Bangko Sentral Ng Pilipinas - Overvie...Luzon Visayas Mindanao Overview Through the years, the rural...

STATUS REPORT ON THE PHILIPPINE FINANCIAL SYSTEM, FIRST SEMESTER 2009

Rural Banks

Source: Office of Supervisory Policy Development, Supervision and Examination Sector

Through the years, the rural banking

industry fulfilled its vital role of invigorating

development in the countryside

RURAL BANKS

101

Rural Banking SystemMarket Structure of Assets

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

June 2009

Luzon Visayas Mindanao

Overview

Through the years, the rural banking industry fulfilled its vital role of invigorating economic development in the countryside and of delivering a sustainable and market-driven financial services to the agricultural sector and the enterprising households.

In the first half of 2009 as well as in

the second half of 2008, the industry faced a series of bank closures, halting year-on-year growth in most of its balance sheet and income statement accounts. Nonetheless, the industry continued to perform relatively well, demonstrating a high degree of capacity and flexibility to adjust to the challenging environment. This was manifested by the structural developments which helped strengthen the industry over time: sustained profitability, adequate liquidity and improved solvency.

Rural banks continued to be

profitable in the first half of 2009 as net profits stood at P1.7 billion. Though P0.2 billion lower than the P1.9 billion posted in the same period last year, this already accounted for 60.7 percent of the profits earned by the industry in year 2008. With lower earnings during the semester in review both the annualized return on assets and equity (ROA and ROE) ratios declined to 1.7 percent and 10.9 percent from 1.9 percent and 13.6 percent, respectively.

Since end-June 2008, there were 31

rural banks which ceased to operate. With fewer industry participants, total assets declined to P147.5 billion or by 8.4 percent from year ago’s P161.1 billion. Nevertheless, this was still higher compared to the P146.1 billion total assets of the industry at end-year 2008.

Luzon based rural banks accounted

for the biggest asset share at P103.2 billion or 69.9 percent , fo l lowed by

Rural Banks STATUS REPORT ON THE PHILIPPINE FINANCIAL SYSTEM, FIRST SEMESTER 2009


102

Top Five Regions of Rural Banks

Based on Consolidated Statement of Condition as of End-June 2009 p/

Amounts in P Billion

Region Amount Rank Region Amount

1 CALABARZON (Region IV−A) 29.9 1 National Capital Region 18.4

2 National Capital Region 24.7 2 CALABARZON (Region IV−A) 17.4

3 Central Luzon (Region III) 20.0 3 Central Luzon (Region III) 12.6

4 Ilocos (Region I) 9.5 4 Ilocos (Region I) 6.5

5 Central Visayas (Region VII) 7.2 5 Central Visayas (Region VII) 5.4

Total 91.2 Total 60.2

% Share 61.8 % Share 62.1


1 CALABARZON (Region IV−A) 22.8 1 CALABARZON (Region IV−A) 4.3

2 National Capital Region 16.0 2 National Capital Region 4.1


4 Ilocos (Region I) 7.0 4 Ilocos (Region I) 1.4

5 Central Visayas (Region VII) 5.1 5 Northern Mindanao (Region X) 1.2

Total 64.7 Total 14.1


p/ Preliminary

Rank

Rank

Assets Loans

Deposit Liabilities Capital Accounts

Mindanao-based rural banks 31.1 billion or 21.1 percent. Visayas-based rural banks lagged behind at P13.2 billion or 9.0 percent.

The 5.5 percent decline in loans,

gross to P97.0 billion from year ago’s P102.7 billion was also a result of fewer industry players. This was further dampened by the rising incidents of problem accounts as non-performing loans (NPLs) increased by 3.4 percent leading to a higher NPL ratio at 10.8 percent from the 9.9 percent ratio at end-June 2008. Meantime, non-performing asset (NPA) ratio remained unchanged at 12.0 percent from year ago with the 8.0 percent decline in bad assets matching the reduction in gross assets.

Liquidity remained adequate with the

ratio of liquid assets-to-deposit liabilities at 35.2 percent, up from year ago’s 30.9 percent.

Total capital accounts reached P24.4 billion, an increment of P1.3 billion from year ago’s P23.1 billion. The industry remained well–capitalized with capital adequacy ratio (CAR) as of end-March 2009 reaching 18.3 percent well above the minimum 10 percent requirement and the eight percent benchmark on a consolidated basis was set by the Basel Accord.

On a regional basis, rural banks

situated in CALABARZON (Region IV-A) consistently took the lead in terms of the highest assets, deposit liabilities and capital accounts while rural banks in National Capital Region captured the biggest share in total loans.

Pursuant to Circular Nos. 583 dated 24 September 2007 and 594 dated 8 January 2008, rural bank can now engage in limited trust activities and participate in selected derivatives transactions.

As of end-June 2009, no rural bank

engaged in these special authorities yet.


