks faced by digital banks such as UnionDigital and what did you or are currently doing to eliminate these risks?

At UnionDigital Bank, we recognize significant risks such as the digital divide within our customer segments, cybersecurity threats, regulatory standards, and operational challenges.

Many of our customers do not have data connections, which limits their ability to engage with digital banking services. To address these risks, we are developing inclusive technology initiatives, such as low-bandwidth solutions, and actively supporting government projects that promote the digitization of the Philippines.

Additionally, we continuously fortify our cybersecurity measures, maintain rigorous communication with regulatory bodies to ensure compliance, and implement robust operational frameworks.

These comprehensive efforts demonstrate our commitment to delivering secure, reliable, and accessible services, empowering every Filipino, everywhere.

To know more about UnionDigital Bank, visit www.uniondigitalbank.io.

A MIXTURE of inflation, El Niño, and geopolitical tensions continued to rock the financial markets in the first quarter while analysts expect borrowing costs to come down in the latter half of the year.

The Philippine Stock Exchange index (PSEi) — the barometer for the country’s stock market — closed the first quarter at 6,903.53, up 6.2% from 6,499.68 in the same period last year. The index was also up 7% from 6,450.04 in the October-December 2023 period.

Meanwhile, data from the Bankers Association of the Philippines showed the peso closed at P56.24 to the dollar in the first quarter, weakening by 1.6% and 3.5% from the fourth and first quarters of last year, respectively.

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According to the Bangko Sentral ng Pilipinas (BSP), the peso weakened in the first two months of the year due to higher market expectations of US Federal Reserve’s monetary policy continuing restrictions following higher-than-expected US inflation and strong labor data.

“Concerns over potential escalation of geopolitical conflicts in the Middle East and in the West Philippine Sea also had an impact on market sentiment. Nonetheless, the peso recovered in March amid signals from the US Fed on the timing of its monetary policy easing cycle possibly in the latter half of the year,” the BSP said.

The demand for Treasury bills (T-bills) reached P551.49 billion with offered T-bills reaching P202.3 billion in the first quarter. Demand was higher than P443.8 billion in the same quarter in 2023, and P300.51 billion in the final quarter of last year.

The oversubscription amount reached P349.19 billion, nearly twice last quarter’s P188.22 billion.

Treasury bonds jumped to P1.07 trillion from P461.69 billion in the previous quarter.

At the secondary market, domestic yields rose by 24.23 basis points (bps) on average quarter-on-quarter based on the PHP Bloomberg Valuation (BVAL) Service Reference Rates published on the Philippine Dealing System’s website.

On an annual basis, yields were also up by 12.38 bps.

Alvin Joseph A. Arogo, economist at Philippine National Bank (PNB), said in an e-mail that expectations of easing interest rates led to “mostly favorable movements” in the local financial markets in the January-to-March period.

In January, former Finance Secretary Benjamin E. Diokno said the central bank may reduce borrowing costs by up to 100 bps if inflation settles within the BSP’s 2-4% target.

Inflation fell within the BSP’s target of 2-4%, averaging 3.5% as of end-May.

The BSP has kept its policy rate steady at 6.5%.

However, other analysts said that headwinds such as geopolitical tensions, global inflation, and El Niño dampened markets in the first quarter.

Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines (UnionBank), said in an e-mail that tensions between Russia and Ukraine and Israel and Palestine caused an increase in oil and energy prices, negatively impacting financial markets.

“The war in Ukraine and potential conflicts in the Mideast ramped up risk aversion and disrupted global economic growth,” Security Bank Corp. Chief Economist Robert Dan J. Roces likewise said in a separate e-mail interview.

“Rising inflation in major economies notably the US and a sentiment pivot by the US Federal Reserve on the back of mixed economic data triggered capital flight from emerging markets like the Philippines,” he added.

The Fed kept its policy rate at 5.25-5.5% on May 1, waiting for “greater confidence” in easing inflation before cutting rates, Reuters reported.

High commodity prices such as that of oil and food further spurred domestic inflation, Mr. Roces said.

On the other hand, Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp., sees possible rate cuts despite geopolitical tensions.

“Global crude oil prices still hovered among two-year lows or since January 2022 despite the increased geopolitical tensions between Israel and Iran. That could still help US and local inflation to ease further, thereby supporting possible cuts in Fed and local policy rates later in 2024,” he said.

“At a local lens, the Philippine markets were affected as the agriculture industry faced the firsthand effects of El Niño. With lower crop yields and higher production costs, companies that are reliant towards agriculture resulted in price increases,” Mr. Asuncion said.

The effect of El Niño is expected to persist until May, causing agricultural produce to continue increasing in prices.

“[El Niño] is also expected to affect the foreign exchange markets. Since the Philippines heavily relies on exporting agricultural goods, the country’s trade balance and currency value will be negatively affected,” Mr. Asuncion said.

INDICATORS TO WATCH OUT FOR
Mr. Roces said that easing geopolitical tensions or a slowdown in global inflation could bode well for market performance, but continued headwinds could lead to volatility.

He also noted that Philippine economic data and the BSP’s monetary policy decisions are key factors to watch out for.

Analysts also said that Fed rate cuts should be monitored closely, as the Fed could be matched locally by the BSP later in the year.

“The outlook for US monetary policy continues to be a significant factor for emerging markets and thus may exert some pressure on domestic financial markets. In particular, expected delays in the US Fed’s policy easing cycle have fortified risk-off sentiment among market participants, which may indicate increased safe-haven trade and continued broad US dollar strength,” the BSP said.

Analysts said that the BSP will also consider inflation, economic growth, and exchange rate stability before cutting rates.

“If inflation shows a sustained downward trend and settles within the target range 2-4%, a rate cut becomes more likely. Continued economic growth without inflationary pressures would support a rate cut, and a stable peso is crucial to avoid imported inflation and potential capital outflows,” Mr. Roces said.

The central bank likewise said that its priority is to ensure that inflation will consistently be within its target before it starts its monetary easing cycle.

“The BSP deems it appropriate to keep monetary policy settings sufficiently tight in the near term to ensure that inflation reverts back to target inflation path before shifting to an accommodative policy stance,” it said.

“Since inflation continues to persist, there will be an increase in the yield on fixed income securities, leading to capital losses for bondholders,” Mr. Asuncion said.

PNB’s Mr. Arogo sees interest rate at 6% by end-2024 as they expect inflation to settle within the BSP’s 2-4% target starting September.

“In our view, however, the BSP should not cut rates ahead of the Fed or else risk further exchange rate weakness. If the Fed eases by 25 bps each on September and December, the BSP could follow in October and December,” Mr. Arogo said.

He expects markets to remain volatile in the second quarter due to uncertainty of the timing and magnitude of rate cuts amid fluctuations in inflation.

Mr. Asuncion expects seasonal effects to remain a factor in the second quarter and throughout the year as La Niña may develop in July or August this year. He added that the unpredictably of the climate may negatively impact sectors such as agriculture, construction, and tourism.

“In line with La Niña, there is a risk of flooding and landslides which will lead to delays or increased government spending in the construction of public works and destroyed crops from floodings leading to an increase in the production cost and the price of agricultural produce. In this case, investors will be keen on potential fluctuations in the market, to anticipate potential upward spikes in these commodities,” he said.

The BSP also said that supply-induced inflationary pressures stemming from adverse weather conditions may shift expectations and lead to further second-round effects.

On the upside, domestic factors such as economic growth prospects as well as growth in remittances and foreign direct investments are expected to help markets, it said.

FOREIGN EXCHANGE (FX) MARKET
Mr. Asuncion: The monthly USD-PHP exchange rate has been moving within the 55.88-56.03 range on average. However, in the beginning of [the second quarter], this increased to an average of 56.99 for April. For the remainder of [the second quarter], exchange rates are expected to face an increase, especially for the month of May, as the Philippines experiences negative implications from external factors such as US monetary policy, extreme heat from El Niño, increasing geopolitical tensions, etc.

Mr. Roces: The peso faces depreciation pressure due to potential global capital outflows and a stronger US dollar.

Mr. Ricafort: Improved US/global market risk appetite that could support sentiment on Emerging Markets, such as the Philippines, after US stock markets again posted new record highs. It is important to note that the US dollar-peso exchange rate already posted a bigger increase compared to most ASEAN currencies since the start of 2024 and since the Russia-Ukraine conflict started on Feb. 22, 2022.

EQUITIES MARKET
Mr. Asuncion: PSEi index closed at 6,646, 6,945, and 6,904. As for [the second quarter], the month of April ended with a close of 6,700. With historical data and Autoregressive Integrated Moving Average (ARIMA) models, we have forecasted the remaining months to have a close of 6,733 and 6,765 for May and June, respectively. Evidently, decreasing by a substantial amount when compared to Q1 index. This, however, is set to recover as we forecast a close of 6,962 by the end of 2024.

Mr. Ricafort: The local stock market gauge, the PSEi, corrected lower recently, at 6,607.22 after higher-for-longer signals from most Fed officials recently that partly reduced the odds of Fed rate cuts. Mostly higher net income of local listed companies recently that could support valuations. Seven-month support is at 6,360, which helps keep intact the underlying upward trend/momentum over the past seven months or since October 2023.

BSP: External developments including uncertainty in the timing of the US Fed’s monetary policy easing cycle due to delayed US inflation progress, subdued global economic growth prospects amid the elevated interest rate environment, as well as geopolitical concerns in the Middle East are expected to influence movements in domestic financial markets in the remainder of the second quarter. Other factors affecting market sentiment, such as the increasing upside risks to domestic inflation, as well as lingering geopolitical tensions in the West Philippine Sea will likewise continue to influence market movements.

FIXED-INCOME MARKET
Mr. Asuncion: Fixed-income inflation during [the first quarter] headlined at 2.77%, 3.4%, and 3.7%. In [the second quarter], the headline for inflation in April was 3.8%. Based on historical data ARIMA models, we have projected that May and June will have inflation headline values of 3.97% and 4.47%, respectively, for the coming months. Since inflation continues to persist, there will be an increase in the yield on fixed-income securities, leading to capital losses for bondholders.

Mr. Roces: If the BSP maintains current interest rates, fixed-income yields could rise, making existing bonds less attractive. However, new bond issuances with higher yields could be appealing to investors.

Mr. Ricafort: PHP BVAL yields mostly corrected lower since May 2024: Long-term PHP BVAL yields mostly among one-month lows, with the 10-year tenor at 6.7%. Further local policy rate pauses or cut (especially in 2024) could already be possible for the coming months, as fundamentally supported by the easing inflation trend as seen recently amid higher base/denominator effects; also, as a function of future Fed rate pause or cut. n

The Philippine Stock Exchange index (PSEi) rose by 7% in the first three months, faster than the 2% quarter-on-quarter growth in the fourth quarter and the 6.2% a year ago.

Meanwhile, the financials subindex, which included the banks, grew by 17% in the first quarter. This was a turnaround from the 6.6% contraction in the previous quarter.

Year on year, the subindex went up by 12.4%.

The first quarter saw 11 out of 15 listed banks’ stock prices grow on a quarter-on-quarter basis. Metropolitan Bank & Trust Co. (MBT) led with 27% in its share price from P51.30 in the fourth quarter. This was followed by Philippine Bank of Communications (PBC, 23.7%), BDO Unibank, Inc. (BDO, 18.4%), China Banking Corp. (CHIB, 18.3%), Asia United Bank (AUB, 18%), Bank of the Philippine Islands (BPI, 13.8%), East West Banking Corp. (EW, 7%), Philippine National Bank (PNB, 6.7%), Philippine Savings Bank (PSB, 3.6%), Philippine Business Bank (PBB, 2.3%), and Rizal Commercial Banking Corp. (RCB, 1.7%).

On the other hand, four listed banks saw their share prices decline in the first quarter.

Philippine Trust Co. led the losers with a 29.2% decrease in its share price quarter on quarter. Other lenders also recorded declines including Union Bank of the Philippine (UBP, -10.6%), Bank of Commerce (BNCOM, -9.2%), and Security Bank Corp. (-4.1%).

“Accelerating industry loan growth, healthy lending margins, and stable asset quality underpinned the performance of banks in the first quarter,” BDO Securities Corp. First Vice-President and Head of Research Abigail Kathryn L. Chiw said in an e-mail.

Aggregate net income of universal and commercial banks grew by 9% to P337.28 billion as of end-March from P309.44 billion last year, data from the Bangko Sentral ng Pilipinas (BSP) showed.

Outstanding loans by universal and commercial banks, net of reverse repurchase (RRP) placements with the BSP, grew by 9.4% year on year to P11.8 trillion in March, faster than the 8.6% growth in February.

Gross total loan portfolio of these big lenders rose by 9.6% to P12.71 trillion as of end-March from P11.59 trillion last year.

Likewise, the big banks’ gross nonperforming loans (NPLs) ratio went up by 3.07% in March from 3.03% in March a year ago.

The big bank’s net interest margin (NIM) — a ratio that measure banks’ efficiency in investing their fund by dividing annualized net interest income to average earning asset — improved to 3.96% in the first quarter from 3.59% recorded in the same period last year.

Provision for credit losses by these big banks reached P20.87 billion, up by 28.2% from P16.28 billion in March 2023.

Luis A. Limlingan, head of sales at Regina Capital Development Corp., said that listed banks’ performance in the first quarter was mainly affected by macroeconomic conditions, interest rate environment, regulatory changes, loan growth, asset quality, and operational efficiency.

“Additionally, the interest rate environment, especially any changes in central bank policies, directly impacted NIMs and profitability,” Mr. Limlingan said in an e-mail.

At its May meeting, the Monetary Board kept its benchmark rate at a 17-year high of 6.5%. The BSP raised borrowing costs by a cumulative 450 basis points (bps) from May 2022 to October 2023.

For the first quarter, the Philippine economy expanded by 5.7%, up from the 5.5% growth in the last three months of 2023. However, this was still below the 6-7% growth target of the government.

BANK STOCK PICKS
Analysts said market players should closely monitor economic trends affecting loan demand and asset quality.

“Steady growth in economic activity is likely to support loan demand, while still, elevated interest rates may discourage businesses and households from taking on new additional debt,” BDO Securities’ Ms. Chiw said.

Ms. Chiw also expects bank segments such as lending, credit cards, and various fee-based services to expand; however, she noted that trading and investment banking will tone down due to the volatility of financial markets.

Meanwhile, PNB Research said developments in the US Federal Reserve’s and BSP policy decisions would dictate the NIM performance of banks.

“The banks’ strategies in growing their respective loan portfolios and ability to control increases in their operating expenses and loan loss provisions are now more important compared to last year because we are expecting limited NIM expansions this year,” PNB Research said in an e-mail.

For those seeking potential investments, Maybank Securities Research–Philippines picked out BDO and Metrobank as a good choice to buy.

“BDO remains our top pick as its scale makes it best placed to capture lending growth in a growing economy. We also believe it has the best mix of digital banking and branches to gain market share, especially in the Philippines where many still don’t have bank accounts. We also like Metrobank for its high dividend yield post its announcement of special dividends,” Maybank Securities Research–Philippines said in an e-mail.

For Mr. Limlingan, BPI and Chinabank stood out due to its ability to “navigate regulatory challenges and maintained prudent risk management practices demonstrated resilience amidst market uncertainties, reflected in robust loan growth, improved asset quality, effective cost management, and diversified revenue streams,” he said.

OUTLOOK
With the hope of rate reduction this year, analysts point out its possible effects to the banks’ income growth.

The central bank is expected to cut rates by up to 150 bps with an anticipation that the inflation will settle within the BSP’s 2-4% target.

Inflation continued to accelerate to a six-month high of 3.9% in May. To date, inflation averaged 3.5%.

Globalinks Research expressed optimism about the banks’ performance in the coming quarter despite potential cheaper borrowing costs this year.

“There is speculation that although Fed officials are looking to cut rates in September, insufficient progress bringing inflation down further alongside rising price expectations has stoked some doubts about whether the Fed will move at all this year,” Globalinks Research said in an e-mail.

PNB Research sees a delayed impact on the banks’ NIM once the central bank decides to cut rates, but this would depend on the magnitude of rate cut.

“A lower interest rate environment would stimulate the economy and business activity so this might have a positive effect on the bank’s loan growth performances,” PNB Research said.

For Ms. Chiw, the impact of rate cuts on the banks’ NIM may be compensated by robust loan growth and lower provisioning costs.

“As long as banks are able to demonstrate the ability to sustain healthy earnings growth, then we think stock prices of banks will remain supported,” she added. — MIUC

SCROLLING THROUGH social media means more than merely about likes and shares today. It has become an instrument for financial literacy for many Filipinos.

As of January, almost 73.6% of Filipinos had access to the internet, of which 73.4% were connected through one or more social media platforms spending four hours a day on average. This was the highest daily consumption across all Asian countries included in Meltwater’s Global Digital Report.

Interweaving digital influence and consumer behavior, social media has become a key player in spreading information in the country.

In an era where digital connectivity has become a dominant aspect of Filipino lives, banks and financial institutions have also begun to acknowledge its importance and utilize it.

All banks in the country have built a dedicated social media page across various platforms in which consumers can connect with the banks.

The 2024 Global Digital Overview showed that 34.2% of internet users utilize the web for information on finance and savings, inching up from 33.7% in 2022. For the country, almost 42.3% of the population turn to social media for finding content and information.

Similarly, based on the 2021 Financial Inclusion Survey (FIS), 32% of Filipinos rely on these platforms for financial-related information.

“Statistics show that social media has been a source of financial information and has influenced financial decision-making,” the Bangko Sentral ng Pilipinas (BSP) said in an e-mail interview.

“Social media has transformed financial literacy for the youth by offering easily comprehensible content on topics like financial planning, credit, and investing, often with humor,” said the BSP.

Inclusivity in the younger generations saw an uptick in 2021 as more than a fourth of individuals aged 15-19 had formal bank accounts, almost four times higher from 7% in 2019, according to the central bank’s latest Financial Inclusion Dashboard.

Similarly, almost half of the older adults owned a formal account, an improvement from 32% in 2019.

The ease of accessing information, captivating content, and the convenience of customer support were the key factors on social media that contributed significantly to the improvement of literacy.

Johann C. Uy, a member of Facebook (FB) groups focused on investment talks, said that social media helped him be a part of the “banked” population.

“When I opened my first savings account, what I did was look up suggestions on social media groups and communities and read up on [comment] threads to determine which bank is crypto-lenient and would fit my needs,” he said in phone interview.

Ease of information allowed them to compare products, services, and financial approaches across social media pages and posts.

“In finding which car loans would be perfect for my new car, I had to compare across the pages of different banks and the experiences of content creators until I had decided on which one to go with,” said Beverly A. Arevalo, a member of finance-related FB groups, in a phone interview.

On top of the accessibility, how the topic was discussed also helped the consumers digest and remember the information.

“The new audience is the millennials, the aggressive ones, if they see [finance-related] information, they see it as boring or not interested in it. People are more engaged if they see the information in entertainment or as funny content and something they would spend time browsing,” said Joel Khristopher S. Cabugos, cofounder of KasKasan Buddies, an FB group focused on credit card hacks promos and other financial topics.

“Relatability is a big factor as to why people watch videos and content on social media about finances. Particularly in content creators, you see their struggles and relate to it then you see their success and try to replicate their money handling,” said Randy A. Arevalo, consumer of TikTok clips on financial topics.

Based on the January 2024 Meltwater data, 43.9% of Filipinos follow influencers and other experts on social media.

Kimberly C. Soriano, manager at a financial institution and consumer of money-handling topics on Facebook, said that “social media offers simpler and more engaging content which makes learning finances fun and easier to remember.”

Similarly, content creators and social media influencers saw that today’s generation is more likely to learn the information by making it more interactive and less technical.

“I can see that a shift has occurred in recent years as creators made financial information more available and less intimidating for Filipinos,” said Prexel Parnacio, owner of the Millionaire in Progress (MIP) academy coaching program and TikTok finance influencer.

For KasKasan Buddies’ Mr. Cabugos, content creators promote financially literate Filipinos by giving them a space to discuss topics that they may be afraid to ask their bank about such as credit card usage.

“Our goal [as creators] is to make the information as simple and engaging as possible so we can slowly onboard the majority of Filipinos in proper finance handling,” Mr. Cabugos said.

Banks have also noticed today’s reliance on social media for customer service interactions.

The central bank sees these platforms as an avenue for BSP-supervised financial institutions (BSFIs) to interact with customers, address concerns, and foster brand building.

The availability of chatbots and case resolution services via the banks’ social media platforms helps consumers deal with their finances better than the old-school customer service calls and bank visits.

“For simple issues and concerns, I would prefer online services like chatbots and chats with customer service,” said Ms. Arevalo. “If the banks had services for more complex document processing requests, I would prefer to do it online as well instead of having to schedule to go onsite. It is a time hassle.”

APPROACH
Amidst this digital landscape, it is no surprise that banks and institutions have leveraged platforms like YouTube, Facebook, and Google to engage with consumers through them.

Banks employ various approaches including organic ad reach and internet campaigns to inform users about product offerings and services.

“The algorithm of social media works like this: if a post on a specific product or topic caught your interest and you interacted with it, expect to see the same product or topic appearing on your feed in the future,” Mr. Cabugos of KasKasan Buddies said.

Audience engagement with bank products on social media, ranging from credit cards to high-interest savings accounts, shows the importance of targeted marketing strategies.

Development Bank of the Philippines (DBP) President and Chief Executive Officer Michael O. de Jesus said in an e-mail that “through [this] strategic analysis of audience interactions and feedback, the bank gains insights into the preferences and priorities of its online community, enabling more targeted and effective outreach efforts.”

Although external link advertisements remain a common tool in banks’ marketing, data by Meltwater showed a 19.6% decline in external link traffic shares attributable to organic social media in the past 12 months.

On the other hand, the Philippines leads as the top consumer of vlogging content creators with a significant 55.6% of daily vlog consumption, 60.4% of which uses online video as a source of learning.

Keeping up with this trend, both Maybank Philippines, Inc. and DBP had altered their marketing approach to meet the current consumption habits.

“Our content [has adapted to] using informative short videos or stories to drive the messaging. However, we do still maintain presence in traditional media, and throw in events into the mix,” Maybank said in an e-mail.

BSP, on the other hand, launched campaigns that aim to make “friendlier” contents such as #BSPExplained, which releases definitions of terms of technical concepts in the local language, and PisoLit which releases creative and funny cartoons focused on saving, personal finance, and fraud prevention.

In handling customers via social media, BSP, Maybank, and DBP utilized chatbots and dedicated teams online.

While Maybank leverages both automated responses and real-time responses, DBP utilizes automated responses focused on frequently asked questions.

The BSP also launched a dedicated chatbot by the name BSP Online Buddy or BOB in FB Messenger to make it more accessible to financial consumers.

Banks have also tapped into collaboration with content creators for social media marketing and awareness campaigns.

Both TikTok coach Ms. Parnacio and KasKasan Buddies’ Mr. Cabugos have had numerous collaborations with banks.

“I have had partnerships mostly with banks and other institutions to create awareness campaigns on how to avoid being a victim of these fraudsters as well as what to do if you become a victim,” Ms. Parnacio said.

Similarly, Mr. Cabugos cited his experience in working with banks for credit card campaigns.

“Once, we partnered with RCBC in credit card applications, and the process got delayed due to the massive volume of applicants,” he said.

“If it was not for the collaboration, we would not have been able to coordinate the experience of the users to the banks and the banks would not have been able to respond via announcement to the users.”

“Collaborations allow the users to have their voice heard by the institutions,” Mr. Cabugos said.

RISKS AND DANGERS
Despite the opportunities available in using social media as a platform of financial literacy, challenges such as fake news and fraud remain.

For content creators, a common issue experienced is the rise of fake accounts that copy them and swindle their followers.

“I am not sure how they do it, but they copy my account from contents to pictures to texts then they contact my followers asking for money,” Ms. Parnacio said.

“This was detrimental for both the followers and the creators who might lose their credibility because of such events,” she added.

Mr. Uy, an employee who follows creators focused on trading and finances online, said that he experienced the same situation but was able to evade it by taking time to discern and research the page.

“I noticed that the like count is unusually lower than the original page and when the creator started subtly asking for my money, I knew something was up. However, if I had not become vigilant, I might have been scammed,” he said in a phone call interview.

Additionally, there is also data permanence, a problem felt by both banks and users. Once an information, comment, or post has been released on social media, copies of it may remain even if the information — be it good or bad — has been removed or deleted.

“What goes on social media, stays on social media,” said Maybank.

Alongside creators and users, banks also advocate for vigilance and due diligence in researching the person you follow and the content you digest online.

LEVELING UP
Looking ahead, social media is bound to stay as part of the marketing mix for banks and an influencer on consumer decisions.

For the consumers, speed in conflict resolution as well as a wider range of customer service transactions are factors that the banks can still improve on their social media utilization.

More engaging and gamified contents were recommendations by the social media personalities.

“More collaborations with creators and banks would help users be more at ease with grasping concepts. However, financial institutions should be careful of who they partner with,” said TikTok coach Ms. Parnacio.

KasKasan Buddies’ Mr. Cabugos, on the other hand, said that gamified contents would help gather the personalized feedback of the users on the banks.

“Generate more gamified financial literacy content that people can participate and get involved in. The more involved the person is, the higher the chance of the content being shared across their peers,” he said.

“Banks will have to recognize social media overlaps. People have multiple accounts that they log into [and to keep up with this] banks and content [should] not live on one channel only, it travels across,” said Maybank.

BSP expects wider utilization of these platforms in the future as “it can provide access to previously untapped segments for financial education and integration.”

As social media evolves and more people rely on it for financial insight, the responsibility to remain critical in the spread of information relies on every member of the financial sector — banks, financial institutions, content creators, and users. 

IN THE LATTER PART of 2023, Cagayan de Oro City Rep. Lordan G. Suan proposed House Bill (HB) No. 9162 or the Financial Literacy Education Bill to incorporate financial literacy into the senior high school education curriculum.

In the bill’s explanatory note, he said that the proposed measure aims to equip students with knowledge, skills, and attitudes necessary for managing personal finances, making informed financial decisions, and contributing to the economic development of the nation.

If enacted, students will learn the basics of personal finance, including budgeting, saving, investing, credit and debit, insurance, taxes, and how to apply them in real-life situations.

The HB mandates the Department of Education (DepEd), in consultation with the Department of Finance (DoF) and Bangko Sentral ng Pilipinas (BSP), to develop a financial literacy curriculum.

“This bill recognizes the role of the youth in nation-building and its role in molding citizens with values that will enable them to become assets of the country,” the Education department said in a Viber interview.

“The DepEd will also provide educational materials for teaching financial literacy and conduct training programs for teachers who will deliver this instruction,” it added.

The central bank reiterated this commitment, with public and private institutions to integrate financial literacy lessons into the basic education system.

Robert Dan J. Roces, chief economist at Security Bank Corp., said that this is a welcome development for financial literacy.

“The ability to budget, save, manage debt responsibly, and avoid predatory products sets them up for lifelong success, fostering economic participation and contributing to national stability,” he said.

For BDO Network Bank, it is indeed crucial to build financial literacy in one’s formative years.

The Sy-owned rural bank said that this is critical to help families rise above and overcome economic challenges and achieve their aspirations.

Being financially responsible is a lifelong pursuit that must start early, the bank said.

“We have improved but are still lagging behind our neighbors in the region in assessing financial literacy of young Filipinos,” the bank said.

Multisectoral effort has been invested in educating overseas workers and their families. Additionally, the central bank, banks, and other financial technology companies have increased awareness and education among the banked population particularly in digital banking.

HIGHLIGHTS AND CHALLENGES
The Education department said that the bill’s passage aligns with its curriculum reform and its Financial Literacy Policy in DepEd Order No. 22 s. 2021, which makes the initiative strategic and prompt as financial literacy is already integrated into the K-to-12 curriculums, not just in senior high school.

Through this policy, learners should be taught the essential concepts of financial literacy to help them handle their finances. As early as it could be, they should be introduced to the difference between wants and needs, the value of money, and how it is used.

These are stepping stones for individuals with essential financial skills which will be a solid foundation for becoming responsible financial decision makers.

The Education department also cautioned of the challenges it could bring when the House bill is enacted into law. Financial concepts, it said, must be taught effectively and consistently.

“The Department considers capacity building among its teaching force as one of its challenges and the development of instructional resources is seen to be a major challenge,” it said.

Despite its potential benefits, the House bill’s effective implementation may face common hurdles such as challenges in its initial deployment, interagency collaboration, and monitoring and impact evaluation.

“Addressing these challenges will require collaboration between DepEd, the academe, teachers, and other stakeholders to ensure the successful implementation of these initiatives,” the central bank said in an e-mail.

Careful planning is needed to implement and resource the curriculum effectively, ensure teacher competency, and counter external misinformation, Mr. Roces said.

SOCIAL MEDIA AND ITS EFFECTIVENESS
The central bank said that the emergence of social media influencers discussing financial management and providing advice is a positive development.

However, it should be considered that there are disparities in the use of technology based on socioeconomic backgrounds, highlighting unequal digital learning opportunities.

Therefore, it is crucial to recognize that technology alone can have negative consequences if not carefully considered. It is essential to use social media as a platform to communicate information that is genuinely beneficial for everyone.

“Content creators are embracing the responsibility of promoting financial literacy and recognizing the escalating need for such knowledge in present-day society,” BSP said.

According to studies, social media is not only used for communication but also for looking for and sharing financial knowledge, BSP further explained.

The trend is further amplified by the emergence of social media influencers, who are driven by the competitive landscape. To engage more “netizens,” they need to generate various catchy but relevant content for their respective platforms.

So, the credibility may already be questionable for one.

Amid the proliferation of financial advice online, it is essential to critically assess content creators’ ability and trustworthiness before relying on their advice, the BSP warned.

For Mr. Roces, social media provides convenience, diverse content, and interactive learning, limitations exist but warned that misinformation may come along with it.

It is crucial for consumers to critically assess information and use social media as a starting point and not as a definitive source.

Marga Sayo, a financial consultant, said social media is one of the most effective mediums to deliver information to the public but one of its risks is the accuracy of the information being delivered.

She pointed out that fact-checking and media literacy is also something that a lot of Filipinos lack.

“With the number of investments and scams becoming more public knowledge, Filipinos are looking to experts to help them understand the difference, and social media is the most accessible way to reach people who can discuss topics like this.”

BANKS USING SOCIAL MEDIA
Mr. Roces said that banks can be the prime financial mentors in using social media. This could be done by using it to develop high-quality, targeted financial educational content, partnering with credible and somehow, reputable financial influencers, and promoting responsible financial behavior.

“Measuring success through user engagement and more importantly real-world outcomes allows for continuous improvement and evolution,” he said.

For Ms. Sayo, financial institutions must always keep up with what their customers need, including understanding the types of social media content that work best on different platforms.

Knowing what content to make and how to deliver it to its target audience is key to achieving efficiency, she explained.

For the central bank, social media platforms are powerful tools for banks to effectively communicate and educate consumers about personal financial management.

Banks can capitalize on social media to promote financial literacy by providing informative and engaging content. They can create educational content, such as videos, infographics, and articles to simplify complex financial concepts and offer practical tips for handling personal finances.

The BSP suggested other efforts such as banks should engage with their customers through social media by organizing live Q&A sessions, webinars, and virtual workshops on financial literacy.

This interactive approach will allow consumers to ask questions, seek personalized guidance, and gain a better understanding of their financial situations.

“The level of progressiveness in these efforts will depend on the bank’s commitment and adaptability to emerging social media trends,” BSP said.

With these efforts, banks can promote financial empowerment and contribute to a financially literate society.

FINANCIAL INDEPENDENCE
Learners can reach financial independence at an early age by learning about earning, saving, spending, budgeting, donating, investing, and protecting funds. In turn, this would also make them careful of their purchases and create plans accompanied by suitable financial actions.

Ms. Sayo said she listens to clients’ needs and offers multiple options rather than just advice.

She said that managing finances is a personal and independent decision, and the only way to ensure compliance is if the individual comes up with the solution on their own.

“Learning the value of money and how to manage your expenses should be taught as early as when a child is given money to spend,” Ms. Sayo said.

“The concerning issue with children not understanding the importance of money is that it can make them disconnected from reality, which in turn can lead to a sudden shock when they eventually must face financial responsibilities in the future,” she added.

For the central bank, recognizing the significance of being well-informed about managing finances, savings, and related areas is key to nurturing our financial well-being.

“Recognizing the value of financial literacy and its impact on financial health motivates individuals to engage in continuous education through diverse channels [which will help them] strive toward achieving their financial objectives,” BSP said.

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By Mariedel Irish U. Catilogo, Researcher

MONEY MANAGEMENT is not exactly a foreign concept to Filipinos but rising prices of goods and services recently has certainly made this very difficult.

Changes in financial behavior were also seen in 2021 as 37% of adults were reported to have saved more for emergencies while 17% frequently used online banking and digital payments, according to the Bangko Sentral ng Pilipinas’ (BSP) Financial Inclusion Survey.

Despite the rise of budgeting tools in app stores worldwide, there was no budgeting app that is customized for Filipino consumers, which uses the local currency and the native language.

In 2021, Lista founders aimed at bringing service primarily to medium, small, and microenterprises (MSMEs), sari-sari store owners, stay-at-home mothers, and young adults who want to manage their finances. The app sought to remove the use of pen and paper, Microsoft Excel, and calculator in monitoring daily finances.

Today, Lista also offers various services including credit scores and marketplace for credit card applications.

To know more about Lista and its goals in the financial management landscape, BusinessWorld reached out to one of Lista’s founder, Khriztina Lim, in an e-mail interview.

Here is the excerpt of the interview:

1. What is Lista app? How did the concept start? What are the app’s features?

In May 2021, co-founders Aaron Villegas and Khriz Lim met and quickly shared the same excitement of helping Filipinos stress less about their finances. Shortly after, they built the first version of Lista and shared it with friends and family.

Lista’s early iterations (as a bookkeeping app) were designed for Filipino small businesses including sari-sari stores and online shops. In July 2021, Lista got its first 1,000 users, a result of on-the-ground marketing efforts including handing out flyers, pitching at live webinars, and posting on Facebook groups.

In September 2021, Lista was officially launched and garnered over 100,000 downloads, which saw users across the country collect debt and manage their business and personal finances through the app. Lista noticed more users were downloading the app for personal finance management. This prompted Lista to launch features for personal users including budgeting, marking its transition from bookkeeping to financial management app.

In April 2023, Lista launched Credit Score in partnership with credit bureaus.

Today, Lista’s main product offerings include Credit Score, Marketplace (for credit card applications with Moneymax, and more), budgeting, savings challenge, and money in/money out.

2. What services do you offer in the local market, especially for your target markets which are young adults, small business owners, mothers?

Credit Score – offers easy and instant access to credit scores and credit reports starting at P199.

Marketplace – offers easy credit card (with Moneymax), loan, and insurance applications through the app.

Budgeting – lets users plan, organize, and track their budget according to their terms, whether it’s weekly, monthly, or semimonthly.

Savings Challenge – allows users to track their savings, can customize their target timeline and target amount.

Money In/Money Out – allows users to see and track their cash flow by tapping Money In or Money Out on the app, synced with the Budgeting feature.

3. How do you describe the progress of these services? Why do you think that the concept of financial management thrives today?

There has been remarkable growth, particularly in recent years marked by the pandemic. There’s certainly a noticeable shift in people’s attitudes towards their finances, a heightened awareness of managing their money wisely. We think that’s something worth celebrating.

What makes this moment beneficial for us is the role we can play in this evolving landscape. Originally designed to cater to Filipino MSMEs, Lista has successfully transitioned its focus to serve individuals, recognizing the growing need for personal finance management tools. Whether it’s tracking expenses, setting budgets, or planning for the future, Lista provides the necessary resources to understand where one’s money is going and maximize it to improve their quality of life.

4. What makes Lista different from other financial management app?

Lista distinguishes itself from competitors by our straightforward mission: transforming the way Filipinos perceive their finances, shifting from a negative outlook to a positive one.

Lista believes in the power of education. The app puts the power of financial management directly into the hands of its users, giving them encouragement and confidence in navigating personal finance.

As more individuals recognize the importance of understanding and managing their finances, Lista remains committed to providing the tools and resources needed to support their journey toward financial wellness.

5. According to a report by S&P Global Ratings, the Philippines placed at the bottom 30 of 144 countries surveyed on financial literacy. Also, the BSP’s study showed that 37% of Filipino adults started saving for emergency fund while 17% started using online banking and digital payments frequently. With this, how do you think the app helps gauge one’s capability to understand or manage their finances well?

Lista is well aware of the challenges surrounding financial discussions. In daily conversations, many Filipinos still consider talking about money as taboo, if not awkward. That’s why Lista prioritizes ease of use, straightforwardness, and simplicity. Lista also embraces cutting-edge technology to simplify life’s complexities. Free from convoluted jargon and perplexing menus, our platform offers simple tools to empower users to plan, manage, and understand their finances better.

6. To date, how many downloads do you have? What feedback have you received about your app?

Lista has been consistently generating an average of over 80,000 installs monthly, finishing off 2023 with a total of 2.6 million downloads.

Since its introduction, the demand for access to credit scores and reports has been substantial, sparking numerous conversations among users about the accessibility and utility of Lista’s services in understanding and improving their credit health.

Lista also underwent a successful rebranding last September, a change that was welcomed with positive feedback. With a renewed focus on user-friendliness and a vibrant aesthetic, Lista has effectively fostered approachable discussions on money, significantly reducing intimidation among users.

7. What challenges do you encounter and/or currently face when it comes to the operation or providing financial management services further to your consumers?

Naturally, the challenge at hand is to ensure inclusivity and accessibility for all users, both online and offline. More and more Filipinos own smartphones but data/load credits are still expensive for some. Lista tries its best to make the app accessible with little to almost no data cost to users. This is to encourage them to continuously use the app without having to worry about data usage.

8. What are the company’s upcoming projects or developments that the market can expect this year?

Lista is working on a few products that will bring our users new levels of financial flexibility and convenience. More credit reports from different credit bureaus will be available in the app soon. This will help users understand more about their financial situation and how banks evaluate their credit card or loan applications.

We are also enhancing user experience in budgeting and finance tracking. This is to help Filipinos develop the habit of budgeting and sticking to it.

9. Anything else you would like to share with us? What is your advice for those who would like to start saving up but don’t know how to?

For individuals seeking to manage their finances effectively and permanently, it’s essential to know the motivation behind your financial objectives.

Whether you’re saving for an emergency fund or planning for future endeavors, utilizing financial management tools such Lista can provide valuable support on your path to achieving financial clarity.

There is not one clear cut set of instructions that would apply to every financial situation. It really depends on each individual which is why we made the app as customizable as possible so as not to overwhelm the user.

For those who do not know where to start, we recommend them “Lista mo muna.” List all of your current income streams and recurring expenses. That’s how you can start seeing a clear picture of where you are. Then decide what your short- and long-term goals are.

After you’ve done this, our app can help you reach your goals as long as you keep on using it.

To know more about Lista, visit https://www.lista.com.ph/ The app can be downloaded for free on Google Play and App Store.

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THE COUNTRY’S financial markets swayed in the final quarter of 2023 as geopolitical tensions and interest rates pushed the market and policy makers to a waiting game in search of better economic conditions.

The Philippine Stock Exchange index (PSEi) closed the fourth quarter at 6,450.04, down 1.8% year on year from the 6,566.39 in the same period in 2022. On the other hand, the index was up by 2% from 6,321.24 in the July-to-September 2023 period.

In a Viber message, Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines (UnionBank), said that despite the “challenging environment,” PSEi rebounded from its lowest close last year at 5,961.99 last Oct. 27 as inflation eased further and the US Federal Reserve (US Fed) hinted at policy rate cuts this year.

However, other analysts said headwinds such as the breakout of the Israel–Hamas war in October last year contributed to the slower year-on-year growth.

“At a local level, investors continued to monitor and sat on the side watching over the rates for better investment opportunities given interest rate fluctuations, indicating risk for investors,” Mr. Asuncion added.

“Prospects for lower inflation rates and interest rates in many countries around the world made investors cautious to enter the market for fixed-income securities and more eager to explore the equities market,” Cid L. Terosa, senior economist at University of Asia and the Pacific (UA&P), said in an e-mail.

“The higher-than-average interest and inflation rates, however, continue to make the fixed-income securities market more attractive than the equities market,” he added.

Demand for Treasury bills reached P300.51 billion with only P112.30 billion total offered amount in the fourth quarter. This was lower than the P220.6 billion seen in the same quarter in 2022, and the P654.9 billion in the third quarter.

The oversubscription amount of P188.22 billion was lower than P384.8 billion in the third quarter.

Similarly, Treasury bonds eased to P461.69 billion from P642.2 billion in the previous quarter. This was higher than the aggregate offered amount of P210 billion in the last three months of last year.

At the secondary bond market, domestic yield went up by 97.5 basis points (bps) on average year on year, according to data from the PHP Bloomberg Valuation Service Reference Rates published on the Philippine Dealing System’s website.

On a quarterly basis, yields grew by 93.5 bps.

“There was growing expectation that the Fed could be winding down its tightening stance and eventually shifting to potential easing by [first half of] 2024. This helped drive a bit of a rally for bonds with US treasuries trading below 4% at one point in December. Local bond yields for [10-year papers] similarly also fell below 6%,” Nicholas Antonio T. Mapa, senior economist at ING Bank N.V. Manila, said in an e-mail.

Makoto Tsuchiya, an economist at Oxford Economics, attributed the rise in long term yields from the Bangko Sentral ng Pilipinas’ (BSP) move to hike rates by 25 bps as a preemptive move to control inflation in effect of the Israel–Hamas war.

“Following the start of the war, the rise in risk premium led long term yields to rise in the Philippines. In addition, flight to safe assets led to a broad-based appreciation of the US dollar, which exerted downward pressures on the peso,” Mr. Tsuchiya said in an e-mail.

The peso kept at the P55 range as it closed at P55.370 against the dollar on the last trading day of December, according to the Bankers’ Association of the Philippines. This was stronger than the P55.755 finish on Dec. 29, 2022.

The BSP said in an e-mail that in the last quarter of 2023, the exchange rate was broadly manipulated by the uncertain monetary policy direction of the US Fed amid easing inflation rates.

“Despite the volatility in the peso-dollar rate, the peso closed the year stronger than the US [dollar] and became one of the better performing currencies in Asia and the ASEAN region,” Mr. Terosa said.

While the geopolitical tensions did not have a direct effect on the country’s financial market, analysts said that the market remained uneasy and cautious amid supply disruptions and price concerns arising from the Israel–Hamas war.

The central bank said that the heightened conflict in the Middle East moved the financial markets as outlook on international oil prices remain uncertain.

“With the volatility of the oil market, as a third world country who heavily relies on international market movements, spillovers are guaranteed to be felt. As a result, investor confidence was subdued toward the end of 2023,” Mr. Asuncion said.

The US Federal Open Market Committee (FOMC) retained their interest rates at the 5.25% to 5.5% range for the fourth straight meeting last January on a wait-and-see stance tracking inflation movements before cutting rates.

Similarly, the BSP kept its benchmark interest rate steady at 6.5% for the fourth consecutive meeting last Feb. 15 to keep watch on the US Fed’s move despite easing inflation.

Since May 2022, the BSP raised a total of 450 bps.

On the other hand, inflation eased further to 2.8% as of January this year, lowest in three years or since the 2.3% print in October 2020 during the height of the pandemic.

This was also an improvement from the 8.7%-high inflation recorded in January last year.

While analysts think the BSP’s move last year to hike interest rates by another 25 bps was “overstated” with inflation slowing, they said that they expect local interest rates to remain high until the US Fed makes a move to cut their policy rates.

INDICATORS TO WATCH OUT FOR
Analysts are pegging the central bank to continue to rein in policy rate cuts as long as the US Fed remains cautious. However, they are expecting policy rate cuts as early as mid-2024 should the US Fed strike a move to also cut rates.

UnionBank’s Mr. Asuncion said that any move by the BSP before the US Fed could add pressure to the peso-dollar rally.

“With a March cut out of the question for the US Fed, we may see a sliver of likelihood in June. Thus, a cut by the BSP may come in August, the only meeting of the Monetary Board in the [third quarter of 2024]. Inflation will continue to be front and center and how it is trending,” he added.

“We believe that the target RRP (reverse repurchase) rate of 6.5% is likely the peak and our baseline view for now is still 50 bps cut in 2024. We believe that inflation will re-accelerate anew before sustainably settling within the BSP’s 2-4% target in [fourth quarter 2024],” Alvin Joseph A. Arogo, economist at Philippine National Bank (PNB), said in an e-mail.

The central bank assured that they remain “forward-looking” when it comes to its monetary policy, keeping track of recent inflation data, their forecasts, and noting risks that could arise surrounding their forecasts.

“While our latest inflation forecasts are lower as risks to inflation have receded amid improved conditions, the BSP considers it appropriate to keep the BSP’s monetary policy settings unchanged in the near term as risks are still mostly skewed to the upside,” the central bank said.

“In view of lingering risks, the Monetary Board deems it necessary to keep monetary policy settings unchanged in the near term. Along with a sustained decline in headline and underlying/core inflation, we also want to see inflation expectations settling well within our inflation target range,” the central bank added.

Analysts are tracking several headwinds that could push the central bank to delay rate cuts until the last quarter of this year.

“We think the major risk remains in inflation, where risks are tilted to the upside. Continued weather-related disturbances, geopolitical tensions and possible related rise in commodity price and shipping rates, and possible minimum wage hikes could all lead to a reacceleration in inflation,” Mr. Tsuchiya said.

In addition to inflation, UA&P’s Mr. Terosa said to look out for the same external pressures felt back in 2022 with the Russia–Ukraine war to the breakout of the Israel–Hamas war last year.

“The possibility of tremendous wage increases this year as recommended by legislators can help pull up inflation beyond the range set by the BSP,” he added.

PNB’s Mr. Arogo said that should conditions improve in the coming months, rate cuts may happen earlier, and a reduction in the RRP rate and above 50-bps cut is possible.

“The Fed also has opened the door for a total 75 bps cut this year and investors believe that it should be more,” he added.

“The BSP has maintained a 100-bps interest rate differential from the Fed rates, and we think this will continue,” Mr. Asuncion said.

“The pursuit of price stability remains the BSP’s primary objective, and we remain committed to keeping inflation within the government’s target range while also ensuring inflation expectations remain anchored. That being said, the BSP continues to monitor current developments and the risks to inflation and remains ready to adjust monetary settings as necessary,” the BSP said.

FOREIGN EXCHANGE (FX) MARKET
BSP: Uncertainty over the path of US monetary policy amid potential upside risks to inflation as well as lingering geopolitical concerns are likely to remain key factors in regional currency movements in the near term. Nevertheless, the country’s improving current account outlook amid the expected increased growth in services exports and the business process outsourcing sector will provide support to the peso. Structural FX flows from overseas Filipino remittances, foreign direct investment inflows as well as recent recovery in travel receipts will likewise influence the domestic currency. The substantial gross international reserves also provide a level of comfort in the peso amid the current challenging global environment.

Mr. Arogo: We believe financial markets will remain volatile due to the possibility of inflation re-acceleration in [second quarter 2024] to [third quarter 2024]. Nevertheless, average inflation in 2024 and 2025 should generally be better. This is because we assume that supply shocks will not be as severe compared to 2022 (Russia-Ukraine war) and 2023 (State of Calamity from November 2022 to April 2023 due to Typhoon Paeng). As such, the USD/PHP trade at a range of P54.5-P57.5.

Mr. Asuncion: We expect the USD/PHP to rewind back to the P53-P54 trading range by year-end 2024. We trace this bullish year-end PHP outlook to the fundamental arguments of: 1) waning USD due to Fed rate cuts; 2) lower net external outflows—a reflection of a 2024 GDP (gross domestic product) growth below 6% that supports a gradual GIR (gross international reserves) buildup; and 3) a rate differential that would buck pressures to compress amid central bank rate cuts with the BSP on course to cut its policy rate in [fourth quarter 2024] and thus, trail the Fed’s rate easing schedule.

Escalating geopolitical risks that can spawn supply chain bottlenecks and higher logistical costs can throw a monkey wrench at this too-good-to-be-true year-end trajectory of a weaker USD/PHP. But as geopolitical risks and drought conditions dissipate at some point (including safe-haven demand), the fundamental backdrop depicted by a weaker USD and Fed easing rates would re-surface and conclude the unfinished business of a weaker USD/PHP.

Mr. Mapa: Local financial markets will once again take their cue from global developments with the Fed rate cut cycle (once called the pivot) still in question.

Mr. Terosa: The peso can become strong this year if the Fed cuts policy rates and inflation will continue to be tame. In the first quarter, the peso will continue to trade sideways as interest rates in the USA remain elevated and inflation remains within the BSP range.

Mr. Tsuchiya: We expect the peso to depreciate a bit in [the first half of] 2024, before strengthening later in the year. Relatively high prices, particularly given assumed reacceleration in prices in [second quarter] due to base effects, would likely keep investors cautious. But once the Fed and the BSP starts cutting rates and inflation rate declines, it should provide support to the peso.

EQUITIES MARKET
BSP: The robust economic growth outturn for 2023, easing inflation, and the positive growth outlook for 2024 are expected to support investor confidence.

Domestic economic activity is seen to remain intact over the medium term. The projected GDP growth path is supported by improved global GDP growth outlook and a projected decline in global crude oil prices, tempered in part by the lagged impact of the policy interest rate adjustments.

Inflation also eased further to 2.8% in January 2024 from 3.9% in December 2023, and the lowest since October 2020 when inflation was at 2.3 percent.

Various multilateral organizations expect the Philippines to be one of the fastest-growing economies in Asia in 2023 and 2024.

Risks to the macroeconomic outlook include a temporary rise in inflation in April to July 2024 due to possible price pressures from lower domestic supply of rice and corn as well as positive base effects. Downside risks to global economic growth include new commodity price spikes from geopolitical shocks — including continued attacks in the Middle East — and supply disruptions and concerns over the property sector in China.

Mr. Arogo: We believe financial markets will remain volatile due to the possibility of inflation reacceleration in [second quarter 2024] to [third quarter 2024]. Nevertheless, average inflation in 2024 and 2025 should generally be better. This is because we assume that supply shocks will not be as severe compared to 2022 (Russia-Ukraine war) and 2023 (State of Calamity from November 2022 to April 2023 due to Typhoon Paeng). As such, PSEi may reach 7,250 as a baseline (8,150 as bull case).

Mr. Asuncion: Our updated PSEi year-end 2024 forecasts using autoregressive distributed lag models (commonly known as ARDL models) yielded a range of 6,900 to 7,100. ARDL models are often used to analyze dynamic relationships with time series data in a single-equation framework. Using the same set of economic variables used previously (PISM, Inflation, RRP, USD/PHP, and Dow), we updated our PSEi using this top-down forecasting method.

Initially using the assumptions from our latest PSEi ARDL forecasting exercise, we update the assumptions looking at the following: 1) PISM or the local version of the S&P Global Philippines Manufacturing PMI (or simply the PMI) monitored by the BSP was assumed to gradually slowdown (as the PMI noted a December 2023 manufacturing growth slowdown, albeit still above the 50-level that indicates an expansionary environment within the manufacturing sector) that will eventually recover as the US Fed eventually embraces monetary policy rate cuts starting third quarter 2024 with an upside of earlier-than-expected cuts; 2) For the inflation trajectory, we assumed our current view seeing El Niño impacts as upside to CPI food especially in the summer months; 3) Consequently, we adopted our BSP monetary policy rate stance that sees the BSP tracking its US counterpart’s monetary policy movements throughout 2024 with a potential 100 bps cut that starts around November 2024; 4) For USD/PHP, we assumed steady currency movements between P55-P56 and an end-2024 a little over P56 to the USD; and 5) Finally, US Dow Jones is expected with a steady rise in [first half of 2024] until rate cuts in June that may propel the said stock market index between [44,000-45,000].

Mr. Mapa: Local financial markets will once again take their cue from global developments with the Fed rate cut cycle (once called the pivot) remains in question.

Mr. Terosa: Possible policy rate cuts in the second half of the year and lower inflation rates will shift greater activity to the equities market. Global and domestic optimism [regarding] economic growth and the slowing down of inflation this year bode well for investors in the equities market.

Mr. Tsuchiya: We think normalizing economic conditions and policy setting should help equity prices, after four consecutive years of poor performance. But with slower economic growth, the recovery will be very gradual, falling short of the pre-pandemic level even by the end of the year.

FIXED-INCOME MARKET
BSP: Bond yields particularly in the short-term are expected to be influenced by the BSP’s monetary policy signals on the back of easing domestic inflation and continued demand expansion. Risks to the outlook include possible spillovers from international bond markets, particularly from the US’ signal of maintaining higher for longer policy rate than what market expects and, as a consequence, a potential fall in asset prices. Continued conflict in Gaza and Israel, compounded by attacks in the Red Sea, ongoing war in Ukraine, and extreme weather shocks, could also result in another episode of supply shocks that could impact global recovery and hence influence trends in global financial markets.

Mr. Arogo: We believe financial markets will remain volatile due to the possibility of inflation re-acceleration in [second quarter 2024] to [third quarter 2024]. Nevertheless, average inflation in 2024 and 2025 should generally be better. This is because we assume that supply shocks will not be as severe compared to 2022 (Russia-Ukraine war) and 2023 (State of Calamity from November 2022 to April 2023 due to Typhoon Paeng). As such, we believe that benchmark BVAL rates by end-2024 will be lower compared to end-2023 levels.

Mr. Asuncion: Even with BSP’s average inflation for 2023 way off with its target range of 2%-4%, the December inflation went down to 3.9% which marked the lowest point for the whole year in 2023. With disinflation continuing and central banks likely to follow Fed’s preference of not rushing into a premature rate cut, the market play would be caution on long-term duration bonds.

Mr. Mapa: Local financial markets will once again take their cue from global developments with the Fed rate cut cycle (once called the pivot) remains in question.

Mr. Terosa: Fixed-income securities will continue to have a positive outlook as long as interest rates remain elevated in the first quarter.

Mr. Tsuchiya: We expect long term rates to rise over the course of the year, despite subsiding inflation and easing monetary policy. This is due to the widening term spread, which is now at a historic low. As monetary policy and economic conditions normalize, the spread should start to recover, exerting a small upward pressure on the long-term rates. — Bernadette Therese M. Gadon

MAJORITY of the bank stocks dropped quarter-on-quarter in the final three months of the year as investors get ready for possible interest rate cuts in the latter half of 2024.

The Philippine Stock Exchange index (PSEi) gained 2% on a quarter-on-quarter basis in the final three months of 2023, a reversal from the 2.3% decline in the third quarter. Year on year, PSEi dipped by 1.8%.

Meanwhile, the financials subindex, which included the banks, fell by 6.6% quarter on quarter at the end of the October-December period, a turnaround from the 0.8% growth recorded in the third quarter. The subindex, however, rose by 5.7% annually.

Ten banks’ stock performance declined out of 15 banks covered in the fourth quarter last year. Leading the quarter-on-quarter decliners were Security Bank Corp. (SECB, -10.6%), East West Banking Corp. (EW, -9.3%), and BDO Unibank, Inc. (BDO, -8.0%).

Five banks were able to gain with their banks’ stock performance in the fourth quarter: Philippine Trust Co. (PTC, 20%), Asia United Bank, (AUB, 6.4%), China Banking Corp. (CHIB, 1.6%), Philippine Business Bank (PBB, 1.2%), and Philippine National Bank (PNB, 0.3%).

Aggregate net income of universal and commercial banks went up by 16.3% to P334.27 billion as of end-December from P287.34 billion last year, data from the Bangko Sentral ng Pilipinas (BSP) showed.

Gross total loan portfolio of these big lenders rose by 8.8% to P12.85 trillion as of end-December from P11.80 trillion a year ago.

The big banks’ gross nonperforming loans (NPLs) ratio, however, edged up to 2.94% in December from 2.85% in December the previous year.

The big banks’ net interest margin (NIM) — a ratio that measures banks’ efficiency in investing their funds by dividing annualized net interest income to average earning asset — grew to 4.52% in the fourth quarter from 3.43% recorded in the same period in 2022.

Despite healthy earnings growth, the banks covered by Maybank Investment saw stock prices weakening in the fourth quarter was a result of some investors pricing in the impact of potential rate cuts in 2024 to the banks’ margins and the slower industry lending growth.

“We, on the other hand, remain positive on the sector, particularly on the big three (BDO, BPI, and MBT), given their scale and pricing power which gives them the advantage on the corporate lending segment, as well as the capacity to fund huge infrastructure projects,” Rachelleen A. Rodriguez, head of research for Maybank Investment Banking Group, said in an e-mail.

“The Philippine banking system remained relatively stable with strong capital and liquidity buffers and improving asset quality.  Most banks kept their credit standards generally unchanged for lending to businesses and consumers in the fourth quarter of 2023,” said Toby Allan C. Arce, head of sales trading at Globalinks Securities and Stocks, Inc., in an e-mail.

Regina Capital Development Corp. Head of Sales Luis A. Limlingan said in an e-mail that key drivers banks growth in the fourth quarter were interest rate movements, economic indicators such as gross domestic product (GDP) growth and unemployment rates, regulatory changes, and market sentiment towards the financial sector.

“Interest rate hikes or cuts by central banks, for instance, can impact net interest margins and profitability. Economic indicators reflect the health of borrowers and overall loan demand. Regulatory changes, especially in terms of capital requirements and compliance costs, can affect operational efficiency and profitability,” added Mr. Limlingan.

Data from the Philippine Statistics Authority (PSA) showed the Philippine economy grew by 5.6% in 2023, falling short of the government’s full-year target of 6-7%. It eased from the 7.6% expansion in 2022.

Preliminary results from the PSA’s Labor Force Survey showed the average unemployment dropped to a record low of 4.3% rate last year, it was lower than 5.4% logged in 2022.

This was the lowest jobless rate in almost two decades since the PSA revised the definition of unemployed in April 2005 to refer to Filipinos aged 15 years and older without a job and are available for work and actively seeking one.

“Continued loan growth and margin expansion drove higher revenues. This was accompanied by lower loan loss provisions for Bank of the Philippine Islands (BPI) and Metropolitan Bank & Trust Co. (MBT). As for Union Bank of the Philippines, despite its strong topline performance, its profitability was dragged down by much higher increases in operational expenses and provisions,” said PNB Research in an e-mail.

The Monetary Board hiked interest rates 450 basis points (bps) from May 2022 to October 2023, bringing the key interest rate to a 16-year high of 6.5% to control inflation.

Latest central bank data showed gross outstanding loans by big banks reached P12.85 trillion at end-December, 8.9% increase from P11.80 trillion in 2022.

BANK STOCK PICKS
In choosing bank stocks, analysts said that investors should look for banks’ loan growth and the consistency of NIM expansion.

“We continue to look to loan growth and net interest margin as the factors driving bank lending income, and thus earnings growth. For the most part, the banks who have been able to keep funding cost low and manage this well, thereby maintaining consistent NIM expansion, are the ones that outperform,” Charmaine Co, research analyst at COL Financial Group, Inc., said in an e-mail.

Mr. Limlingan said that when considering buying bank stocks in the future, investors and traders should weigh several factors.

“Firstly, they should assess the economic environment, including interest rate expectations and GDP growth projections, as these directly impact bank revenues and loan quality. Secondly, regulatory developments, especially those affecting capital adequacy ratios and lending practices, should be monitored closely. Thirdly, competitive positioning within the banking sector, including market share, product offerings, and digital capabilities, is crucial for long-term growth prospects,” he said.

For Ms. Rodriguez, she said that investors should look into the bank’s pricing power, deposit franchise, and lending appetite.

“Scale gives banks pricing power, which we believe is essential to preserve margins. Strong deposit franchise would also help contain the impact of elevated funding costs; we prefer banks with higher current and savings account ratios,” said Ms. Rodriguez.

On the lending side, she recommends going for the banks with the strongest high-yielding consumer loan growth push and the most appetite and scale to take on infrastructure loan demand given the government’s more aggressive infrastructure push this year.

INFLATION
In response to persistent inflationary pressures, the central bank is expected to maintain a hawkish stance on monetary policy in the near term, aimed at curbing inflationary forces. While this strategy may benefit banks through increased interest income, prolonged high interest rates could potentially lead to a rise in loan defaults and NPLs.

“Even if the Monetary Board decides to maintain its current stance, the stringent monetary policy is likely to exert downward pressure on economic growth,” said Mr. Arce.

It is anticipated that the central bank will prolong its pause on rate adjustments until inflation expectations are firmly anchored.

“Looking ahead, the central bank is expected to maintain its cautious approach well into 2024, with the possibility of considering rate cuts only towards the latter part of the year, contingent upon favorable economic conditions and subdued inflationary pressures,” Mr. Arce added.

“This 2024, we expect earnings to expand by 11.1% year on year against 22.5% year on year growth in 2023. The increase in earnings is expected to be driven by higher lending income as loan growth continues and net interest margin expansion tapers off,” said Ms. Co of COL Financial.

“We expect to still see growth in select names due to still healthy expected income growth to be driven by robust consumer lending, improved cost-to-income ratios from the banks’ digital push, and lower overall credit costs.” Ms. Rodriguez of Maybank said.

“For 2024, we forecast earnings growth of around 10% for index banks,” PNB said.

THE COUNTRY’S small enterprises have been the backbone of the economy but their access to credit to grow their business has been challenging.

A total of 1.11 million business enterprises were operating in the Philippines in 2022, Trade department data showed.

About 99.59% of these were MSMEs while 90.49% were micro enterprises. Additionally, of these establishments, 8.69% were small enterprises while 0.40% were medium enterprises.

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Large enterprises, meanwhile, accounted for 0.41% of the businesses operating in the country.

Latest Bangko Sentral ng Pilipinas (BSP) data showed that as of June, banks in the country did not meet the mandatory credit allocation targets for small businesses.

As of June, the country’s banking industry’s loan portfolio reached P9.8 trillion, with loans to micro-, small-, and medium-sized enterprises (MSMEs) accounting for just 4.71% or P461.387 billion.

The compliance rate for micro and small enterprises (MSEs) is still under the mandated 8%, with only 1.93% of the required funds allocated to these businesses.

On the other hand, medium-sized enterprises (MEs) have exceeded the mandated 2% allocation with a compliance rate of 2.78%.

BSP data also showed that the rural and cooperative banks’ compliance rate with MSEs stood at 18.59% while for MEs at 9.32%.

The central bank has stated that they are aware of the importance of financial and digital infrastructure in reducing risks and costs associated with financing for MSMEs.

They also emphasized that they are continuously providing regulations that enable financial support for MSMEs and make it easier for them to access funds. The BSP is working towards bridging the information gap and addressing information asymmetry in the MSME market. 

BSP reiterated that they are committed to providing a regulatory environment that addresses financial access barriers such as cost, lack of infrastructure, and information asymmetry, among others.

Karen L. Cua, senior vice-president at BDO Network Bank, said commercial banks struggle to meet the mandatory credit allocation targets for small business principally for two reasons.

They are either undocumented or under-documented so that traditional methods for credit evaluation would be challenged and the owners of these small business have little or no assets against which banks can secure their exposure.

BDO Network Bank, the rural banking arm of BDO Unibank, Inc., has invested in serving MSMEs over the last six years.

For Japhet Louis A. Tantiangco, senior research analyst at Philstocks Financial, Inc., the high interest rates on loans for MSMEs could be due to the high risk associated with lending to this group.

This makes it difficult for many in the MSME sector to afford these loans.

“There may also be capacity constraints wherein many of the MSEs are unable to comply with the loan application requirements of the banks,” Mr. Tantiangco said in an e-mail.

The MSME sector is “highly vital” not only for economic growth, but also for the livelihoods of the majority of the population, Rachelleen A. Rodriguez, head of research at Maybank Investment Banking Group – Philippines, said in an e-mail.

“Growth of the sector would raise per capita wealth and overall standard of living, and for the banking sector, would raise yields and profits,” she added.

For his part, Mr. Tantiangco said that if the productivity of these enterprises increases, it may then provide a significant boost in economic growth.

“MSMEs, especially the micro businesses, may also help in narrowing the income inequality in the country. Microenterprises are usually the path to go of individuals in lower quintile groups if they wish to pursue business,” he added.

These businesses are growth engine for the economy, said Ms. Cua.

In rural areas, MSMEs dominate the business landscape compared with medium to large companies.

Moreover, she explained that banks help MSMEs cover short-term cash flow gaps and fuel their growth and expansion.

THE FRAMEWORK
According to the Magna Carta for MSMEs, banks are required to allocate 10% of their credit portfolio to small businesses — 8% of it should be allotted to micro and small enterprises while 2% of it to medium enterprises.

Republic Act (RA) No. 6977 or the Magna Carta for Small Enterprises promotes, supports, strengthens, and encourages the growth and development of MSMEs in all productive sectors of the economy.

Additionally, RA 6977 sets the minimum percentage of banks’ loan portfolios to be allocated for MSME lending, which makes the process for MSMEs to operate and obtain financial support for their businesses easier.

BDO’s Ms. Cua said that the Magna Carta highlights the role of the private sector in serving MSMEs by participating in government programs for MSMEs.

She also added that the RA 6977 specifies the government assistance that must be made available and the proper government agencies who will be responsible in achieving the set objectives.

In the third quarter, the economy saw the continued rise in inflation rates alongside the rise in interest rates.

In hopes to stabilize and anchor inflation expectations, the BSP resumed hiking its policy rate by 25 basis points to 6.5% in an off-cycle meeting held in late October.

However, in its November meeting, the central bank decided to maintain its interest rate unchanged following the favorable ease in inflation that was seen in October.

Ms. Cua said that given these developments, corporate demand softened while consumer demand sustained loan growth.

“MSME growth is similarly affected as inflation has limited consumption and demand for goods [and] interest rate hike has increased the cost of funding,” she added.

For Ms. Rodriguez, she said that third-quarter market performance is largely impacted by the movement and expectation of hikes on both the Fed and BSP’s policy rates.

“As rates appear to be higher for a longer period of time, banks will benefit from higher margins for a few more quarters,” she said.

She further explained that policy rates, meanwhile, does not impact the MSME sector as interest rate movements for all consumer type loans are driven more by competition, rather than policy rate movements.

HURDLES
Though simply, one could not overlook that MSMEs in the country may have challenges or struggles they may be facing as well.

Ms. Cua noted that some key challenges that MSMEs may experience are limited access to reasonable bank financing, regulatory compliance, and insufficient financial education.

Other reasons are financial difficulties which include inadequate risk management to mitigate the impact of natural disasters, fire outbreaks, personal accidents, and illnesses.

Additionally, many people lack sufficient credit, capital, and savings to cope with short-term cash flow disruptions caused by supply chain shocks, collection delays, or large personal expenses like tuition fees.

For Ms. Rodriguez, rising inflation would still be the biggest hurdle MSME may face as this largely impacts their input costs and may result to reducing their margins.

“High commodity prices would force them to stock up more inventory, raising their need for leverage while their profits are actually shrinking.”

Meanwhile, Mr. Tantiangco believes that the MSME sector currently faces challenges in accessing financing, rising production costs, market competition, and productivity.

EFFORTS IN ACTION?
The central bank should continue its efforts in enabling institutions to better serve MSMEs, BDO’s Ms. Cua said.

The BSP has been actively promoting the digital landscape, with initiatives such as the implementation of the Basic Merchant Account (BMA) allowing MSMEs to accept and make digital payments.

Other initiatives include creating digital footprints for MSMEs which enables banks to do better credit assessments.

Ms. Cua believes that strengthening the credit bureaus will enable more institutions to serve MSMEs more effectively. She further explained that the central bank, along with the government and private sector, can develop and implement more risk-shared programs to reach other underserved segments within MSMEs such as the agricultural sector.

Ms. Rodriguez said that BSP assigns a lower risk weighting for MSME loans compared with other types of loans, which means that banks are incentivized to lend to the sector.

“It’s a win-win situation as banks could improve their yields through MSME lending at a lower capital charge,” she said.

Furthermore, she explained that the risk weight was reduced to 50% during the pandemic but was increased to 75% in 2023, coinciding with the BSP’s lowering of the reserve requirement to 9.5%.

She also said that implementing programs aimed at enhancing financial education would prove to be beneficial.

For his part, Mr. Tantiangco said that the government should increase the capacity of its agencies that provide financial aid to MSMEs and raise awareness about the availability of such aid.

Additionally, he emphasized the importance of helping MSMEs adopt digital means of conducting business, which could significantly improve their efficiency. Given this, the DTI is already executing efforts.

REVAMPING LENDING PRACTICES
What should banks do to rethink their lending practices to small businesses and bring about growth opportunities?

In a 2022 McKinsey and Co. report titled “How banks can reimagine lending to small business and medium-sized enterprises,” modernizing business-lending processes can help banks capture more growth.

McKinsey highlighted that while banks face both opportunities and challenges in the market for lending to small businesses, most of them are not reaching their full potential.

This failure to meet the needs of small businesses makes them miss out on certain opportunities that could be advantageous to them.

“There is no one-size-fits-all approach to suit every bank and market, but banks that rethink their SME-lending businesses can increase their market share and promote profitable growth,” the report said.

Furthermore, the report emphasized that lending to small- and medium-sized enterprises (SMEs) will be crucial for banks’ economic growth and profitability, especially after the economic impact the pandemic has left and scarred.

Despite the opportunities and trends laid out for them, the report also pointed out that banks often struggle to provide appropriate lending solutions to their SME customers and reduce the cost of serving them.

Banks, therefore, need to re-strategize their lending practices to small businesses and create credit offerings that will cater to the specific needs of SMEs. This, in turn, will help them to better serve their customers and increase their revenue growth.

Banks are primarily responsible for developing their business strategies, on the other hand, MSMEs constitute an untapped segment that can actively contribute to the country’s economic growth.

The central bank’s role is to create an enabling environment that will encourage banks to lend to viable and productive sectors and enterprises, including MSMEs.

“BSP has adopted a three-pronged approach to improve access of MSMEs to financing,” BSP said in an e-mail.

This approach includes strengthening credit infrastructure, enabling digital and bankable MSMEs and agriculture enterprises, and promoting innovative financing approaches which are all supported by financial literacy programs.

BDO’s Ms. Cua said that establishing a complete banking relationship is crucial for sustainable and rewarding lending to MSMEs.

She said that rethinking lending for MSMEs requires challenging conventional lending methods.

Ms. Cua also said that business loans are heavily reliant on financial statements, require collateral for security, and involve extensive write-ups and committee discussions for credit approval.

For Mr. Tantiangco, he believes that banks should incorporate more technological means in their dealings with SMEs, especially in their processes.

Additionally, they should rely more on data analytics when assessing SME loan applicants.

However, he also noted that there are no necessary changes needed in banks’ credit offerings for MSMEs. Instead, banks should focus on digitizing their processes and becoming more data analytics dependent in their dealings with these enterprises.

The rise of digitalization has led to a boom in e-commerce, Ms. Rodriguez said.

And as a result, banks are aggressively expanding their digital lending offerings and simplifying the borrowing process for even the non-tech savvy Filipinos.

“Data science and AI (artificial intelligence) can help identify lending opportunities based on borrowing patterns, enabling banks to offer personalized services that cater to clients’ specific funding needs,” she said.

Additionally, there is a huge untapped market in non-urban areas that banks can tap into, she said.

Banks are constantly enhancing their data mining capabilities to identify lending opportunities more effectively.

She also said that offering lending and other financial products to existing depositors is beneficial, as they represent a large pool of potential customers.

JESSICA DELA, 60, got a bank loan to start her liquefied petroleum gas (LPG) franchise.

However, she said that she wouldn’t accept the loan if her first business — a refreshment kiosk — isn’t stable.

For her, she advised new business owners, especially small business owners, to prepare beforehand, and only resort to lending when you need an additional revolving funds or you can ensure your business or other income can cover for your loan, because there are no guarantees on a startup to bring profit right away.

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Latest data from the Department of Trade and Industry’s (DTI) 2022 Philippine MSME Statistics showed 99.59% of total businesses in the country are MSMEs, with 90.49% falling under microenterprises.

In an e-mail interview with the Department of Trade and Industry Regional Operations Group (DTI-ROG) it defined micro, small, and medium enterprises (MSMEs), per the Magna Carta for MSMEs, as any business activity or enterprise, whether single proprietorship, cooperative, partnership or corporation, whose total assets are not more than P3 million (micro business), P3 million-P15 million (small), and P15 million-P100 million (medium).

Additionally, its Barangay Micro Business Enterprise (BMBEs Act of 2002), who caters to microenterprises, also adapted its definition to any businesses whose total assets are not more than P3 million.

With a huge chunk of these businesses falling under services, such as retail stores and sari-sari stores, most Filipino business owners survive on profits accumulated from their business to either restock or expand said business.

The country’s economic landscape was heavily affected this year from base effects of inflation from the COVID-19 pandemic, and geopolitical tensions that started last year bringing prices of goods and services up, which cascaded to smaller businesses in the Philippines.

Data from the DTI-ROG showed a total of 277,666 BMBE registrations since the transfer from local government units (LGU) to Negosyo Centers.

A total of 46,933 BMBEs have been registered from January to October, down from 60,021 registrations as of end-2022.

“A 2021 survey commissioned by the Asian Development Bank (ADB) among 1,000 respondents revealed that access to credit and capital, after access to markets, continues to be the second most significant barrier to growth for MSMEs,” the Bangko Sentral ng Pilipinas (BSP) said in an e-mail exchange.

With MSMEs not needing to loan, the central bank said that these small businesses rely mostly on self-funding or funding through family and friends.

With limited resources of owners to improve their business, some have opted to lending to start or grow their business. However, how safe is it for MSMEs to lend in the Philippines?

MSME LENDING LANDSCAPE
Ms. Dela said that she was not aware of how rampant illegal lending companies are in the country. While she received offers online on lending offers, she did not see the need to avail of those offers because she already received a loan offer from her bank and is aware of different loan programs from other well-known banks.

As a government agency handling and ensuring fair competition of businesses in the country, the DTI-ROG addressed usurious or predatory lending practices by “(1) providing legitimate financial services that further disincentive small businesses to avail of illegal lending companies, and (2) enhancing information dissemination for better informed borrowers.”

“In terms of information dissemination against illegal lending, the Credit Information Corp. (CIC) publicizes the efforts of the Bangko Sentral ng Pilipinas (BSP) and Securities and Exchange Commission (SEC). In particular, [the] SEC is conducting a crackdown on unauthorized and abusive online lending activities,” the DTI-ROG said.

In an e-mail exchange, Union Bank of the Philippines (UnionBank) Business Banking Head Senior Vice-President Jaypee Soliman said that UnionBank offers different products for different MSMEs such as their Supply Chain Financing program wherein they provide a revolving credit facility to MSMEs within the system.

“We use data driven and alternative data models plus relationship data to assign credit limits and provide funding even on a per transaction basis. This allows full control and flexibility to the MSME, as they are not tied fully to a term, but they have the ability to draw and pay as needed and as funds are collected,” Mr. Soliman said.

“This is what truly sets us apart. Our ability to collect data that gives us a better understanding of the MSME and be used in credit models that no longer requires massive documentary and long assessment periods,” he added.

Once a business has been registered under BMBE, they can seek services of capacity building, technology transfer, financing support, and market access assistance through Negosyo Centers around the Philippines, the DTI-ROG said.

Furthermore, certified BMBEs are eligible for income tax exemptions from the Bureau of Internal Revenue and exemption from the coverage of minimum wage by the Department of Labor and Employment.

While many programs are available for all kinds of MSMEs in the country, Ms. Dela said that she started her first business using her own money because she did not meet the criteria of most banks.

“I was offered a loan for my second business because I already had a record in the bank from my first business, [and] saw how capable it is, and they saw that I deposit every day,” she said.

According to the DTI-ROG, prior to the Go Negosyo Act, BMBE registration was coursed through LGUs which required nine documentary requirements. With the BMBE transferred through Negosyo Centers, businesses only need to present two requirements (business certificate and registration form) to be certified.

For UnionBank, Mr. Soliman said that they accommodate small businesses by credit scoring them through alternative models, and using those data to allow businesses who does not have access to collateral to be able to borrow.

“We are able to expand the ability of a small and even a micro business to access formal lending, which is hard to do for them.”

“As a bank, we also educate small business owners or negosyantes on how they can fully manage their financial data through digitization of their accounting, collections, and so on, which later on builds a ‘digital footprint’ for them that is used in alternative credit,” Mr. Soliman said.

Moreover, for small businesses who do not meet most banks’ criteria, Mr. Soliman said that there are platforms such as SeekCap, a hub of financial institutions in the Philippines where borrowers can register to gain access for easier search on various institutions where businesses can meet its criteria.

Despite the innovation of technology to make lending easier for small businesses, predatory lenders also adapted online to scam business owners.

For businesses that have been scammed already, Mr. Soliman said that rebuilding your business can help you in applying to legal lenders. With alternative data, UnionBank will use data points of the business, its operations, collections, and financial behavior to assess whether a business can be granted a loan.

“Businesses who might not be able to meet some of the alternative criteria would have an option to provide additional security to their loan such as real estate,” Mr. Soliman added.

The DTI-ROG recommended MSMEs to apply for loans via Small Business Corp. (SB Corp.) through its RISE UP Micro Multi-purpose Loan where microenterprises can borrow up to P300,000 payable monthly up to three years.

Loans through the SB Corp. only have four requirements, namely: a government-issued ID, photos and videos of business operations and assets, corporate documents (if applicable), and barangay certificate (for P100,000 and below loans)/BMBE certificate or Mayor’s permit (for above P100,000 loans).

With inflation rising this year affecting goods and services, businesses also bear the brunt of the effects to adjust their prices that can accommodate both their business’ needs, as well as keeping it low to avoid passing the expense to their customers.

Ms. Dela said that because her business is a franchise, she has no say on price movements of LPG products. Her option is to text blast her customers on price changes prior the implementation to let them know ahead if the LPG price increases or decreases, helping her customers decide when to order.

TIPS FOR A WISER NEGOSYANTE
Mr. Soliman said to watch out for “too-good-to-be-true” programs, and as a negosyante, doing research on various lending offers or finding a fellow experienced negosyante or business communities to provide feedback and guidance, can help to make sure businesses won’t be tricked.

He also noted that UnionBank provides platforms for community building such as the UnionBank Globallinker.

“This platform allows you to connect with more than 80,000 MSMEs in the Philippines, and even access more than 500,000 MSMEs around the world. We also provide access to MSME support such as educational webinars and trainings, technology service providers, and even other financial lenders who are all part of a larger community,” he said.

The central bank advised negosyantes to ensure that they are borrowing or transacting with licensed financial service providers.

“It is also important for MSMEs to fully understand the terms and conditions of their loan contracts, their responsibilities as borrowers, and the consequences of defaulting on a loan contract. MSMEs are encouraged to ensure that they have the capacity to pay their obligations within the terms of their loan contracts,” the BSP said.

The DTI-ROG added that small businesses can also coordinate with their local Negosyo Centers or the Negosyo Center Online Portal to keep track on trainings, marketing opportunities, and other business development services available within their location.

“The DTI invests in developing MSMEs by allocating funding for programs such as the ‘One Town, One Product’ to provide product development assistance, or ‘Kapatid Mentor Me’ to provide mentorship modules. Participation of MSMEs to these programs are fully subsidized by DTI,” it said.

“We also advise small businesses to leverage digitalization to enhance their business operations (e.g., digitized bookkeeping, automated Point of Sale, etc.) or expand their consumer base (e.g., online marketing, last mile delivery services, etc.),” it added.

MEETING between strong minds of Gokongwei group of companies and Tyme group, digital bank GoTyme Bank was formed and conceived its “phygital” model, a combination of a well-established digital system with physical and human banking.

Tyme Bank, a multicountry digital banking group, designs, builds, and commercializes digital banks to solve the challenge of financial services access for the underserved and unbanked in emerging markets. It brought its experience and expertise to GoTyme.

As one of the six digital banks licensed by the Bangko Sentral ng Pilipinas, GoTyme leverages the trusted brands and retail ecosystem of the Gokongwei group of companies. The bank started its commercial operations in October 2022.

Its focus is to provide preferred banking to all Filipinos through the “phygital” model and this will pave the way to unlocking the Filipino financial potential.

To know more about GoTyme Bank, BusinessWorld reached out to GoTyme’s President and Chief Executive Officer Nate Clarke and Co-Chief Executive Officer Albert Raymund O. Tinio to share their insights. Below is the excerpt of the e-mail interview.

How does GoTyme stand out among other existing digital banks in the country?

Nate Clarke: GoTyme Bank is the first digital bank in the country with a phygital business model. This allows us to provide customers first-rate banking experiences previously reserved for the premium or preferred clients of traditional banks. The fact that we provide digital banking services with a personalized and humanized customer experience makes us a human digital bank — with focus on human interaction or human support so that customers feel that their needs, and even wants, are understood and addressed.   

A thriving startup, GoTyme continues to invest in technologies and humans to provide its customers the best possible products and services.

What are the products you offer in the local market that would make you different from existing banking products in the country?

Albert Raymund O. Tinio: Our vision is to unlock the financial potential of all Filipinos. To do so, we use technology to drive inclusion and accessibility.  We have simplified products, processes, and services so that these are available to all our customers.

We started with sending money — GoTyme users can use their app to send funds from their GoTyme account to any bank or e-wallet for free, three times a week. Our deposits and withdrawals are always free at any Robinsons or Gokongwei retail counter.

We followed that up with shopping — GoTyme users earn three times the points whenever they use their GoTyme Bank Visa debit card within the Gokongwei retail ecosystem and one point elsewhere.  Further, we introduced a way to redeem these rewards points either as direct merchandise or as cash. The Asian Banking & Finance Retail Banking Awards 2023 cited GoTyme as the Debit Card Initiative of the Year.

We simplified savings — GoTyme offers the highest base interest rate of 5% per annum. Every GoTyme savings account holder can enjoy this interest rate, with no mission to complete and no minimum balance to maintain.  We also introduced savings tools like Save the Change and Auto-Save to help instill the habit of saving.

Moreover, GoTyme has started to roll out small merchant loans based on customers’ transaction history with an easy and hassle-free collection method, as well as consumer loans or earned wage access that allows employees access to their already earned net wages before their payday.

What are the benefits users can enjoy when they open an account with GoTyme?

Mr. Tinio: Customers seek not just products, but solutions tailored to their specific needs. They crave proactive outreach, bespoke services, and, critically, the empathy that comes with a seamless hybrid experience. A good user interface or user experience begins at first contact: GoTyme makes sure that customers enjoy a friendly and inviting experience using the app or at the kiosk. The GoTyme app is easy to use and navigate even for the non-digital natives, while the GoTyme kiosk’s sleek design makes onboarding and card printing a smooth and pleasant experience. GoTyme was recognized by the Red Dot Design Awards 2023 and UX Design Awards 2023 for its app and kiosk that bring world-class user interface and user experience to its customers.

GoTyme has rolled out 400 kiosks supported by over 1,000 bank ambassadors (BAs). These are located in Robinsons Supermarkets and other Gokongwei retail outlets. The kiosks and the BAs account for two-thirds of GoTyme’s customer acquisition.

In terms of cybersecurity, what are the measures you implement to protect customers from issues encountered in online transactions?

Mr. Clarke: GoTyme Bank offers secure, straightforward banking. We have adopted and keep upgrading our cutting-edge technology that strengthens cybersecurity controls. We employ high levels of encryption throughout our platform. We do automated security checking of our code with a tool for analyzing software for bugs and vulnerabilities; this allows us to monitor the entirety of our systems for any problems that may arise and address these right away.

As a cloud-based bank, we take advantage of Amazon Web Services (AWS), availing ourselves of PCI DSS (a global information security standard for protecting data) and NIST (cybersecurity framework used by governments and industries worldwide). Amazon has a team of thousands of security engineers who constantly work on the platform to protect its clients from all kinds of threats. 

We use Vulnerability Assessment and Penetration Testing (VAPT), a process that helps us identify and fix security weaknesses before attackers can exploit them. We use in-app tools to prevent code being broken into or the use of the app on jailbroken phones.

We work with NICE Actimize, the leading global provider of financial crime, risk, and compliance solutions, guarding us against fraud and money laundering. This allows us to create a whole bunch of machine learning and AI-driven models for us to make choices around, to help to know if this transaction is a real one or a fake one.

Further, our teams conduct real-time monitoring of our platform’s health. This enables them to react immediately to potential incidents. Our modern design enables our systems to self-heal and scale to maintain service to customers.

Mr. Tinio: We also educate customers on the secure use of digital banking platforms and encourage them to set up features such as multifactor authentication, SMS or e-mail alerts, and fraud monitoring to prevent suspicious online banking activity. We use in-app biometrics to authenticate and additional GoTyme-implemented biometrics for validation for high-value activities like change in phone number. We design and execute the most user-friendly experience, encouraging customers to intuitively turn on valuable security features.

What are your plans to tap the unbanked population in the country, especially in the rural areas?

Mr. Clarke: GoTyme’s goal is to help all Filipinos unlock their financial potential. Our kiosks have been deployed to Robinsons retail outlets in the provinces in Luzon, the Visayas, and Mindanao. Our phygital model makes it easy for the unbanked and underbanked in the rural areas to open an account with us.

We have considered some of the peculiar banking problems plaguing Filipinos. For example, financial services are hampered by obsolete legislation that excludes potential customers from opening bank accounts, a shortage of cash points to enable account funding and transactions, and underdeveloped public infrastructure, particularly in the rural areas, resulting in poor connectivity. These have knock-on effects on banking fees on the back of security and logistical challenges, the high credit risk driven by unavailability of data and/or underdeveloped credit bureaus, and the markets being dominated by incumbents who are not motivated to offer competitive pricing. Finally, there’s the all-important emotional access stemming from a general distrust of the banking sector, and a relatively lower financial and digital literacy, which make it more difficult to drive adoption.

Our phygital business model puts a premium on access in all aspects of its operations. It has deployed a high-tech, high-touch retail-integrated distribution model powered by GoTyme’s smart mobile apps. Physical onboarding kiosks staffed by bank ambassadors enable five-minute account opening and real-time physical card issuing, while cash deposits and withdrawals are widely available through store cashiers. By ensuring that a helpful human is always at the end of the line, GoTyme Bank is committed to constantly improve on its customer service, such that quick, efficient, and helpful responses become a habit among its bank ambassadors and personal bankers.

Your website claims, “We’re high tech with a human touch — everything a next-level bank should be.” What does this mean exactly? Can you provide specific instances that illustrate this?

Mr. Tinio: Among the digital innovations we introduced is the use of onboarding kiosks that enable account opening and receiving a bank card in five minutes or less. These kiosks though, while digital and innovative, would not be sustainable, without the BAs.  BAs are there to help and guide would be GoTymers, as our customers have come to be called, through the onboarding process.  They patiently explain, answer questions, and provide the human interaction that Filipinos crave and need.  The BAs have built relationships with their supermarket-going GoTymers, so much so that they return with potential GoTymers in tow.  We actually ran an experiment in which we left newly activated kiosks without BAs for a period of time.  As expected, these kiosks had zero activations compared to those with BAs.

We utilize technology and analytical processes to better understand the services and products suited to our customers’ financial needs. With AI dominating the current conversation, data-driven AI capabilities allow us to analyze customers at a level of granularity, which puts us in a better position to predict needs and behaviors more accurately. But our interactions remain human-to-human because people prefer to talk to people to be heard and be understood by someone who generally cares.

On the surface, digital excellence and human interaction often appear as two opposing forces. But in today’s reality they are two sides of the same coin, both playing a crucial role in enhancing customer experiences. Balancing these two elements can significantly improve the service quality offered by financial institutions and drive success at a time when consumers feel less certain about their financial wellness on the heels of the pandemic.

The bank is planning to launch a new loan product which will focus on micro, small, and medium enterprises (MSMEs). How will MSMEs benefit from this loan program?

Mr. Clarke: Many banks currently impose onerous documentation and checks on MSMEs before approving the MSMEs for a credit product. These processes often take a long time, such that by the time the credit application is approved, the MSME’s business or ability to take advantage of growth opportunities is negatively impacted. Some MSMEs are intimidated or confused by the documentation requirements, and choose to opt out of the process, resulting in an opportunity loss for both banks and MSME customers. MSMEs are also often stressed by the thought of taking out loans and are worried if they will have sufficient control over their cash flow.

GoTyme Bank’s Flexible Financing product for SMEs is designed to address these difficult pain points. Often, no further documentation is required from MSMEs beyond the basic identification checks. Customers are approved in real time, after a three-step, three-minute application. The loan funds are disbursed within one business day. The more the MSME does business with us or with our partners, the bigger the credit we are able to make available to the MSME customer. The Flexible Financing repayment scheme also follows the business performance of the MSMEs, as it is pegged at a percentage of the MSME’s  business revenue. If the MSME has a slower month of business performance, we collect less in repayments from the MSME customer. Through this, MSMEs can now get credit instantly when they need it, enabling GoTyme to stand shoulder to shoulder with the MSME business, with the Flexible Financing product, as a supportive banking partner.

What other products and services should we look forward to in the future?

Mr. Clarke:  With less than 3% of the Filipino population having access to credit, investments, and insurance, we plan to offer all these. We have in fact begun to offer affordable loans. By next year, we will be expanding our portfolio by including more investment instruments such as stock and cryptocurrency trading in our platform. There is much higher penetration into crypto than in traditional investments. More people in the Philippines have crypto investments than even stocks. We are planning to have one new asset class live on our platform by the first quarter of 2024, by the middle of which we should have two more asset classes. We want to have a healthy mix of high-risk and low-risk asset product offerings. We’re working with the BSP and the Securities and Exchange Commission to meet the requirements to begin moving this new lineup of financial products. We are also considering offering microinsurance, but the plan is still under review as we need to acquire a license to advance insurance products.

To know more about GoTyme Bank, visit https://www.gotyme.com.ph/.

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By Andrea C. Abestano, Researcher

HIGH INFLATION, expensive borrowing costs continued to affect local financial markets in the third quarter, signaling volatility to persist for the rest of the year.

The barometer Philippine Stock Exchange index (PSEi) finished the July-to-September period at 6,321.24, dipped by 2.3% quarter on quarter from 6,468.07 at the end of the second quarter.

Annually, the index went up by 10.1% from the 5,741.07 finish in the third quarter of 2022.

On the other hand, data by Bankers Association of the Philippines showed the peso closed P56.575 against the greenback in the third quarter, weakening by 2.4% from the second quarter finish of P55.20 to a dollar.

Year on year, the local unit strengthened by 3.6% from P58.63 finish in the same quarter last year.

The demand for Treasury bills (T-bills) auction subscription totaled P654.9 billion with a cumulative P182.6 billion offered amount in the third quarter. This was higher than the P416.6 billion subscription with P157.4 billion offered amount in the previous quarter.

The amount of oversubscription at P384.8 billion was also higher than the second quarter’s P259.2 billion.

Meanwhile, the demand for Treasury bonds (T-bonds) saw a total of P642.2 billion, lower than the P687.2 billion in the April-to-June period. Despite the decline, the demand for T-bonds in the third quarter period was higher than the aggregate offered amount of P279.7 billion.

Domestic yields at the secondary bond market inched up by 0.90 basis points (bps) on average quarter on quarter, based on the PHP Bloomberg Valuation (BVAL) Service Reference Rates published on the Philippine Dealing System’s website.

On an annual basis, yields grew on average by 18.38 bps.

Analysts attributed the local financial market developments for the third quarter to global factors of rising borrowing costs, stubborn inflation, and geopolitical conflict.

The third quarter of the year saw rate pauses as the US central banks pause key monetary policies at 5.25-5.5%, the highest level in two decades.

Borrowing costs were raised by 500 bps by the US Federal Reserve since March 2022 to combat inflation.

The Bangko Sentral ng Pilipinas (BSP) also kept its key rate at 6.25% between May to September this year. Since May 2022, policy rate hikes had reached a total of 450 bps to tame inflation.

But headline inflation quickened to 6.1%, the highest since the 6.6% recorded in April.

However, in an off-cycle meeting in October, the central bank lifted its policy rates by 25 bps. Target reverse repurchase (RRP) rate was raised to 6.5%. Interest rates for the overnight deposit and lending facilities were also kept at 6% and 7%, respectively.

October inflation eased to 4.9% and further cooled to 4.1% in November, a 20-month low.

Security Bank Corp. Chief Economist Robert Dan J. Roces said in an e-mail that the local financial market in the third quarter was influenced by stubborn inflation and high borrowing costs.

China Banking Corp. (China Bank) Chief Economist Domini S. Velasquez said that “these two factors led to higher government security yields, weaker peso, and outflows from the local bourse.” 

“Amid export restrictions, extreme weather conditions and fare hikes, domestic inflation remained on the upside for the first two months of the quarter,” Metrobank Research said in an e-mail. 

BSP said in an e-mail interview that by the end of the [third] quarter, widening debt spreads and rising domestic and global inflation fueled “a higher-for-longer interest rate environment.”

INDICATORS TO WATCH OUT FOR
Volatility is likely to persist in the local financial markets in the near term, said Mr. Roces.

For Ms. Velasquez, the financial market will be relatively stable for the rest of the year given that “central banks have reached their peak policy rates.”

“Looking ahead, the outlook for the local financial markets remains cautious [with] inflation [still] a key concern for policymakers while elevated interest rates are a challenge to businesses,” Mr. Roces said.

Similarly, the BSP said that it “[deems] it appropriate to keep an elevated target RRP Rate for the time being until inflation expectations are better anchored and a downtrend in inflation becomes evident.”

Mr. Roces adds that although inflation may have slowed in October, further rate hikes by the BSP are still dependent on several factors, namely: inflation data, global economic developments, domestic shock due to adverse weather, and the previous Barangay and Sangguniang Kabataan (SK) elections which should increase government spending, he said.

He also expects geopolitical conflict between Israel and Palestine to be an influencing factor to look out for.

“The ongoing conflict between Israel and Palestine has the potential to disrupt global energy supplies and contribute to rising oil prices if it turns regional. This could directly impact the local financial markets by putting upward pressure on inflation,” Mr. Roces said.

On the other hand, Metrobank Research said that the conflict should not influence the local financial market in the coming months as it is still mainly a regional conflict. 

“The risk of an escalation has recently receded, and there are talks already of a truce and an exchange of hostages,” it said.

“The effects of the Israel-Hamas conflict on the financial markets and economy remain manageable, for as long as the conflict does not escalate and spread to other countries in the Middle East,” Rizal Commercial Banking Corp. (RCBC) Chief Economist Michael L. Ricafort said in an e-mail.

“[The conflict’s] effect to financial markets is quite small. We saw this at the start of the war, where financial markets reacted with risk-off sentiment the day after but corrected immediately,” Ms. Velasquez adds.

On the upside, Mr. Ricafort sees a boost in the economy for the last quarter of the year as the gross domestic product (GDP) print picks up amidst increased government spending and easing global prices as of October.

He expects the Philippine economy to grow around 5.5%-6% in 2023.

In the July-to-September period, the country’s GDP posted a 5.9% annual growth, an improvement from the 4.3% in the second quarter. This brought the country’s year-to-date GDP growth to 5.5%, falling short of the 6-7% growth target by end-2023.

RATE HIKE PAUSES
“For the coming months, US and local inflation is moving closer to central bank targets and would justify at least a pause in Fed and local policy rates later in 2023,” RCBC’s Mr. Ricafort said.

Strong economic performance in the easing trend of inflation in October, four-month low prices of oil, and strong peso-dollar exchange rate are among the factors cited by Mr. Roces to warrant a pause in rate hikes.

“With local inflation likely staying above-target in the near term, an additional hike remains to be a risk although the baseline view is still a long pause followed by cuts,” the Metrobank Research said.

For near-term, it expects electricity rates and minimum wage adjustments outside the National Capital Region to be upside risks to inflation.

Meanwhile, Metrobank Research sees rate pauses for both local and US central banks since “another Fed rate hike would cause a sell-off in the US treasury bonds space.”

Similarly, Ms. Velasquez said that she expects the BSP to pause rate hikes, but a hawkish sentiment may remain with risks and inflation still “tilted to the upside.”

Security Bank’s Mr. Roces, on the other hand, said that “the Fed’s commitment to keeping interest rates ‘higher for longer’ and the possibility of a further rate hike by the end of the year could put renewed pressure on the local markets in the coming months.”

“Even if the Fed does not hike anymore and decides to hold its policy rate at 5.25%-5.50% for longer, expect the global markets to start pricing in rate cuts even before the Fed starts talking about it,” Metrobank Research said.

As for the BSP, it said that it is “prepared to adjust all policy levers as necessary to contain second round effects and prevent the disanchoring of inflation expectations.”

EQUITIES MARKET
Metrobank Research: Given the uncertainties in the equity markets, maintaining a cautious stance is advisable. Various threats, both local and global, including persistent higher interest rates and elevated inflation, may continue to keep investors cautious. The current market valuation appears attractive, and selective bottom-fishing, particularly for stocks that have experienced significant declines and have valuations significantly deviating from their historical averages, may be warranted.

Security Bank’s Mr. Roces: For the fourth quarter of 2023, equities is seen to rise modestly on the back of holiday spending season amid relatively light trading activity and net foreign selling.

RCBC’s Mr. Ricafort: The COVID state of public health emergency finally lifted since July 22, 2023, after no more large lockdowns since 2022, and no more lockdowns as a policy priority, going forward, thereby improving sales/revenues, earnings/net income, employment/jobs, more business/economic opportunities; all of which would help support higher/better investment valuations, though offset by still relatively higher prices/inflation and still relatively higher interest rates/borrowing costs/financing costs.

BSP: For Q4 2023, the PSEi may be supported by some optimism over strong corporate fundamentals with hopes of higher economic activity as the Christmas season nears. Nonetheless, worries about persistent inflation along with the high interest rate environment may limit gains in the PSEi. Risk sentiment may be weighed by worsening geopolitical tensions globally (Israel-Hamas, Ukraine-Russia, North-South Korea, China-Taiwan, and China-Philippines).

FIXED-INCOME MARKET
Metrobank Research: By year-end, we expect the curve to be very flat, with one-year to 10-year yields between 6.25% to 6.50%. Bonds greater than 10 years may still yield above 6.50% but no greater than 6.90% as high excess liquidity keeps yields capped. However, the three-month treasury bill yields will likely end between 5.65% to 5.90% as this is where foreign portfolio investors park much of their short-term peso investment requirements.

Mr. Roces: Fixed income markets are expected to be relatively stable in the fourth quarter, with yields likely to remain range bound. The BSP’s messaging to continue raising interest rates if warranted could put some upward pressure on yields, but this is likely offset by the global slowdown and lower inflation expectations.

Mr. Ricafort: Easing trend in local interest rate benchmarks yields which could lead to lower borrowing and financing costs locally. Improved fiscal performance in terms of narrower budget deficit and lower national government debt-to-GDP ratio, as well as the continued affirmation of the country’s credit ratings at 1-3 notches above the minimum investment grade would also support sentiment on the local fixed income markets.

China Bank’s Ms. Velasquez: For [the fourth quarter], we have already experienced a rally since the start of the quarter. Ideally, a continuation of the rally would be preferred, however at the time of writing, we expect prices and yields to stabilize until the end of the year, meaning there would not be much movement in the market for a while.

BSP: For Q4 2023, the local bond market may continue to be supported by the lower-than-expected October CPI data, and as the lagged effects of the previous rate hikes work their way into slowing economic activity. On the international front, concerns over the ongoing geopolitical tensions may also limit the expected drop in yields.

FOREIGN EXCHANGE
Metrobank Research: The view is that the USD/PHP exchange rate will end 2023 at around P55.10 as seasonal effects push the peso to appreciate, given peak OFW remittances during the Christmas period, the unloading of dollars by the Business Process Outsourcing (BPO) sector to fund employee bonuses, and a general lack of import activity in the fourth quarter.

Mr. Roces: The peso is expected to remain relatively stable against the US Dollar in the fourth quarter. However, the possibility of a further rate hike by the US Federal Reserve could put some downward pressure on the peso in the coming months.

Mr. Ricafort: Easing of the US dollar-peso exchange rate especially as the markets expect seasonal trends to be a positive factor in the foreign exchange market. By the latter part of the fourth quarter, seasonal increase in OFW remittances and conversion to pesos during the holiday season will peak causing peso exchange rate to appreciate versus the US dollar.

Ms. Velasquez: The Philippine peso would continue to benefit from a relatively weak US dollar and remittances coming from abroad. We expect the USDPHP to remain at the 55.0-56.0 range for the rest of the year.

BSP: For Q4 2023, the peso may be supported by dollar inflows from seasonal remittances toward the end of the year. Nonetheless, gains in the peso may be limited by risk aversion due to worsening geopolitical tensions globally (Israel-Hamas, Ukraine-Russia, North-South Korea, China-Taiwan, and China-Philippines)

By Mariedel Irish U. Catilogo, Researcher

THE LISTED BANKS continued to flourish, fueled by higher interest rate level despite slowing loan growth in the third quarter, analysts said.

The Philippine Stock Exchange index (PSEi) went down by 2.3% in the third quarter, faster than the 0.5% quarter-on-quarter contraction in the second quarter. On an annual basis, the benchmark rose by 6.5% at the end of the third quarter.

The financials subindex, which includes the banks, grew by 0.8%, easing from the 2% growth in the previous quarter and the 25.4% in the third quarter last year.

“The high interest rate level following the Bangko Sentral ng Pilipinas’ (BSP) monetary tightening has made borrowing costlier, in turn resulting in a bank lending growth slowdown,” Philstocks Financial, Inc. Senior Research Analyst Japhet Louis O. Tantiangco said in an e-mail.

The BSP kept its benchmark interest rate at 6.5% at its Nov. 16 policy meeting, while interest rates on the overnight deposit and lending facilities were also maintained at 6% and 7%, respectively.

Abigail Kathryn L. Chiw, head of research at BDO Securities Corp., said in an e-mail that high inflation and borrowing costs stifled credit demands in the third quarter.

“Nonetheless, banks are still able to deliver robust net interest income growth on higher loan margins and additional yield income from investment securities,” she said.

Outstanding loans by universal and commercial banks (U/KBs), net of reverse repurchase placements with the BSP, expanded by 6.5% year on year to P11.17 trillion in September, slower than the 7.2% growth in August, data from the BSP showed.

The September print was the slowest in 21 months or since the 4.8% seen in December 2021.

September inflation quickened to 6.1%, making it the 18^th straight month that the inflation exceeded the BSP’s 2-4% target.

BSP data showed total net income of the big banks reached P314.10 billion as of end-September, up by 12.7% from the P278.69 billion in 2022.

Gross total loan portfolio of these big banks grew by 7.1% to P12.11 trillion as of end-September from P11.31 trillion in the same period last year.

Meanwhile, gross nonperforming loans (NPL) ratio of U/KBs fell to 3.09% in September from 3.11% in August and 3.10% in September 2022.

The big bank’s net interest margin (NIM) — a ratio that measure banks’ efficiency in investing their funds by dividing annualized net interest income to average earning asset — improved to 3.90% in the July-to-September period compared with the 3.74% NIM in the second quarter and the 3.38% in the third quarter of 2022.

Provision for credit losses by these big banks reached P57.24 billion, down by 19.7% from the P71.29 billion in the same period in 2022.

Rachelleen A. Rodriguez, head of research at Maybank Investment Banking Group – Philippines, said that the listed banks’ price performance in the third quarter was mainly affected by overall stock liquidity and earnings performance.

“Investors appear to favor banks with more pricing power and scale as this would eventually lead to NIM preservation and would also help maintain or even improve market share in both lending and deposit-taking,” Ms. Rodriguez said in an e-mail.

The third quarter saw eight out of 15 listed banks stock prices decrease on a quarter-on-quarter basis. Union Bank of the Philippines (UBP) led with a 13.9% drop in its share price from the P74.90 in the second quarter. This was followed by Philippine Bank of Communications (PBC, -9%), Philippine Trust Co. (PTC, -4.8%), Security Bank Corp. (SECB, -4.3%), Philippine Savings Bank (PSB, -3.3%), Metropolitan Bank & Trust Co. (MBT, -3.1%), Philippine National Bank (PNB, -1.4%), and Rizal Commercial Banking Corp. (RCB, -0.2%).

On the other hand, seven listed banks saw gains in their share prices in the third quarter.

East West Banking Corp. led the gainers with 37.7% increase in its share price quarter on quarter. Other lenders also posted share price increases including Philippine Business Bank (PBB, 16.2%), Bank of Commerce (BNCOM, 8.6%), BDO Unibank, Inc. (BDO, 3.1%), Bank of the Philippine Islands (BPI, 2.9%), China Banking Corp. (CHIB, 1.2%), and Asia United Bank (AUB, 0.2%).

BANK STOCK PICKS
Analysts said that market players should monitor closely the interest rate movements and economic trends that affect credit demand and the overall economic recovery.

“The BSP is expected to keep a hawkish monetary policy stance in the near term to combat inflation. This will likely continue to benefit banks in term of higher interest income,” Globalinks Securities and Stocks, Inc. Head of Sales Trading Toby Allan C. Arce said in an e-mail.

“However, if interest rates remain elevated for an extended period, it could also lead to increased loan defaults and higher NPLs,” he said.

Mr. Arce also expressed optimism to those banks who are investing in artificial intelligence and blockchain in improving their products and services.

“The overall economic recovery and regulatory changes could influence the performance of listed banks in the near term,” Regina Capital Development Corp. Head of Sales Luis A. Limlingan said in an e-mail.

The  Philippine economy expanded by 5.9% in the third quarter, bringing the year-to-date economic growth to an average of 5.5%, still below the government’s 6-7% 2023 target.

Meanwhile, Philstock’s Mr. Tantiangco said that banks are likely to earn from the consumer and commercial segment for the rest of the year.

“Both the commercial and consumer segment has still been posting loan growth this year with latter at a fast pace. These together with the high interest rates are seen to help in banks’ earnings,” he added.

OUTLOOK
With the BSP’s continued hawkish stance in raising key policy rates, analysts cautioned gloomy market sentiment to the financial index on the back of sustained slower bank loan growth for the rest of the year.

“The overall impact of domestic and global markets on listed bank stocks in the coming quarters is likely to be mixed. Banks with strong deposit base and a focus on retail lending are likely to be more resilient to challenges… however, banks that are more exposed to corporate lending or international markets may be more vulnerable to risks such as increased loan defaults and global market volatility,” Globalinks’ Mr. Arce said.

For Maybank’s Ms. Rodriguez, the risk of increasing tensions in the Middle East region between Israel and Palestine has no significant effect to the Philippine banking sector but noted that spillover effects may arise in the global oil prices which could offshoot inflation.

“Philippine banks businesses are highly domestic-driven, hence, weakness seen in other countries would not significantly impact the business,” she added.

The Islamist Hamas group attacked Israeli towns in early October, making it the deadliest attack into Israeli territory since 1973 during the Yom Kippur war.

DIGITAL BANKING in the Philippines is set to revolutionize the country’s financial sector as consumer demand rises, financial institutions adopt new technologies, and the government supports these advancements.

The Philippines is one of fastest-growing economies in Southeast Asia, but its banking penetration rate is one of the lowest in the region, McKinsey & Co. said in a report titled “On the verge of a digital banking revolution in the Philippines.”

Amidst the introduction of digital technologies, which has driven gains in financial access in emerging markets and developing economies, existing banks in the Philippines have underinvested in digital offerings.

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The report also added that banks in the country devote less than 10% of their revenues to information and technology (IT), while about 5-15% of these revenues go to digital channels.

In addition, financial technologies focus solely on payments, while infrastructure constraints limit their capacity.

Given the situation, this results in a gap between the underbanked and unbanked Filipino consumers and the increasing adoption of financial technologies.

But bridging the gap is pretty much close.

On the positive side, the report highlighted that the country is a productive ground for digital banking, providing opportunities for interested players in the banking landscape.

The McKinsey report also said there is a need to promote fintech innovation, which is deemed necessary to achieve financial inclusion goals.

In response to this, local regulators are stepping up their game by “creating conditions to address the underbanked customers while fostering competition.”

With digital startups rapidly increasing, traditional banks investing in digital offerings, foreign banks, and fintech service providers expanding their presence in the country, the central bank welcomes these developments.

The Bangko Sentral ng Pilipinas (BSP) said that digital banks and banks offering digital financial services are well-positioned to be crucial enablers for greater digital transformation and financial inclusion.

“These banks are at the forefront of digitalization as they leverage emerging and innovative technologies to operate efficiently and do business effectively,” the BSP said in an e-mail.

The BSP has lowered requirements for opening bank accounts, issued digital banking licenses, established a real-time payment system, and standardized a Quick Response (QR) network.

The six digital banks granted licenses by the BSP and began their operations in 2022 were UNObank, UnionDigital Bank, GoTyme, Overseas Filipino Bank, Tonik Bank, and Maya Bank.

The current roster of digital banks provides unique products while prioritizing customer satisfaction, following ethical market practices, and ensuring consumer safety, the BSP said.

The central bank highlighted that digital banks in the country have maintained their capitalization above the required regulatory level and enabled the opening of more digital deposit accounts.

BSP data show that the total assets of digital banks as of end-June stood at P77.13 billion, about 0.3% of the banking system’s total assets.

Meanwhile, total deposits amounted to P62.01 billion (0.3% of the total), while its total loan portfolio reached P22.4 billion (0.2%) as of end-June.

ABUNDANT OPPORTUNITIES
The digital banking space has much room for growth, said Japhet Louis O. Tantiangco, senior research analyst at Philstocks Financial, Inc., in an e-mail.

“The digital space is expected to play a vital role in the local economy with more commercial transactions to be done in which the government is supportive of the said development to boost the competitiveness of the local economy,” he said.

The McKinsey report also emphasized that the sustained economic growth brought more underprivileged Filipinos to the middle class and increased their purchasing power, resulting in higher demand for digital space.

They also added that due to the emergence of a young, tech-savvy consumer base, this has led to an increasing demand for innovative financial services.

This resulted in a significant increase in the use of mobile payment platforms, including e-wallets and digital apps offered by established banks.

Digital banking is an avenue to pursue greater financial inclusion given that a significant majority of the population is at ease with digital technology, said John Paolo R. Rivera, president and chief economist at Oikonomia Advisory & Research, Inc., in a separate e-mail interview.

He also said that digital offerings pose security threats, thus traditional banks take slow and calibrated moves to ensure regulatory compliance and consumer protection before going into full swing into digital offerings.

Traditional banks will only invest in digital offerings for financial inclusion when proper regulations and protections are done accordingly, Mr. Rivera said.

For Munmun Nath, chief marketing officer at UnionDigital Bank, digital banking enhances the banking experience by providing faster, easier, and more affordable access to financial services from anywhere at any time.

“As a result, it improves the accessibility of banking to consumers whom traditional banks previously underserved,” she said in a separate e-mail.

She also added that digital banking’s support to the banking sector includes enhanced product innovation, wider market reach, increased transactions, and reduced costs.

Additionally, the central bank noted that digital banks are in the early stages of exploring emerging technologies driving the significant digital transformation in the banking sector.

These include the use of application programming interfaces, cloud computing, artificial intelligence (AI), machine learning, and big data, wherein these tools are adopted and can change how banking operations may be performed.

In addition, BSP said the development and growth of open finance in the country will drive the emergence of fintech start-ups that utilize technology to provide innovative products and services.

ESCALATING DEMAND
The use of digital payments in the country has been growing, signaling a shift of preference from traditional cash-based payments into digital modes of payments due to their safety, speed, and convenience for Filipino consumers.

This rise in online payments suggests that more consumers are embracing digital payment methods due to their convenience and accessibility, the central bank noted.

In response, the government has been supportive of ongoing initiatives or efforts to further promote digitalization.

“The BSP has been making significant strides in promoting digital payments as evidenced by the increasing share of online payments in the total volume of retail transactions,” BSP said.

The central bank said that they are continuously working towards digitalizing 50% of retail payments by end-2023.

It also added that their continuous efforts to educate the public on the benefits of digital payments and to address any concerns could lead to a higher adoption rate as more individuals become acquainted with the convenience, security, and efficiency of digital transactions.

For Mr. Tantiangco, if digital finance expands further, we may see some changes in consumer behavior, as this may help them to make commercial transactions easier.

“The expansion of digital finance could possibly expose consumers to more financial investment products, which could entice them to invest, too,” he said.

Similarly, Mr. Rivera sees the same results but cautions against its repercussions.

Consumer demand will step up if the bandwagon effect is accompanied by legislation protecting consumer’s interests against fraud, hacking, unauthorized transactions, and other threats to digital use, Mr. Rivera said.

Likewise, he said that digital banking is a good investment, noting that regulation should also go with this trend so that investments in digital technology or digital banking will be worth it and sustainable.

GEARING UP FOR DIGITALIZATION
The central bank is aware that a considerable portion of the population remains unbanked or underbanked.

To address this issue, several regulatory measures have been implemented, including the issuance of a regulatory framework that permits the establishment of digital banks.

“Digital banks act as partners of traditional banks in advancing financial inclusion in the country by leveraging on digital technology to offer customer-centric digital financial products and services.”

BSP’s goal is to provide access to communities in remote areas and fill the gaps in the market for those who are unserved and underserved.

This includes efforts to encourage the widespread use of digital payments and educational campaigns to promote financial literacy in public markets and barangays using these new platforms.

Financial institutions are encouraged to build a culture of innovation and adaptability to technological changes with these initiatives in place.

Banks can enhance their infrastructure to provide new digital services that coexist with their traditional offerings.

The BSP also recommends that traditional banks should improve the skills of their current workforce, allocate resources to establish partnerships with technology companies and tap individuals with the necessary skills.

This will enable traditional banks to compete with fintech players and technology-driven banks and keep up with the rapidly advancing industry developments.

HURDLES AND SETBACKS
The central bank, despite making progress in digitalizing financial services and increasing financial accessibility, has identified key areas that require improvement.

By addressing these issues, such as the inadequate access to digital financial infrastructure, the necessity of identification documents, and the lack of awareness and perceived risks associated with digital payments, the BSP can maximize its impact.

As much as the country is ripe for digital banking, threats to security, the persistence of fraud and a lack of regulatory mechanisms to protect banks and their consumers impede these, Mr. Rivera said.

Likewise, Mr. Tantiangco said that with digital banking growth, these will present more opportunities for cybercrimes.

In response to these, it is best and safe to strengthen the country’s cybersecurity framework.

Mr. Tantiangco also underlined that digital banking growth may widen the socioeconomic division between the poor and the rest of the economy.

“Financial services, especially the core of banking, which is lending and borrowing, if done strategically, [can help improve one’s] socioeconomic status. However, for the [underprivileged], there are a lot of barriers to availing financial services,” he said.

Also, he said that such challenge the underprivileged face when accessing financial services is the lack of knowledge on how to use them effectively; specifically, the lack of technological knowledge and even access to devices needed to navigate into the digital banking space due to their limited income levels.

He said the underprivileged often have limited savings and are perceived as high-risk borrowers or lenders to take part in the loanable funds market.

“As the financial industry grows, the poor usually get left behind, and this is just traditional banking. If we talk about digital banking, we will tackle additional challenges,” he explained further.

For the central bank, digital banking does not only raise concerns on cybersecurity risks but also in data privacy issues.

The government is aware of these and is taking steps to address these concerns.

Some measures initiated by the BSP are the digital literacy program, cybersecurity policies and measures, consumer protection policy and policy on data governance and ethical use of data.

Similarly, Mr. Rivera said that digital banking is accompanied by issues of fraud.

These must be addressed by legislation so consumers may have confidence aside from comfort in using digital banking that will usher in an age of greater financial inclusion for all segments of society.

For Mr. Tantiangco, intensifying efforts are needed to bridge the gap between low-income individuals and consumers who fully embrace digital technologies in promoting financial literacy.

“Expanding the digital banking space while helping the poor get past financial and technological barriers would [greatly help] the financial inclusion mission,” he said.

POSITIONED FOR GROWTH
“Digital banks will significantly contribute to the growth and development of the digital financial ecosystem,” BSP said.

The central bank has observed greater market acceptance and consumer adoption of products in the digital banking sector.

They added that digital banks are well-situated to achieve growth trajectory while continuing to implement their various strategies and offerings.

Digital banks will revolutionize the banking industry standards by improving operational efficiency and utilizing technology to navigate the digital space.

Consumers can also access financial products and services easily and conveniently through digital banking.

“Digital banking can enhance financial inclusion that will prompt the population to save money, and use financial instruments correctly assisted by financial institutions — all of which would create capital accumulation necessary for sustained economic growth and development,” Mr. Rivera said.

ARE FILIPINOS still willing to take a chance to buy their dream home amid an economic slowdown and high inflation?

Concerns have eased as real estate demand shows no signs of slowing. Analysts noted that it is still every Filipino’s dream is to have their own homes.

To recall, the Philippines’ economic output eased for three straight quarters at 4.3% as of the second quarter as effects of the central bank’s interest rate hikes slowed consumption.

The Bangko Sentral ng Pilipinas (BSP) kept interest rates steady at 6.25% for the fourth straight meeting on Sept. 21.

Inflation picked up in August to 5.3% year on year amid higher prices of food and transport commodities. This ended the six-month easing streak since the 8.7% peak in January.

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said that the Filipinos’ experience of forced stay-at-home during the pandemic “sparked heightened interest” in real estate.

“This may have generated increased demand for more space for dwellings and/or alternative living arrangements in the event that we need to lockdown again in the future,” he said in an e-mail interview.

Analysts also attributed the demand in real estate to better labor conditions in the Philippines.

Labor Force Survey (LFS) data from the Philippine Statistics Authority (PSA) showed unemployment rate at 4.8% in July, lower than the 5.2% logged in the same month a year ago.

“The economic reopening helped bolster job creation, which is notable in the current trend we’re seeing in the labor market. With access to jobs, this helped households generate cash flow, which will make credit more accessible if households need or [is] interested in acquiring real estate,” Mr. Mapa said.

In a phone call interview, Joey Roi Bondoc, associate director of Research at Colliers Philippines, said that more employed Filipinos present a “very good backdrop” for the residential sector and investing in your home is still practical despite sky-high interest rates.

“Because in the Philippines, we don’t really have a lot of investment options and properties is one of those that over the past few years has really shown resiliency in terms of capital appreciation potential, or as a source of recurring income,” Mr. Bondoc said.

He also noted that condominium units in Metro Manila have seen a recovery in the primary market, and a rebound in the secondary market, evidence of robust demand this year.

“We are projecting a 2-3% increase in rental prices every year, that’s from 2023 up to 2025. But the problem is that’s still slow because at the height of the pandemic in 2020 to 2021, rents and prices corrected via combined 12-19%.”

Likewise, outside of the capital region, Mr. Bondoc sees sustained demand for house and lot or lots only, showing recovery in the market.

BDO Unibank, Inc.’s (BDO) Senior Vice-President and Consumer Banking Group Home Loan Business Head Angelita C. Manulat said via e-mail that historically, real estate is “one of the most stable long-term investments,” and that they expect a boost in the value of both residential and commercial properties.

According to the BSP’s latest Consumer Expectations Survey (CES), the percentage of households that consider the second quarter as a suitable time to buy a house and lot went up to 22.3% from 19.5% in the first quarter. This was the highest share in 11 quarters or since the 34.3% recorded in the first quarter of 2020.

Considerations to buy a house and lot in the next 12 months rose slightly to 4.7% in the second quarter from 4.6% in the previous quarter.

By type of housing, single detached houses are still majorly considered to buy in the next 12 months by Filipinos at 55.6%, with more than half of the households consider buying a house within P450,000 and below.

In an e-mail interview, the BSP said that the universal and commercial banks (U/KBs) and thrift banks’ (TBs) real estate exposure (REE), composed of real estate loans (RELs) expanded by 5% year on year to P3 trillion as of end-March.

RELs went up by 4.6% to P2.57 trillion as of end-March, slower than the 7.3% growth in end-March last year.

Commercial real estate loans (CRELs), which is almost two-thirds of total RELs, increased by 4.6% to P1.62 trillion, slower than the 6.9% in the same period a year ago.

However, residential RELs (RRELs), which hold 36.9% share of the total, slowed by 4.6% to P950.1 billion from 8% in end-March 2022.

On the other hand, nonperforming REL ratio eased to 4.1% as of end-March 2023, lower than 4.2% in the fourth quarter last year, and 5% from the same quarter a year ago.

“The continuous growth in both CRELs and RRELs reinforces the upbeat outlook of industry experts that the property market is on its path to recovery,” the BSP said.

As of first quarter this year, residential real estate price index (RREPI) showed overall house prices picked up by 10.2% from 5.7% in the same quarter a year ago.

Single detached houses grew by 17%, a turnaround from 2.3% drop in first quarter 2022.

In a separate e-mail, Pag-IBIG Fund Deputy Chief Executive Officer for Home Lending Operations Benjamin R. Felix, Jr. said that according to their latest data, the Philippines’ housing backlog stands at 6.5 million housing units, backing the demand for housing despite trying times.

Pag-IBIG supplied stimulus packages such as special rates on its home loans, and P10 billion financing for qualified developers to address these backlogs.

“We believe that the demand for housing will always be present, as part of our culture as Filipinos is to dream of owning a home for ourselves and our families,” Mr. Felix said.

LAYING THE FOUNDATION
To entice Filipinos to finally take that step to buy their own house, Colliers’ Mr. Bondoc said that developers offer bundle promos that includes either a parking space for condominium units, or appliances for housing units, and implement various payment schemes such as extended down payments to cater to diverse Filipinos.

“The problem with banks is they have not really reduced their mortgage rates, so what we have seen is more aggressive partnerships between banks and the developers,” he said, adding that with the policy rate not declining, banks are tied at this point and could not reduce mortgage rates.

Since 2018, the BSP put in place the Uniform Loan and Mortgage Agreement and its Supplemental Terms and Conditions Templates for Real Estate Mortgages which makes comparison in different lending institutions easier for borrowers.

In addition, to aid in making these dreams come true, financial institutions have offers to make housing financially easier.

Ms. Manulat said that BDO made measures to make housing loan with them better such as providing flexible payment terms of up to 25 years for ease of payment of monthly amortizations and a built-in mortgage redemption insurance and fire insurance, payable in 12 equal monthly payments at 0%.

Additionally, BDO has light payment options, affordable cash out, and fast and easy processing for its clients.

“We take to heart our mandate to provide our members with affordable home financing. That is why Pag-IBIG Fund’s interest rates on its home loans remain low, despite the relatively high interest rates prevalent in the home mortgage industry,” Mr. Felix said.

Pag-IBIG has adapted a lower interest of 6.25% per annum under a three-year repricing period from 6.375%. Interest rate cuts have also been implemented on the five, 10-, 15-, 20-, 25-, and 30-year repricing periods to 6.5% (from 6.625%), 7.125% (from 7.375%), 7.75% (from 8%), 8.5% (from 8.625%), 9.125% (from 9.375%), and 9.75% (from 10%), respectively.

Furthermore, only Pag-IBIG offers the longest repayment term of up to 30 years, compared with the maximum 20-year loan period offered by most home mortgage entities.

“With our fiscal standing strong, we have been able to effectively fund the high demand for our home loans without the need to borrow from the market. As a result, we are able to keep our rates low,” he added.

To protect borrowers from getting buried in interests, Pag-IBIG offers interest rebates for loans paid in full before its original term, as well as adding penalties only on unpaid dues to keep missed payments affordable for members.

“Another feature that is almost always overlooked is the low insurance premiums on the Mortgage Redemption Insurance (MRI) and Fire and Allied Perils Insurance of our home loans at P0.225 for every P1,000, [which] means a P1-million loan will have a monthly insurance premium of only P225, about a quarter of the insurance fees that other financial entities charge for their loans,” Mr. Felix said.

With Pag-IBIG’s mandate to invest at least 70% of its investible funds in housing, the agency is currently on the lookout for socialized housing units to address the housing needs of minimum-wage earners and to spread housing development across all regions in the Philippines.

“This is why we continuously collaborate and create policies in consultation with housing developers, local government units, and other organizations to accelerate housing development under sustainable communities to provide homeownership opportunities for all our members, particularly in the socialized housing segment,” Mr. Felix said.

OUTLOOK
For the rest of the year, analysts are expecting the demand and recovery trend to continue for real estate despite headwinds.

“One headwind really is the interest rate. If it will remain high, then it might clip the recovery of the residential market,” Mr. Bondoc said.

It’s important to monitor interest rate policies because once the BSP cuts its policy rate, it will signal the reduction in mortgage rates, enticing more Filipinos to acquire residential units.

The effects of global economic crisis should also be monitored, Mr. Bondoc noted, as it will affect the inflow of remittances and deployment of overseas Filipino workers (OFWs).

BDO’s Ms. Manulat cautioned the sector on the impacts of natural calamities as well as it could affect pricing of properties in general.

The central bank said to keep in mind of government policies and legislation, such as tax incentives, deductions, and subsidies that could either boost or hinder demand for real estate.

Most importantly, analysts remain vigilant of the country’s economic performance in the coming months.

With the slower growth seen in the second quarter, worries of the Philippines not achieving its growth forecast of within the 6-7% range this year might dim demand in housing and could potentially spill over in 2024.

However, Pag-IBIG’s Mr. Felix is optimistic on real estate growth as overall outlook remains vibrant and institutions are ready to support housing needs.

“This is primarily due to the increase in economic activity brought about by the lifting of public health emergency, the increasing appreciation of young professionals in the value of real estate, and the demand to be driven by the 4PH Program (Pambasang Pabahay para sa Pilipino Program),” he said.

He also added that Pag-IBIG’s programs to stimulate the housing industry is a way to promote economic growth as it provides support to many industries and Filipino workers that could also empower them to secure home financing.

“And while we own more than a third of the share of the total home mortgages in the country, we need the active and strong participation of financial entities and banks to address the home financing needs of Filipinos,” Mr. Felix said.

“Overall, I think what’s positive in the market is owning a residential unit is aspirational for a lot of Filipino households. While you see prices still increasing, Filipinos will definitely find a way to own a piece of property, to own their dream home, whether it’s a condominium unit or a house and lot unit outside of the Metro Manila,” Mr. Bondoc said.

SOFTER global economic growth, high inflation, and the US Federal Reserve’s hawkish stance stirred the domestic financial markets in the second quarter.

The barometer Philippine Stock Exchange index (PSEi)closed the second quarter at 6,468.07, down 0.5% quarter on quarter from 6,499.68 in the first quarter. Year on year, the index went up by 5.1% from the 6,155.43 finish in the second quarter of 2022.

Meanwhile, the peso closed P55.20 against the dollar in the second quarter, down by 1.5% from the previous quarter’s finish of P54.36 to a dollar. On an annual basis, the local unit inched down by 0.4% from P54.98 close in the same quarter last year.

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The demand for Treasury bills auctions recorded a total subscription amounting to P416.6 billion with P157.4-billion total offered amount in the second quarter.

The oversubscription amount of P259.2 billion was lower than the P266 billion in the first quarter.

Meanwhile, the demand for Treasury bonds saw a total of P687.2 billion, lower than the P1.1 trillion in the first quarter. The demand was higher than the aggregate offered amount of P319.5 billion in the April-to-June period.

At the secondary bond market, domestic yields saw an increase by 3.97 basis points (bps) on a quarter-on-quarter average, based on the PHP Bloomberg Valuation (BVAL) Service Reference Rates published on the Philippine Dealing System’s website.

On a year-on-year basis, yields also grew by 57.81 bps.

“The Fed proved to be more hawkish than financial markets expected in the second quarter where the revised dot-plot showed that an additional 50 bps increase is expected. This caused rates to move up and urged market players to adjust their expectations,” China Banking Corp. (China Bank) Chief Economist Domini S. Velasquez said in an e-mail.

The US Federal Reserve in July hiked its benchmark rate by 25 bps to 5.25-5.5% range, after it paused its tightening cycle the previous month.

The Fed has raised its policy rate by a total of 525 bps since March 2022.

“With the easing inflation in the US (June and July CPI prints), the Fed is looking to be a little more dovish and markets are currently pricing in a small chance of another rate hike,” Ms. Velasquez added.

Nicholas Antonio T. Mapa, senior economist at ING Bank N.V. Manila Branch, attributed the overall sentiment to the developments of China’s slower economic growth.

“Where will the Fed go is the main theme for the quarter with investors trying to gauge whether the Fed would end its current rate hike cycle or whether they would continue to push rates higher,” Mr. Mapa said in an e-mail.

In April-to-June period, China’s economy expanded by 0.8% from the 2.2% expansion in the first quarter, the National Bureau of Statistics reported. Year on year, its gross domestic product (GDP) grew by 6.3% in the second quarter, up from 4.5% in the first quarter.

POLICY RATE CUTS?
Despite the downtrend in the country’s headline inflation, analysts believed that policy rate cuts are still unlikely to happen.

“At most one more rate hike is likely from the Fed this year before it ends its monetary tightening cycle. With a possible narrower interest rate differential, the BSP may use other non-monetary measure such as using its foreign reserves to resist excessive depreciation of the peso,” China Bank’s Ms. Velasquez said.

The BSP told BusinessWorld that policy rate cuts may be considered once inflation settles within its 2-4% target range.

“While the data seems to suggest that inflation is gradually moving in the right direction, persistent upside pressures on prices require continued monitoring, particularly as they could contribute to the emergence of further knock-on effects,” the BSP said in an-email.

The central bank also emphasized that while international policy decision is measured in policymaking process in the local scene, the Fed’s decision is currently “not as important” to the BSP’s decision-making process.

“At this time, the BSP sees less need to match the actions of the US Fed and other advanced economy central banks, as the recent decline in domestic headline inflation provides the BSP grounds to pause its monetary tightening,” the BSP added.

The country’s headline inflation rose by 5.3% in August from 4.7% in July and 6.3% in the same period last year. The August print marked the 17^th straight month of inflation exceeding the central bank’s target range.

For the eight months of 2023, it averaged 6.6%, way above the BSP’s 5.6% full-year forecast.

BSP, for its part, kept its key rates steady at its fourth straight meeting in September. Current target reverse repurchase rate still stands at 6.25%, while overnight deposit and lending rates are maintained at 5.75% and 6.75%, respectively.

Meanwhile, University of Asia and the Pacific Senior Economist Cid L. Terosa expects the central bank to track closely decisions made by the Fed as the “economy lacks enough fiscal and monetary space to detach effectively from Fed’s policy decisions.”

He also noted that market players should monitor the local impact of food and commodity markets including economic growth trends in major world economies.

“In the second half of the year, sustained inflation, economic slowdown, and geopolitical tensions in the global economy will help determine if inflation rates at home will continue to slow down,” he said via e-mail.

“In addition, we cannot discount the inflationary effect of El Niño on agricultural production and the perennial menace of more lethal weather disturbances in the second half of the year,” Mr. Terosa added.

The Philippines’ economy saw the second quarter with a weaker-than-expected growth as its GDP expanded by 4.3%, the slowest in over two years.

It was slower compared to the 6.4% growth in the first three months of 2023 and 7.5% last year.

For the first half of the year, GDP growth averaged 5.3%, well below the government’s 6-7% full-year target.

FIXED-INCOME MARKET
BSP: The performance of the fixed income market will largely depend on the movement of domestic policy rates and local bond supply concerns. In the near term, domestic yields may trade sideways with an upward bias as the BSP remains hawkish in its monetary stance despite the temporary pause in monetary tightening.

Meanwhile, risks to the outlook remain, stemming from the uncertainty over future monetary policy decisions from the US Fed amid easing but above-target inflation. Given the recent policy rate increase of the US Fed and expectations of another rate increase before the end of the year, the narrowing of the interest rate differential between the US Fed’s and the BSP’s key policy rate may provide downside risks to the performance of the fixed income markets in the medium term.

Ms. Velasquez: Domestic market interest rate will continue its downtrend as inflation also cools down and as most emerging market economies’ central banks have also reached their terminal rate. The yield curve will be relatively flat until the fourth quarter, when we think central banks will be open to talks on rate cuts already.

Mr. Terosa: This market may benefit from historically higher interest and inflation rates because both will help invigorate current demand for fixed-income securities.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort: Easing inflation trend in the US and in the Philippines towards the inflation targets would fundamentally support a pause in policy rates and, eventually, justify any subsequent policy rate cuts, especially in 2024, if inflation rates sustain at the central bank targets.

There would also be relatively large maturities of government bonds/Treasury bonds in March 2023 that could fundamentally support demand for government securities/bonds amid the search for reinvestment opportunities as T-bond yields remain relatively high/elevated, or still among cycle highs, in terms of yield-to-maturity.

Mr. Mapa: We could see an improvement in sentiment as inflation should continue to trend lower and with the BSP possibly finally shifting to a more accommodative stance should the Fed do the same.

FOREIGN EXCHANGE (FX MARKET)
BSP: For [third quarter 2023], the peso is expected to trade sideways with slight appreciation bias on expectations that the country will be one of the fastest growing economies in the region (as featured in the latest reports by the IMF, ADB, and Moody’s Analytics) and expectation that the BSP may resume its monetary policy tightening following continued hawkish remarks.

In the near term, the country’s overall balance of payments will be a significant determinant of the future path of the peso-dollar exchange rate. In particular, the country’s improving current account amid the expected increased growth in services exports and the business process outsourcing (BPO) sector will provide support to the peso.

Moreover, optimism regarding global and regional growth outlook are expected to provide relief to regional currencies, including the peso.

At the same time, uncertainty over the path of the US Fed’s policy rate adjustments amid still-elevated inflation as well as lingering geopolitical concerns may likewise contribute to movements in the exchange rate.

Nonetheless, structural FX flows coming from the BPO sector and overseas Filipinos will continue to provide support to the peso.

Likewise, the eased rules on foreign entry and mobility restrictions coupled with renewed influx of tourists are expected to generate FX receipts in the form of increased tourism revenues. The substantial holdings of international reserves also provide a level of comfort in the peso amid the current challenging global environment.

Ms. Velasquez: In the third quarter, we expect the peso to depreciate due to seasonal importation and a possible rate hike from the Fed. The peso is expected to rebound towards the end of the year as remittances surge ahead of the holidays. Also, the Fed will have likely reached the ends of its tightening cycle by that time. Narrowing trade deficit, tourism receipts, revenues from BPO, and moderating net foreign direct and portfolio investments will also support the country’s balance of payments position.

Mr. Terosa: Inflation can make the peso weaker. Indications of more tightening in the USA will probably contribute to the weakening of the peso.

Mr. Ricafort: Seasonal increase in importation activities in [third quarter 2023] (after the tail-end of the seasonal increase in OFW remittances and conversion to pesos used for tuition payments and other related expenses in preparation for the start of the new school year), in preparation for the expected seasonal increase in demand locally and for exports in [fourth quarter 2023]; then the seasonal increase in OFW remittances and conversion to pesos during the holiday season in the latter part of [fourth quarter 2023].

Mr. Mapa: Current scenario sees a strong USD theme with US yields elevated due to expectations for the Fed to possibly hike rates further.  Once the Fed signals they are done tightening we could see a reversal of this trend with the PHP possibly rebounding before yearend.

EQUITIES MARKET
BSP: Market concerns over domestic and international developments will continue to determine the future performance of the domestic stock market. pressure arising from concerns over its impact on economic activity, borrowing costs, and corporate profits is expected to increase, thereby, weighing on domestic stock market performance.

Risks to the external outlook continue to persist, which include: 1) potential escalation of geopolitical conflicts; 2) adverse weather conditions that could drive up global food commodity prices anew; and 3) China’s economic slowdown which may have a negative spillover effect on neighboring economies, more directly on the revenue of their exporting firms.

On the domestic front, the country’s robust economic growth and the downward path of domestic inflation are expected to boost confidence in Philippine equities.

For [third quarter 2023], the PSEi is expected to rise due to optimism over Philippine economic growth, which is seen to remain as one of the fastest in the region (as mentioned in the latest reports by the International Monetary Fund (IMF), the Asian Development Bank (ADB), and Moody’s Analytics).

The index may be also supported by expectations that the US Fed will soon end its monetary policy tightening. Nonetheless, gains may be limited due to geopolitical concerns (e.g., US-China, China-Taiwan, Ukraine-Russia, and Korea) and worries over China’s economic recovery.

Mr. Terosa: This market will be adversely affected by relatively higher interest and inflation rates since both can weaken company sales and profits. It would be better to park funds in bank deposits or fixed-income securities if both interest and inflation rates continue to be historically elevated.

Mr. Ricafort: Any start of cut in policy rates in the US and locally would help reduce interest rate benchmarks, which would translate to lower borrowing/costs, thereby would help reduce corporate expenditures on interest rate payments on loans and would lead to higher earnings.

Further recovery of business activities as the economy reopens towards greater normalcy with no more large-scale lockdowns since 2022 and no more lockdowns as a policy priority, would lead to higher sales, income, jobs, and overall valuations of listed companies.

Easing inflation and, eventually, policy rates, especially into 2024 would also support sentiment on Emerging Markets such as the Philippines as global investors such for higher returns.

THE listed banks are seen to improve further for the rest of the year, bolstered by high interest rates that could pad their margins, even as their share prices disappointed in the second quarter, analysts said.

Analysts noted the better performance of banks in the second quarter due to higher earnings driven by strong bank lending coupled with interest rates.

The Philippine Stock Exchange index lost 0.5% on a quarter-on-quarter basis, slower than the 1% decline posted in the first quarter and last year’s 5.1%.

Meanwhile, the financials subindex, which included the banks, eased 2% quarter on quarter at the end of the April-June period versus the 10.1% growth recorded in the first quarter. This was lower than the 28.1% recorded at the end of last year’s second quarter.

Most of the banks’ stock performance fell in the second quarter except Asia United Bank (AUB, up 9.8%), BDO Unibank, Inc. (BDO, up 7.2%), Philippine Bank of Communications (PBCOM, up 6.3%), and Bank of the Philippine Islands (BPI, up 6.1%).

Leading the decliners were Philippine Business Bank (PBB, down 23.1% quarter on quarter), Bank of Commerce (BNCOM, down 14.5%), and Union Bank of the Philippines (UBP, down 11.9%).

Meanwhile, aggregate net income of universal and commercial banks went up by 28.9% to P169.92 billion as of end-June from P131.82 billion last year, data from the Bangko Sentral ng Pilipinas (BSP) showed.

Gross total loan portfolio of these big lenders rose by 8.1% to P11.84 trillion as of end-June from P10.96 trillion a year ago.

The big banks’ gross nonperforming loans (NPL) ratio also improved to 3.13% in June from 3.25% in June last year.

The big banks’ net income margin (NIM) — a ratio that measures banks’ efficiency in investing their funds by dividing annualized net interest income to average earning asset — grew to 3.73% in the second quarter from 3.29% NIM recorded in the same period last year.

“The BSP’s action to the United States Federal Reserve’s movement was the primary factor that influenced the banks’ performance,” Regina Capital Development Corp. Head of Sales Luis A. Limlingan said in an e-mail.

“Strong economic growth of the Philippines has helped in buoying the public’s confidence to seek out bank financing, whether it be for business or personal use,” Mr. Limlingan added.

The BSP’s Monetary Board has already kept the policy rates steady for four straight meetings. Target reverse repurchase rate currently stands at 6.25%. Overnight deposit and lending rates are also maintained at 5.75% and 6.75%, respectively.

Meanwhile, the US Fed in September held its interest rates steady between the 5.25% and 5.5% range in its bid to tame inflation while not denting its economic growth.

“Majority of the banks also exhibited higher net income margin (NIM) as of end second quarter of 2023 implying that they were able to make more out of their earning assets. The financial index banks’ average NIM stood at 4.25%, higher than the 3.94% in the same period last year,” Japhet Louis O. Tantiangco, senior research analyst at Philstocks Financial, Inc., said in an e-mail.

Charmaine Co, research analyst at COL Financial Group, Inc., said in a separate e-mail: “The banking sector’s net interest income grew by 24.5% year on year in the second quarter as all banks reported higher lending income. This was mainly due to expansion in the banks’ loan portfolios.”

Rastine Mackie D. Mercado, research director at China Bank Securities Corp., said that the financial results of listed banks were generally strong, as cumulative rate hikes and the full resumption of business and consumer activities underpinned business expansion.

“Year on year, the twin tailwinds from expanding earnings assets and higher NIMs mainly supported lending income growth. Similarly, the uptick in loan volumes, coupled with the full restoration of mobility also supported the year-on-year expansion in fee incomes,” Mr. Mercado said in an e-mail.

BDO Securities Corp. said in an e-mail that growing economic activity, increasing mobility, as well as improving business and household incomes continue to support loan demand.

“We also note that the growth of higher-margin consumer loans (credit cards, auto loans, home loans) continue to outpace that of corporate loans, which help in propping up overall loan yields,” BDO Securities said.

For her part, Rachelleen A. Rodriguez, research analyst at Maybank Investment Banking Group-Philippines, said that the listed banks’ price performance was impacted largely by overall stock liquidity and earnings performance.

BANK STOCK PICKS
Analysts said that investors should pick those banks showing strong income growth, their loan portfolio composition, and their ability to roll with high interest rates.

Philstocks’ Mr. Tantiangco said investors may look for developments first that would bring our economy back to its strong growth momentum.

“Investors are also expected to monitor our bank lending data as well as the upcoming policy decisions of the BSP. With the current economic challenges, investors would want to see if borrowers can still absorb the current interest rate levels so as to keep bank lending growing,” he said.

Mr. Limlingan of Regina Capital said that investors should always consider the loan portfolio composition of the banks they are eyeing to get into position.

“As much as possible, try to filter out those names that are overly exposed to industries that are likely to be remained challenged by a high interest rate environment and how conservative the banks are in extending loans to such industries,” Mr. Limlingan said.

“Investors tend to favor banks with more pricing power as this would eventually lead to NIM preservation, especially since the market is expecting the BSP to start cutting policy rates by 2024. They are also wary of any asset quality concerns; hence, they favor banks with high NPL buffers,” Maybank’s Ms. Rodriguez said.

OUTLOOK
The listed lenders’ performance would be dependent on how effectively they could strike a balance between expanding their loan portfolio and keeping their asset quality in check, Mr. Limlingan said.

Mr. Tantiangco said the banks’ performance in the latter half of the year would be largely dependent on the overall growth of the Philippine economy.

“If the local economy continues to grow slowly, then this may temper our listed banks’ lending operations. On the other hand, if the local economy’s growth re-accelerates, then this is seen to boost bank lending,” he said.

For BDO Securities, it expects the banks’ loan books to move at the same pace of the Philippine economy, margin improvements to continue from the delayed effects of the BSP rate hikes, and the provisioning costs to decline as NPLs stabilize in the near term.

The Philippine banking industry will perform well for the rest of 2023 despite the high interest rate environment which is seen to benefit the NIMs of the lenders, said Toby Allan C. Arce, head of sales trading at Globalinks Securities and Stocks, Inc.

“The Philippine banking sector has strong capital buffers, which will help them withstand any shocks to the economy. However, any upside risk to inflation could dampen economic growth and hurt bank profitability,” said Mr. Arce in an e-mail.

FOR THOSE who lived through the 2008 Global Financial Crisis, the fallout in the international banking scene dominated by the collapse of the Silicon Valley Bank (SVB) earlier this year felt like a déjà vu.

The California-based SVB was the 16^th biggest bank in the United States. With a total asset of $209 billion at the end of 2022, the subsidiary of SVB Financial Group became the second-largest bank to fail in US history.

Flush with massive amount of deposits, startup-focused SVB had invested half of its assets in long-term mortgage securities. However, at the beginning of 2022, the US Federal Reserve started to hike its interest rates to counter rising inflation, which pushed the bond prices to fall.

Fueled by the high borrowing costs, SVB’s depositors, majority of which are tech-based companies, decided to withdraw their deposits resulting in a bank run in just two days. In order to raise capital, the bank sold its bond portfolio incurring a loss amounting to $1.8 billion.

By March 10, California regulators shut down SVB and appointed the Federal Deposit Insurance Corp. as its receiver, controlling the assets and liabilities of the distressed bank.

Just two days following the closure of SVB, the New-York based Signature Bank was shut down by federal regulators, making it the third-largest bank failure in US history. The collapse stemmed from the anxiety brought by the prior failure of SVB.

Needless to say, these US banks’ collapse sent a chilling shockwave across the globe.

In the local scene, the government was swift to address concerns arising following the turmoil in the international banking sector.

In a Reuters report, Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said Philippine banks have “no reported exposure” to the SVB citing that banks’ foreign currency deposit units’ assets are mostly loans, Philippine dollar bonds, and sovereign bonds of countries with high credit ratings.

“One big difference relative to the 2008 Global Financial Crisis is the paradigm shift we are witnessing from an era of low inflation and accommodative monetary policies to a context of high inflation and tighter monetary policies,” International Monetary Fund (IMF) Resident Representative to the Philippines Ragnar Gudmundsson said in an e-mail.

The Fed has raised borrowing costs by a total of 500 basis points (bps) since March 2022, bringing the Fed funds rate to 5-5.25% due to stubbornly high inflation. Meanwhile, the BSP has hiked the key policy rate by 425 bps to 6.25%.

The Philippine banking system is well capitalized and has liquidity buffers, said Mr. Gudmundsson. The banks’ “conservative” risk management practices and well-diversified portfolios helped them to withstand possible shocks and higher interest rates.

Bankers Association of the Philippines (BAP) Jose Teodoro K. Limcaoco said that the country’s banking sector has enough liquidity and capital ratios that could minimize foreign shocks.

“Prudential measures are in place for big US banks and all Philippine banks to maintain their liquidity cover ratios… these regulatory limits have kept the Philippine banking system less susceptible to the mentioned risks,” Mr. Limcaoco, who also sits as the president and chief executive officer of Bank of the Philippine Islands, said in an e-mail.

Over the years, the BSP’s efforts to enhance its regulatory framework to strengthen the resilience of the banking industry have been effective. Through the Basel III — an international set of reform measures developed by the Basel Committee on Banking Supervision that aimed to promote stability of the financial sector worldwide — BSP has set the local standard higher than the minimum required.

The BSP has implemented new minimum capital ratios of 6% Common Equity Tier 1 (CET1) ratio, 7.5% Tier 1 Capital ratio. Both ratios are above the 4.5% and 6% minimum, respectively.

Likewise, it set its Total Capital Adequacy Ratio (CAR) at 10%, higher than the required 8%. CAR indicates the banks’ ability to absorb losses from risk-weighted assets.

Fitch Ratings’ Asia-Pacific Financial Institutions Director Tamma Febrian said that while the SVB’s collapse may not have a substantial impact to the country’s bank and financial system, he noted that a set of secondary effects can affect the banking sector indirectly.

“We are referring to secondary effects in the form of potentially tighter regulatory requirements relating to liquidity or interest rate risk management over the medium term,” Mr. Febrian said in an e-mail.

According to the Fitch Ratings’ report titled “What Investors Want to Know: APAC Banks Navigating Global Uncertainty,” the debt watcher sees no immediate need to amend its bank rating criteria.

“The major Philippine banks are funded by a broad base of diverse and relatively granular deposits that reduces the risks of a sudden and severe drawdown of deposits. Banks’ balance sheets remain liquid, and the Fitch-rated banks are among the largest domestic banks that are likely to be beneficiaries of deposit flight during times of general market stress,” he said.

The country’s big bank’s liquid assets, which are assets that can be quickly converted to cash if needed to meet certain obligations, reached P9.06 trillion as of end-March, up by 2.9% from P8.8 trillion as of end-February this year. This was also 9% higher compared with P8.31 trillion in end-March last year.

Meanwhile, the liquid assets to deposit ratio of the universal and commercial banks was 54.38% in end-March, up from 53.93% in end-February but lower than the 54.90% in end-March 2022.

“Nevertheless, SVB’s collapse has reverberated across financial systems around the world, bringing closer regulatory scrutiny on the reliability of banks’ funding and the quality of their assets. The current impetus to restore financial stability could also have repercussions on global central banks’ monetary policy settings that affect interest rate trajectories,” Mr. Febrian said.

Nikita Anand, associate director at S&P Global Ratings, believed that the Philippine banks’ strong capital and retail deposit base will help the sector to withstand tough operating conditions.

She expects limited contagion effects from the international bank turmoil despite secondary effects brought by global events.

“Investment portfolios form about 28% of total assets, with 70% of the exposure in safe government securities. Moreover, the banking sector’s deposits have significant contribution from household deposits which adds stability to Philippine banks’ funding profile,” Ms. Anand said in an e-mail.

Mr. Gudmundsson emphasized the importance of preemptive measures to protect financial markets from emerging corporate vulnerabilities and possible external shock that may trigger a reduction in a bank’s liquidity.

“Financial regulators should consider strengthening the resolution framework for financial institutions and the insolvency regime for corporates. In addition, further reforms to deepen the domestic capital markets will contribute to better provision and distribution of liquidity,” he said.

For Mr. Limcaoco, a reduction in the reserve requirement ratio (RRR) could help in further strengthening the banks to lessen intermediation costs and will allow banks to allocate and maximize its resources.

The reserve requirement ratio is the share of bank deposits and deposit substitute liabilities that they must park with the central bank which they cannot lend out.

The BSP is eyeing to bring down the big banks’ RRR to single digits this year. Currently one of the highest in the region, mandated reserve for universal and commercial banks stands at 12%. RRR for thrift and rural banks are at 3% and 2%, respectively.

CREDIT CARDS have long been linked to negative thoughts by Filipinos after stories of getting stuck in debt and debt collectors knocking on your houses and calling you nonstop start to spread around. Not only that, the process of acquiring a credit card seems too far-fetched for an average Filipino that most do not even consider getting one assuming that they won’t be given a second thought by credit card companies.

However, with so many ways to transact your finances and the Philippine economy opening once again after the pandemic slump, banks have been advertising their credit card promos everywhere.

According to the Credit Card Association of the Philippines (CCAP), a total of 11.83 million cards have been issued in the first quarter this year, up by 14% from 10.36 million in the same quarter in 2022.

Meanwhile, universal and commercial banks’ credit card receivables — transactions generated using a credit or debit card — rose by 28.4% to P572.87 billion as of end-March this year from P446.07 billion a year ago, latest preliminary data from the Bangko Sentral ng Pilipinas (BSP) showed.

These accounted for more than half of P1.06-trillion consumer loans and 5.2% of total outstanding loans of the big banks as of end-March this year.

With this rising credit card debt, how does one get and use a credit card responsibly?

Since its incorporation on Jan. 6, 1981, CCAP is an organization mediating between the credit card industry, merchant establishments, and consumers to promote wider acceptance of credit cards in the country as a “safe, reliable, and beneficial payment instrument” for Filipinos to add as a mode of payment for their daily needs.

BusinessWorld reached out to Alex Ilagan, CCAP’s executive director and spokesperson, to know more about the credit card landscape, via e-mail interview.

Here’s the excerpt of the interview:

What notable projects has CCAP done or been part of to promote proper use of credit cards?

Mr. Ilagan: CCAP has been conducting seminar workshops (and webinars) in major colleges and universities in Metro Manila since 2019 to educate college students on the responsible use of credit before they officially join the workforce. This year, we are offering the same seminar/workshops to schools outside Metro Manila and private companies with a large workforce, e.g., call centers, to educate their employees on the responsible use of credit. In addition to seminar workshops, CCAP also collaborates with other institutions like the BSP and the Credit Information Corp. (CIC) by participating and providing resource speakers for their consumer education programs like BSP’s Annual Financial Education Stakeholders Exposition and the CIC Academy. CCAP also provides materials for cross-posting in these two institution’s social media platforms in order to reach a broader segment of the population. Additionally, CCAP has been regularly sending out press releases on topics related to the proper use of credit cards.

What are the common mistakes Filipinos commit when using their credit cards and what solution can you give them to avoid making those mistakes again?

Mr. Ilagan: The most common mistake a credit cardholder commits is overspending. This happens when one takes advantage of the credit limit given to him/her and uses the limit to the max. This will often result to the cardholder not being able to pay the full amount due and decide instead to pay only the minimum amount due. By doing so, revolving interest is charged and if the cardholder continues to use the card and pays only the minimum amount due every month, interest charges could pile up and he/she will not be able to reduce the total outstanding amount. And worse, if an unexpected event happens (e.g., sickness/hospitalization, major house or car repair, etc.) that will force the cardholder to use the money intended for credit card payment to pay-off the unexpected major expenditure, the credit card payment is missed resulting to penalty charges in addition to interest. The total outstanding balance will snowball and bury the cardholder in credit card debt.

How did the pandemic change how Filipinos use their credit cards?

Mr. Ilagan: The onset of the pandemic and the resulting lockdowns increased the number of credit cardholders who use their card online.

As the economy bounces back from the pandemic-induced economic slump and credit card ads start to spread, what is your advice for first-time credit card applicants? With so many kinds of credit cards by different banks, how can Filipinos choose the best card for them? How many credit cards should an average Filipino have?

Mr. Ilagan: There are now credit cards designed for very specific lifestyles or preferences. There are cards for frequent travelers which allow one to convert their reward points to airline frequent flyer miles and allow free use of airport lounges. For the price conscious/value-seeking individual, there are cards that offer cash rebates on every kind of transaction. For the status conscious individual, there are premium cards with very high limits and special privileges like concierge services and access to exclusive destinations. For the motorists, there are cards that offer rebates on fuel purchases, discounts in auto shops, and emergency roadside assistance. For the frequent internet/e-commerce user, there are cards with enhanced security features designed for internet use. There are even cards intended exclusively for women that offers special discounts on cosmetics and in popular boutiques.

The key is to choose the card that fits your lifestyle or particular area of interest so you can derive the maximum benefit from it. Ideally, two credit cards will be enough for each individual. One is your primary card for regular use while the other one will serve as a backup. This will also make it easier for you to track your expenses.

What is a credit score? And how can first time credit card users build their credit ratings? How does a good credit score help you financially?

Mr. Ilagan: A credit score is a numeric value that indicates your credit worthiness. This is derived by credit bureaus based on several factors like your payment history, amount and tenure of your debts, frequency, and number of times you applied for a credit card or loan, etc. First time credit card users can improve their credit score by ensuring timely payment of their debts and avoiding excessive use of their credit lines or multiple application for loans and/or credit cards. A good credit score can result to a higher likelihood of approval for new loans or credit cards.

What should clients avoid when using their credit cards and when is a credit card the best option for payment? How can they maximize their credit cards to their full potential?

Mr. Ilagan: The most important thing to avoid is paying your credit card bill after the due date because it will incur unnecessary penalties and interest charges. When paying your credit card, you have to pay at least the minimum amount to avoid unnecessary charges. A credit card is the best option for paying unexpected or emergency expenses. It is also very useful for big-ticket items like appliances, electronic devices, etc. because one can opt to avail of the installment facility either at point of sale or even after you have charged the item to your credit card by simply calling the card issuer and converting your transaction to installment. This will allow you to spread the payment of big-ticket items over a longer period to ease your cash flow. Most merchants also offer zero-interest rate on installment payments for certain items.

With young Filipinos entering the workforce and managing their finances, what advice can you give to those that want to acquire a credit card? What are your tips to be a responsible credit card user?

Mr. Ilagan: One should always remember that a credit card is not “free money.” All transactions charged to a credit card will have to be paid so never use it beyond your capability to repay the amount at a later date. Because of the 30-day monthly billing cycle and 21-day payment grace period provided, one can enjoy interest-free credit for up to 51 days from the date of transaction. It is therefore best to use your card just right after the billing cut-off date indicated in the billing statement because it will allow you to enjoy the longest interest free credit float.

What are your best tips for new and existing credit card users?

Mr. Ilagan: One of the most important benefits of a credit card is the convenience it provides the user. It is therefore ideal for unexpected or emergency purchase situations. It can also be used in-person or virtually and you can also use it locally or abroad.

The other most important benefit it provides is the standby credit line you can use when faced with very tight cash flow situations. It allows one to extend his/her purchasing power and spend his/her future income.

To avoid paying interest, always pay in full and on or before the due date.

An important advantage of using a credit card over cash, aside from the convenience, is the reward points (or in some cases, cash rebate) it will provide the user which can be used to avail of other additional benefits.

Security is another important advantage of a credit card over cash. In case of loss, one simply needs to call the 24-hour hotline of the card issuer to report the loss so it can be blocked.

To know more about CCAP, visit its website at www.ccap.net.ph or its Facebook page at https://www.facebook.com/CreditCardAssocPH/

THINGS TO CONSIDER WHEN APPLYING FOR A CREDIT CARD:
Budget. Don’t get the kind of cards that charge you P12,000 annual fee and be careful that you only get the ones that fit your budget.

Know the reward system. There are many options, and you have to be careful that you know which ones you really need and where you will maximize all of these benefits (e.g., cashback rewards, gas rebates, miles points, etc.).

Convenience. Think of the worst-case scenario and make sure that your credit card company is convenient to you in case of that emergency.

Good security feature. Make sure that the company has the resources to cutting-edge technology that they can protect you from hacks.

Good customer service and flexibility.

TIPS FOR NEW CREDIT CARD OWNERS:
• A credit card is not an emergency fund.

• For beginners, don’t get more than two credit cards.

• Teach yourself to pay your credit card bill in full three days before the due date.

• Know your credit card cycle.

• Maximize your credit card rewards.

ADVICE FOR LONGTIME CREDIT CARD OWNERS:
• Make use of your credit card cycles to get longer days of free money before the bank charges you.

• Maximize your rewards. Know when it’s better to swipe than pay in cash because rewards are like money for those who know how to use their cards wisely.

• Be very careful of cash advance. The moment you get the cash, you start paying interest.

• For those affected during the pandemic, check for debt relief programs with your credit card company to help you pay off your debts.

FIVE THINGS YOU SHOULD HAVE OR BE BEFORE APPLYING FOR A CREDIT CARD: • You need to have a proof of billing under your name.

• Have your own income to pay for your bill.

• You need to be financially educated to know how credit card works.

• Make sure that you don’t have some existing unsustainable debt.

• You need your own identification cards and signature.

ON LATE PAYMENT FEE AND INTEREST:
Both are types of payment for your unpaid credit card bill, Ms. Duplito said. Late payment fees apply when you couldn’t pay a single peso after your due date. Meanwhile, interest comes in when you don’t fully pay your bill upon the due date and whatever is left (called a rollover) will be charged an additional 2% interest per month. The catch is, the next month you roll over, you will be paying 2% interest on whatever’s unpaid plus the interest it accumulated (also called compound interest). — Bernadette Therese M. Gadon

For more tips, check Ms. Duplito’s Money University by SalveSays on Facebook, and follow @SalveSays on Facebook, Twitter, Instagram, Kumu, and TikTok.

THE PROPOSED MERGER of the Land Bank of the Philippines (LANDBANK) and Development Bank of the Philippines (DBP) has once again come to light in the first quarter of 2023 despite time running out from previous administrations and differences in mandates.

LANDBANK primarily caters to developing the Philippines’ agricultural sector and provides support for the agrarian reform program while DBP provides banking services for the medium- and long-term needs of small and medium enterprises (SMEs) in the agricultural and industrial sector.

These two banks have two very different functions, varying corporate objectives and mandates, thus, sparking debates and critics against those who oppose the merger.

As far back as 2006 during the Arroyo administration, the marriage between the two state-owned lenders have been put forward.

The plan was then revived in March this year, after President Ferdinand R. Marcos, Jr. approved the groundwork of the two largest state-owned banks’ union, after a discussion with his economic managers.

LANDBANK will be the surviving entity with larger assets, capital stock and even having more branches compared with DBP.

The Department of Finance (DoF) said in a press release that the merger can generate an amount of P975 million in savings per year through the consolidation of the banks’ branch operations.

DoF also disclosed that the consolidated bank would have an estimated asset size reaching P4.2 trillion and deposit base amounting P3.6 trillion, potentially making LANDBANK the largest bank in the country.

Finance Secretary Benjamin E. Diokno’s push for the said merger “is meant to create a bigger, stronger, and more resilient bank that can better serve the country’s development needs.”

“The current administration is pushing for the merger to allow the merged bank to better withstand economic shocks,” Mr. Diokno said in a Viber message.

He also added that the union of these banks will boost retail and wholesale banking operations compared when they function as separate banks.

The merger is expected to be finalized in November this year.

PAVING THE WAY FOR MAHARLIKA?
The country’s proposed first sovereign wealth fund (SWF), the Maharlika Investment Fund (MIF), is aimed to promote economic development by making strategic and profitable investments in key sectors, Mr. Diokno said in late February.

An SWF is a state-owned investment fund from money generated by the government, which is often sourced from a country’s surplus reserves.

The proposed SWF aims to get its seed capital partially from LANDBANK and DBP, giving P50 billion and P25 billion, respectively. The merger of these two state banks may pave the way for the MIF.

“If after the merger LANDBANK will still be asked for a contribution, then the performance of the SWF would influence the bank’s profits,” said Japhet Louis O. Tantiangco, senior research analyst at Philstocks Financial, Inc., in an e-mail.

If the bank’s contribution to the wealth fund would be a significant portion of its investable funds, it would be risky not just for the bank but for the financial system and if it posts losses then it would have a detrimental effect, he said.

“The merger itself is not important [and] uncalled for. It is basically a political move,” Pablito Malabanan Villegas, former LANDBANK vice-president and the current president of Villegas Organic and Hobby Eco-Tourism Farm Corp. and an independent director of ECCOBank (A Rural Bank), Inc., said in a phone call interview.

For him, the result of the merger will be a “further neglect and even abandonment of the respective mission as mandated by law.”

But for Mr. Diokno, it is a misnomer to say that the two banks have different mandates.

“The fact is that both are universal banks — what one bank can do, the other bank can do also.”

“The corporate action would further solidify the surviving bank’s footing in the banking industry,” said Luis A. Limlingan, head of sales at Regina Capital Development Corp., in an e-mail.

He also added that even if the two banks were merged, it would remain to be relatively smaller than some of its counterparts in the region.

Additionally, the proposal seems a bit rushed for some.

A merged LANDBANK and DBP is “not a good move,” Mr. Villegas said. And the rush for this merger will openly compete with the well-managed and profit-seeking banking sector, he added.

For Mr. Tantiangco, he said the proposed merger should further be studied, noting that while there may be benefits, there are also concerns which needs to be resolved.

“Will all sectors be given ample attention despite them being handled by one entity moving forward? Also, the merger will lead to displaced workers. Where will these workers go?” he said.

WHAT’S IN IT FOR THE BANKS?
Mr. Tantiangco said that after the merger, LANDBANK will pose as an even bigger competitor in the universal banking space.

The merger will lead to higher capitalization for LANDBANK, with the increase in its capital base, the state-led bank will have more cushion against financial shocks, added Mr. Tantiangco.

“The merger is also expected to result in higher productivity, [and] will be a sort of expansion for LANDBANK which may then result in economies of scale,” he said.

Meanwhile, the Finance chief said that the Philippines will likely benefit in the said merger, which will “eliminate redundancy and inefficiency in operations.”

But the planned merger raised concerns more as to who and how will it affect, rather than outlining its benefits. The push for the merger will likely result to layoffs and the banks involved will lose it core mandates and its areas of expertise.

For DBP, there is no clear direction or defined program for the merger at its early stages.

“But as in any merger and acquisition, an incentive will be provided to personnel in view of redundant positions. If and when, the approach may also change depending on the direction the surviving entity will take,” DBP said.

It reiterated that the function of both banks is equally important, and that the expertise of these banks are needed so that no marginalized sector will be disenfranchised.

‘SUPER MONOPOLY’
Some senators has voiced their concerns on the said merger, citing that if these state-led banks’ union is realized, it will create a large financial institution, a “too big to fail” or a “super monopoly.”

Mr. Tantiangco affirmed this, saying that due to the resulting size in its deposit base it is likely a financial giant and comes with attached risk.

“If ever the bank collapses, this would create a very significant dent on the Philippine financial sector and eventually on the overall economy, both confidence and real-wise,” he said.

The bank’s improved capital base resulting from the merger, he added, is seen to mitigate the said risk.

But he noted, that despite this, universal banks in the private sector are seen to be strong and competitive and in turn will prevent the merger from creating a super monopoly.

On DBP’s side, drawbacks of the merger entail identity crisis and mission dilution, industry limits and anti-competition environment contrary to a liberalized economy envisioned by the Philippine Competition Act.

“The merger may result in an institution with consolidated financing programs with no mastery in the administration of the same, unlike in the current set-up,” the infrastructure bank said.

They also said the merged entity is claimed to be stronger, bigger and better and while there may be truths to it, overall, these do not reduce benefits.

“Mergers may be advantageous for private banks where size is critical for scale and market dominance, but this does not hold true for [state] banks with specific mandates, where priority should be towards the effectivity in performing and delivering their respective public missions,” DBP said.

For Mr. Villegas, he sees two possible risks. One is mismanagement, which he said is currently happening in LANDBANK, and two, is the non-fulfillment or the abandonment of these banks’ mandate.

“The banks tend to continue to ignore or marginalize the sector they are mandated to serve, socially and economically, thus [the latter] continue to suffer in poverty and hopelessness,” he said.

He also added that contrary to what Mr. Diokno said, the biggest banks in some countries are owned by the private sectors and not the state.

“Having a state-owned bank as the largest bank usually spells for better performance of the banking industry… State banks can fulfill functions that private banks don’t do, as well as offer countercyclical lending,” Mr. Limlingan said.

SNAGS?
The government watchdogs are mum about the LANDBANK-DBP deal as the merger is still in the works.

“In the case of the LANDBANK-DBP merger, the transaction has not yet reached the Commission, therefore the PCC defers any comment lest it preempts future developments,” the Philippine Competition Commission (PCC) said in an e-mail.

The PCC is mandated to review proposed mergers and acquisitions and prohibit those that will substantially prevent, restrict, or lessen competition in the relevant market.

The Bangko Sentral ng Pilipinas (BSP) was not able to share its comments on the proposed merger as of press time last Friday.

The Governance Commission for GOCCs (GCG), for its part, said in a statement last April that the banks’ merger does not need a new law for them to combine as a single entity.

It conducted a study on the issues concerning the proposed union of the said banks and found that these banks can be combined even though they both received their charters from the Congress.

This was reiterated by former Senate President Franklin M. Drilon, saying that there is an existing law that empowers the president to direct the merger.

The Republic Act (RA) 10149 or the GOCC Governance Act of 2011 authorizes the President to effect the merger without waiting for Congress to file and pass related bills.

However, this is contrary to DBP and some experts.

Mr. Villegas said that the merger requires joint-congressional action, saying that the specific mandates of the respective banks cannot be amended by general law and the GOCC law is a general law.

But DBP remains firm on their position that the proposed merger requires congressional action.

It said there is no provision in Section 5 of RA 10149 and that there is no mention of the power to decide on or to approve of a merger which belongs to the Congress.

“This gave the law the appearance of unlimited power to merge and abolish GOCCs, which is highly prone to abuse and can be whimsically and capriciously exercised,” said DBP.

“This unbridled power of the GCG is dangerous, particularly if the proposed merger does not adhere to the set conditions or exclusive standards,” it added.

EFFECT
For Mr. Diokno, if the merger materializes, the local banking industry will continue to be sound and adequately capitalized and the central bank has one less bank to supervise.

The agricultural lender’s comparative advantage in its digitalization journey can be applied more widely, he added.

Mr. Tantiangco, on the other hand, said that once the merger pushes through, somehow it is expected to help the government in its saving efforts as it pursues fiscal consolidation.

“If the synergy brought by this merger is maximized, it is expected to greatly help in the economic development of the country via financing, primarily in the rural areas,” he said.

Mr. Tantiangco added that the proposed merger is seen to have a positive effect in the field of agriculture, infrastructure development, and small- and medium-scale businesses.

Once the merger is executed, Mr. Villegas said, it will be disastrous to the agricultural economy, and perhaps the economy itself.

“Merging them will not only be too risky but will result in [a] financial and socioeconomic disaster given their already miserable failure to do their mandates, much more their inability to compete with the more efficient and effective management of privately managed universal and commercial banks,” he said.

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By Lourdes O. Pilar, Researcher

STUBBORN INFLATION, costlier borrowing costs, and US banking sector collapse contagion dragged domestic financial markets in the first three months of the year.

But analysts still keep their eyes peeled on central banks’ decision as inflation starts to come down.

The barometer Philippine Stock Exchange index (PSEi) closed the first quarter at 6,499.68, down 1% quarter on quarter from 6,566.39 in the fourth quarter. Likewise, on year-on-year basis, the index declined by 9.8% year on year from the 7,203.47 finish in the first quarter of 2022.

Meanwhile, the peso closed P54.36 against the dollar in the first quarter, appreciating by 2.6% from the previous quarter’s end of P55.76 to a dollar. On an annual basis, the local unit retreated by 5.1% from P51.74 finish in the first quarter last year.

Demand for Treasury bills auctions saw a total subscription amounting to P443.8 billion with P167.8-billion total offered amount in the first quarter.

The oversubscription amount of P266 billion was higher than the P169.4 billion in the fourth quarter.

Meanwhile, demand for Treasury bonds increased to P1.1 trillion, almost double the P572.9 billion in the fourth quarter. The demand was higher than the aggregate offered amount of P511.2 billion in the first three months of 2023.

At the secondary bond market, domestic yields plunged by 15.34 basis points (bps) on quarter-on-quarter average, based on the PHP Bloomberg Valuation (BVAL) Service Reference Rates published on the Philippine Dealing System’s website.

On a year-on-year basis, yields also grew by 193.46 bps.

The US Federal Reserve has raised borrowing costs by 500 bps since March 2022, bringing the Fed funds rate to 5-5.25%. Market players are expecting the Fed to start keeping rates on hold at its next meeting on June 13-14.

The BSP maintained the key policy interest rate on the overnight reverse repurchase facility at 6.25% at its May 18 meeting, ending nine straight meetings of rate hikes. The corresponding interest rates on the overnight deposit and lending facilities remained at 5.75% and 6.75%, respectively.

Economists attributed financial market developments during the first quarter to stubborn inflation, rising borrowing costs, and sudden sell-off due to the collapse of Silicon Valley Bank and Signature Bank.

“The start of 2023 was quite optimistic, especially for Philippine equities as upbeat corporate earnings were sustained,” Union Bank of the Philippines Chief Economist Ruben Carlo O. Asuncion said in an e-mail.

Local factors such as high interest rates and stubbornly high inflation continued to persist causing investors to sit on the sidelines and opt for attractive fixed-income securities, added Mr. Asuncion.

“An external factor was the looming banking crisis in the West. For some time, fear flooded the markets causing a short sell-off on banking stocks. However, it was swiftly tapered down by news on bailouts and acquisitions,” said Mr. Asuncion.

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in an e-mail that financial markets took their cue from the outlook on US Federal Reserve (US Fed) policy and any development that might impact that outlook moved markets.

“Troubles at banking institutions impacted the markets in so far as it might impact on US Fed policy,” said Mr. Mapa.

“To the extent that it had an impact on global yields and in turn currencies. But after the dust settled and local banks were able to effectively demonstrate that they were not in any way like those banking institutions, markets steadied,” Mr. Mapa said.

He also noted that the China’s reopening also affected markets as this could affect US Fed’s policy outlook via faster inflation induced by China’s resurgent demand.

Domini S. Velasquez, chief economist at China Banking Corp., said in an e-mail that bank woes happened abroad had spurred fears of contagion which caused risk off sentiment to emerge in financial markets.

Rachelleen A. Rodriguez, research analyst at Maybank Investment Banking Group–Philippines, said in an e-mail that the PSE financial sector index slid by 2.04% the day following the news of the collapse of Silicon Valley Bank.

“We think the sell-off was overdone considering Philippine banks’ strong capital positions, reinforced credit policies, high NPL (nonperforming loan) cover buffers and predominantly local government investment exposures,” said Ms. Rodriguez, adding that the local banks have no exposure to the failed banks in the US.

WHAT INDICATORS TO WATCH OUT FOR
Investors should continue to watch out for inflation and gross domestic product data this year as these could sway the central bank’s monetary policy decisions, said Ms. Velasquez.

“A continued downward trend may open the doors for a rate cut as soon as the fourth quarter, especially given expectations of slower economic growth this year. The current account balance is also a key indicator as it provides a picture of the country’s external position. A narrower current account deficit will provide support to the local currency,” Ms. Velasquez added.

Mr. Asuncion said that investors should observe the rate of disinflation, whether it’s increasing or decreasing and how fast.

“If inflation remains stubbornly high (although decreasing), the BSP may hold rates high for longer. Meanwhile, if the optimistic case holds, the BSP could now consider cutting rates which could provide a better outlook for debt-driven sectors such as property,” Mr. Asuncion added.

“For now it is still all about inflation. To some extent investors should also monitor real sector variables as movements for these could also influence central bank policy direction,” said Mr. Mapa

Consumer price slowed to an eight-month low of 6.6% annually in April from 7.6% in March, preliminary data from the Philippine Statistics Authority showed.

But this was still faster than 4.9% in April a year ago and marked the 13^th straight month that inflation breached the central bank’s 2-4% target.

This brought the four-month inflation print to 7.9%, still far from the downward-revised 5.5% forecast given by the BSP.

“Easing inflation will provide some relief, however, the recent numbers we are seeing 7-8%, are still far from the BSP’s target of 2-4%,” Mr. Asuncion said.

“This signals the market that the BSP will not be cutting rates anytime soon, hence, the cost of borrowing will remain high in the medium term. A high interest rate environment coupled with lower demand may soften corporate earnings in the second quarter of 2023,” added Mr. Asuncion.

He expects inflation to be at the 6-7% range in the next quarter, while full-year 2023 forecast is at 6.2%.

Security Bank Corp. Chief Economist and Assistant Vice-President Robert Dan J. Roces said in an e-mail that domestic inflation is expected to temper, mostly on base effects and improving food supply.

“However, upside risks are emerging including El Niño which may affect food supply once more and jack up utility costs,” said Mr. Roces.

FIXED-INCOME MARKET
Ms. Velasquez: Market interest rates have likely peaked in the first quarter and are already on a downward path. However, central banks will remain hawkish even as they end their monetary tightening cycles due to sticky inflation. Hence, we expect the yield curve to remain relatively flat in the second quarter.

Mr. Mapa: We could see yields track inflation trends and also take their cue from the BSP policy stance.

Mr. Roces: Yields may continue to go down as inflation tempers.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort: Continued easing trend in long-term peso yields, fundamentally amid the easing trend in global and local inflation largely due to higher base effects.

Mr. Asuncion: With the current rate of disinflation, we expect the BSP to raise 25 bps and pause in 2Q23 and for the rest of 2023. Thus, short-term bonds will continue to be an attractive place to park capital.

EQUITIES MARKET
Mr. Asuncion: With most investors staying on the sidelines, we expect the PSEi to trade between the 6,500-6,800 range in second quarter of 2023 before picking up momentum towards the end of the year.

Mr. Roces: Rangebound to upwards on improving sentiment.

Ms. Rodriguez: We expect the PSEi to reach 7,800 by yearend 2023.

Mr. Ricafort: Important support levels at 6,250-6,400 levels, where there could still be some bargain hunting/bottom fishing activities for some long-term investors. Important resistance at 6,800-7,000 levels where there were some healthy profit taking activities.

FOREIGN EXCHANGE MARKET
Ms. Velasquez: The peso will likely remain weak in the second quarter as easing domestic inflation fuels expectation of a BSP rate pause soon. A narrower interest rate differential between the US Fed and the BSP will lead to a weaker peso.

We expect the peso to depreciate in the third quarter when businesses usually fulfill the bulk of their imports before gaining strength in the fourth quarter as remittances come in ahead of the holidays.

Mr. Roces: Volatile.

Mr. Mapa: Peso should remain pressured on current account dynamics (deficit). That being said, should the strong dollar theme fade towards the end of the year, we could see the peso recover, albeit lagging regional peers.

Mr. Asuncion: Dollar to peso is expected to hover between P54.50-P56.00 in the second quarter of 2023. Forecast range may break to the upside, given rising geopolitical tensions increase within the region the demand for safe-haven assets which benefits the dollar rise. Nevertheless, downside risks remain from the US potential recession overhang.

The benchmark Philippine Stock Exchange index (PSEi) closed the first three months of the year at 6,499.68 points declining by 1% on a quarter-on-quarter basis, a reversal from the 14.4% quarter-on-quarter growth in the previous quarter.

Likewise, the index dropped by 9.8% year on year.

On the other hand, the financial subindex, which includes the banks, closed the quarter with 1,810.59 points, up by 10.1% from 1,645.03 points from the previous quarter. Compared with the first quarter of 2022, the subindex gained by 6.8%.

Majority of the banks’ stock performance rose in the first quarter.

Out of 16 listed banks, 11 have logged increases in their share prices. BDO Unibank, Inc. (BDO) surged the most with a 21.6% gain quarter on quarter. It was followed by China Banking Corp. (CBC, 16.8%), Philippine Bank of Communications (PBC, 16.1%), Metropolitan Banking and Trust Co. (MBT, 8.3%), and Security Bank Corp. (SBC, 5.7%).

Meanwhile, shares in Philippine Business Bank (PBB) fell the most by 5.7% on a quarterly basis. It was followed by Philippine Trust Co. (PTC, 3.4%), Philippine National Bank (PNB, 1.1%), and Bank of Commerce (BNCOM, 0.4%).

Rachelleen A. Rodriguez, research analyst at Maybank Investment Banking Group said that as of May 10, only Union Bank of the Philippines (UnionBank) fell below estimates in the first quarter.

“Although it posted a solid 57.4% [year-on-year] growth in revenues, its higher-than-expected provisions and operating expenses (arising from incremental integration costs related to its acquisition of Citi’s retail assets) tempered earnings to P3.4 billion or 19% of our [full-year 2023] forecasts,” she said in an e-mail.

BDO Securities Corp. Head of Research Abigail Kathryn L. Chiw said that BDO, BPI, and Metrobank were among those who stood out in the first quarter amid a solid earnings report brought by a strong lending and fee income performance.

“Sustained economic reopening, improving business activity, as well as increasing employment opportunities continue to support loan demand in our view. The lag effects of rate hikes by the Bangko Sentral ng Pilipinas (BSP), as well as the lifting of credit card rate caps are also seen contributing to higher incomes for banks,” she said in an e-mail.

The country welcomed the first quarter of the year with a better-than-expected economic output but at a slower pace. The statistics agency’s preliminary data showed the country’s gross domestic product grew by 6.4% annually in the first three months, slower than the revised 7.1% growth in the last quarter of 2022.

For Jonathan L. Latuja and Laisa R. Salinas, equity research department head and macro & fundamental research analyst at PNB Research, the delayed effect of the interest rates implemented by the BSP contributed to a higher net interest margin (NIM) — a ratio that measures banks’ efficiency in investing their funds by dividing annualized net interest income to average earning asset — and the sustained loan expansion of BDO and BPI.

“They showed net interest margin expansion and loan growth coupled while effectively managing their operating expenses as well as lower loan loss provisions. All these resulted to the favorable performance of these banks,” they said in an e-mail.

Gross total loan portfolio of the country’s big banks rose by nearly a 10^th to P11.59 trillion as of end-March from P10.57 trillion in the previous year, latest data from the BSP showed.

However, gross nonperforming loans (NPL) ratio of universal and commercial banks (U/KBs) slightly inched up to 3.03% in end-March compared with 3.01% in end-February but lower than the 3.73% in end-March 2022.

The big banks’ NIM improved to 3.59% in the first quarter of the year compared with the 3.43% seen in the final three months of 2022. This was also higher than the 3.23% seen in the same quarter last year.

Provision for credit losses by these large banks amounted to P16.28 billion, less than P18.79 billion in the same period last year, the BSP data showed.

The central bank paused hiking rates after nine consecutive meetings of rate hikes. BSP has raised a total of 425 basis points since May 2022. The key rate now stands at 6.25%.

Meanwhile, the staff of the Federal Open Market Committee, during the March 2023 US Federal Reserve meeting, has predicted that there is a possibility of a mild recession “starting later this year.” The collapse of US midsized banks Signature Bank and Silicon Valley Bank was considered in their assessment.

Last May, the Fed increased its interest rate by 25 basis points, making it the 10^th consecutive meeting of rate hikes. The Fed has raised its interest rate by 500 basis points since March 2022 to a range of 5-5.25%.

Analysts are not threatened by the US’ recession fears affecting banks as the local banking industry has a diversified deposit bases and exceeded the requirement set by the central bank.

Ms. Rodriguez of Maybank said the Philippine banking industry can weather a possible recession in the US due to highly localized businesses of banks and expect the banks’ high NPL buffers and strong capitalization can absorb the drag.

“A recession in the US could also trigger Fed rate cuts that would widen the gap [versus] our policy rates and strengthen the [peso], which we believe could arrest domestic inflation, stimulate domestic consumption and accelerate domestic expansions, which we believe is a more vital component of the Philippine economy and banks’ exposures,” she said.

To help wade through the banks, PNB Research’s Mr. Latuja and Ms. Salinas said value banks based on their price-to-book valuation and those trading at a discount.

“Moreover, we prefer those that have relatively higher NIM and return on equity while having the ability to grow their loan portfolio. Lastly, we focus our attention on banks that have sufficient capitalization,” they said.

‘RESILIENT’ BANKING SECTOR
Analysts are hopeful that the banking industry can sustain its performance for the rest of the year.

Mr. Latuja and Ms. Salinas said that positive performance of bank stocks this year will be driven by continued loan growth, NIM expansions, improvements in pre-provision operating profit (PPOP) margin, and return on equity (RoE).

“If [banks] continue to report favorable financial and operating results, we think that those trading at a relative discount to their peers or historical valuation have more room for upside if the market rerates their valuation,” they said.

Maybank’s Ms. Rodriguez affirmed the sector to remain “resilient” given the banks’ healthy liquidity indicators.

“We have noticed an uptrend in the cost of funding, alongside the rise in asset yields, as more Filipinos park their funds in time deposits, but this ultimately addresses banks’ liquidity concerns, and, as such, is still positive for banks,” she added.

BDO’s Ms. Chiw suggested investors look at banks that benefit most in a rising interest rate environment, such as bigger banks with strong deposit franchises because this will support loan growth and sustain healthy fundings for said banks.

Additionally, analysts recommended investors to position their bets at banks with strong pricing power, extensive branch networks and digital platforms will better serve the broader market.

How the BSP will react to global market developments, particularly with the Fed’s monetary policy action, will affect the banks’ performance in terms of how they can cascade higher interest rates to their clients without “jeopardizing [their] paying capacity,” Regina Capital Development Corp. Head of Sales Luis A. Limlingan said in an e-mail. — TCSM

WILFRIDO T. GONZALES, a 74-year-old retiree, has no intention of using an electronic wallet (e-wallet) and is strongly against it. However, physically queuing and traveling to places have become quite a challenge for his day and age.

“I don’t use e-wallets or any online financial apps. I don’t intend to use them either. I still go to the bank and line up in bayad centers to pay bills. However tiresome it can be at my age, at least I know that the money is directly handed to the receiver,” Mr. Gonzales said in an interview with BusinessWorld.

However, in the case of 60-year-old interior designer Marite D. Medez, e-wallets have become a game changer for her.

“I only started using e-wallets because I needed them for one of my businesses back in 2022,” Ms. Medez said in a separate interview.

“I didn’t like the idea of using an e-wallet at first. And then one day, I had about 10 customers paying through e-wallets and only my staff had an account at the time. Until I had the app myself, I didn’t need to rely on anything else like going to the bank or cashing cheques,” she said.

The potential of Filipino senior citizens in the digitalization of financial services is often left unnoticed. However, specific barriers exist in e-wallet applications that the untapped segment could overcome and could further the central bank’s goal of digital financial inclusion.

In the Bangko Sentral ng Pilipinas’ (BSP) National Strategy for Financial Inclusion (NSFI) 2022-2028, the underserved and unserved segments of the country are part of the financially excluded persons that it targets to accommodate in their seven-year plan.

“Senior citizens, just like other underserved sectors, are also afforded the financial inclusion benefits from the priority initiatives of the NSFI, including digital finance,” the BSP said in an e-mail interview.

“In fact, one of the four strategic objectives identified in the NSFI is to promote inclusive digital finance as it enables cost efficiencies and innovations that improve the customer experience, affordability, availability, and personalization of welfare-enhancing financial products and services,” it added.

In the 2021 Financial Inclusion Survey (FIS), it was estimated that there are 5.4 million senior citizens. The share of senior citizens that own a smartphone more than tripled to 39% in 2021 from 12% in 2019. Similarly, the elderly population that has access to the internet rose to 26% in 2021 from 8% previously.

Those that hold an electronic money (e-money) account reached 11% of the senior citizens. They remain to be the smallest age group that utilizes e-money, next to those who are 50 to 59 years old (21% share).

Of the Filipino elderly, only 37% have a savings account in 2021 and about 54% of their pension payouts were received through an account. Moreover, 80% of Filipino seniors still made transaction payments as of 2021.

AGE IS JUST A NUMBER
In the research paper titled “Younger Persons are More Likely to Adopt the Mobile Wallet than Older Persons, or are they? The Moderating Role of Age” (2015) by Norman Shaw, the hypothesis that age as a moderator in terms of adopting to e-wallets was proven otherwise.

Results showed that the intention of use was slightly different between the younger generation and the senior citizens, but the age difference was not significant.

Despite this, there is still a gap between the elderly and the digital experience. Both Ms. Medez and Mr. Gonzales face constant struggles in the digital age.

“How to use it at first was the hardest part. I didn’t know what I was doing. It’s still very convenient in my opinion, I pay off all my bills through e-wallets,” Ms. Medez said.

For Mr. Gonzales, he uses his smartphone as his source of daily news, entertainment, and communication.

“I already have difficulty understanding some of the icons and features in my own iPhone, what more with an e-wallet,” he said.

The common ground for both these pain points is the digital experience that could be constantly improved. Thus, user experience (UX) and user interface (UI) are essential ingredients to creating a holistic service for these senior citizens.

UX is the design process developers use to create smooth and purpose-driven software. UI, on the other hand, is the process of creating a pleasurable and easy-on-the-eyes look for a specific application.

Fulltime UX designer Jed C. Cordova points out that a good e-wallet experience depends on the target demographic. His experience involved developing an e-wallet catered to sea-based workers for the smooth transaction of money without the need of stepping foot on shore.

“In my experience, based on the sample of seafarers, we also covered senior citizens as part of the demographic. Most of them are above 60 years old. But even those who are in their mid-50s, most of them are very resistant to e-wallets,” he said in a Zoom interview.

“Simply because they don’t want to learn. That’s the main pain point we have gathered,” he added.

In the design perspective, AIRR Labbs Digital Designer Leila A. Alibudbud emphasizes the importance of a good interface for e-wallets.

“If it’s easy to figure out where things are, that to me is a good interface,” she said in a separate Zoom interview.

An app with a good interface “has icons that are easily understandable and you know what the icons mean at first glance without having to look at the text underneath it. It uses readable font and font size that is readable. Mostly, the little details that go into design still have a huge impact.”

THE MIDDLEMEN
The central bank strives for a “bigger” digital payments ecosystem. With that, BSP supports all initiatives for the advancement of digital infrastructures.

“The BSP also continually broadens its financial literacy and consumer protection programs that cater to the needs of the different segments and age groups of the unbanked,” BSP said.

Likewise, initiatives that are supported by the central bank include digital financial literacy programs and implementation of the consumer protection regulatory framework.

Also, the BSP pushes to collaborate with relevant stakeholders to “develop innovative payment channels that can cater to the needs of senior citizens.” Examples of which are the electronic distribution of pension and social aid through PESONet and InstaPay, the central bank’s regulated electronic fund transfer channels.

Stepping up to the ideal e-wallet experience is G-Xchange, Inc. which offers GCash, and is a subsidiary of Globe Fintech Innovations, Inc. The e-wallet application is also one of BSP’s regulated electronic money issuers (EMI).

GCash Head of Digital Experience Michelle S. Fernandez said the company strives to continuously improve the app while maintaining inclusivity for all 72 million of its users.

“Not everyone is tech-savvy. Not everyone knows how to navigate complex apps. We have to make sure it’s really understandable and friendly to all kasi GCash nga para sa lahat,” she said in a Zoom interview.

For first-time downloaders, GCash ensures that users are familiar with the interface through an onboarding step-by-step process of what the app is and its features. To upskill the digital literacy of those new to the app, video tutorials are also available on their website for ease of use.

Most notably, Ms. Fernandez acknowledges the pain points that exist among senior citizens toward e-wallet usage.

“We do know that [e-wallets] are something that they actually need more. They shouldn’t be going out too much, or exposed to physical cash as it can be a health concern and it can be unhygienic. So, [senior citizens] should be the ones to avail of this service more for their own convenience. We really do consider that when we do our designs. My mom is my main use case because I get a lot of design insights from her,” she said.

GCash started as a Globe Telecom, Inc.’s money transfer service via SMS in 2006. It then transitioned to an app in 2016.

“GCat (the cat mascot of GCash) was still very prominent. The icons were very thin, and fonts were smaller. There was a little bit of a rebrand in 2020. But then, it was really [in 2022] that we changed about 60% of the app visually. A bit of the experience changed as well,” Ms. Fernandez said.

Considering feedback from senior citizens, the GCash team ensures that everyone is included and accessible to the e-wallet service.

“We were actually resizing our fonts and our icons real time as we were speaking with the senior citizens. So, we would check, “How about this? Is this font or icon size okay?” and they would say “Lakihan mo pa (Make it larger).” And, real-time, we would enlarge the font size. Then they would react “okay, tama na ’yan. Nababasa ko na ’yan (that’s good, I can read it already),” Ms. Fernandez added.

Other than the visual and functional aspects of the app’s features, GCash also includes those with physical challenges.

“We also consider the mobility and reachability aside from just the size and color contrast. Some people are colorblind. So that means they won’t be able to tell the difference between some of the shades we use. That’s why we have more contrast. And again, maybe that’s not the most modern way of designing, but it’s a more considerate way of designing,” Ms. Fernandez said.

Thus, it is considerate to understand the target market’s needs. Regardless of age, it all boils down to how the needs for the service can be provided in a simple and all-accepting way.

“Generation Z (those born between 1997 and 2012) are more prone to be able to adapt to changes. But as you get older, you just want to stick to what you know. And you don’t want to be so inconvenienced about relearning things,” Ms. Fernandez said.

“It is our job to adjust for them.”