Rural Banks


103

Closed Rural Banking Offices

1 January to 30 June 2009

No. of

BranchesDate Closed

1. RB of Subangdaku, Inc. 6 01/08/2009

2. RB of Sta Rita, Inc. 1 01/08/2009

3. RB of Bacolor, Inc. 2 01/08/2009

4. RB of Polangui, Inc. No Branch 02/26/2009

5. RB of Batan (Aklan) No Branch 03/06/2009

6. RB of Maribojoc (Bohol), Inc. No Branch 04/08/2009

7. Bangko Rural ng Kalumpit (Bulacan), Inc. 1 04/17/2009

8. RB of Sapang Dalaga, Inc. No Branch 05/14/2009

9. Banco Agricola, Inc. 10 05/21/2009

10. Cardinal RB (Cebu), Inc. No Branch 05/28/2009

11. RB of Mabinay, Inc (Oriental Bank) 1 05/28/2009

12. RB of Oas No Branch 06/25/2009

Name of Bank

OPERATING NETWORK The number of operating rural banks

declined to 648 from 678 offices at end-June 2008, following the closure of several rural banks since the second half of 2008 (including the closure of 12 rural banks under the Legacy Group of Companies in December 2008).

After the closure of 19 rural banks in

the second half of 2008, 12 more rural banks ceased to operate during the first half of 2009, namely: (1) RB of Subangdaku, Inc.; (2) RB of Sta Rita, Inc.; (3) RB of Bacolor, Inc.; (4) RB of Polangui, Inc.; (5) RB of Batan (Aklan); (6) RB of Maribojoc (Bohol), Inc.; (7) Bangko Rural ng Kalumpit (Bulacan), Inc.; (8) RB of Sapang Dalaga, Inc.; (9) Banco Agricola, Inc.; (10) Cardinal RB (Cebu), Inc.; (11) RB of Mabinay, Inc. (Oriental Bank) and (12) RB of Oas.

Subsequent to the merger of SME

Bank, Inc. (RB) with GM Bank, Inc. (RB) as the surviving bank on 1 August 2008, there was one consolidation in the first half of 2009. Lipa Public Bank, Inc. and RB of Mataas na Kahoy started operation on 5 January 2009 as a consolidated bank known as Mt. Carmel Rural Bank.

There were three newly established

rural banks during the 1st half of 2009, namely: (1) Banco de Arevalo, Inc. which started operating on 28 January 2009; (2) Rural Bank of Loboc, Inc. on 1 April 2009 and (3) New Covenant Bank, Inc. on 11 June 2009.

Rural banks remained supportive of

BSP’s advocacy to promote sustainable microfinance catering to the financial needs of the many enterprising poor. As of end-June 2009, the number of rural banks involved in microfinance lending steadily rose since the project was implemented in 2000. There existed five microfinance oriented rural banks having 28 branches nationwide and 161 others engaged in microlending.



104

Parallel to the liberalized branching regime, the growing installation of ATMs

augmented the branch network and further widened the delivery

of banking services in the countryside

Since the liberalization of the branching guideline on 22 December 2005 under Circular No. 505, rural banks were able to make great strides in providing access to financial services in the underserved areas in the countryside. Likewise, the amendment of the branching guidelines on 13 October 2008 under Circular No. 624 further rationalized existing regulations on the establishment of banking offices to further improve the delivery of banking services in the country and the rural areas in particular.

Rural banks benefited from this

policy as manifested in the increase in the number of offices to 2,032 at end-June 2009 from year ago’s 2,026. While the number of operating banks decreased by 30, the number of branches and other offices increased by 36 from end-June 2008 as stronger and viable rural banks expanded their client reach.

The largest number of rural bank

offices, i.e., 841 offices (or 41.4 percent), were located in the National Capital Region and its contiguous areas of CALABARZON (Region IV-A) and Central Luzon (Region III). The Northern Luzon area (Region I, Region II and CAR), which had 373 rural bank offices, took up the second biggest share at 18.4 percent. While 298 rural banks were situated in the Visayas region, comprising 14.7 percent of the total rural banks nationwide. The remaining 520 offices were located in and around the areas of Bicol, MIMAROPA and Mindanao.

Parallel to the liberalized branching

regime, the growing installation of Automated Teller Machines (ATMs) augmented the existing rural branch network and further widened the delivery of banking services in the countryside. As of end-June 2009, the number of rural banks with ATMs reached 120 units (102 on-site and 18 off-site) from 83 units (71 on-site and 12 off-site) at end-June 2008 and just five ATMs in 2005.

Rural Banking OfficesAs of End-June 2009

Rural Banks 2,032 648 1,384

Of which :

Microfinance Rural Banks 33 5 28

Total

Branches/

Other

Offices

Head

Offices


Rural Banks


105

Based on the three major geographical regions, most ATMs were installed in Mindanao with 87 units (or 72.5 percent) while the rest can be found in Luzon (including NCR) with 22 units (or 18.3 percent) and in Visayas with 11 units (9.2 percent)

Meantime, rural banks started to

make use of electronic banking such as the Electronic Fund Transfer Point of Sale system and Mobile Phone Banking to beef up their delivery of financial services. As of end-June 2009, a total of 49 rural banks had e-banking services. Moreover, there were already eight rural banks with FCDU licenses in response to Circular No. 522 dated 23 March 2006, which authorized rural banks to engage in FCDU operations subject to prior BSP approval.

RESULTS OF OPERATIONS The rural banking industry

consistently yielded positive bottom line figures over the years. For the first half of 2009, the industry incurred a decline in net profit which contracted by 11.3 percent to P1.7 billion over the P1.9 billion posted same period last year. Nevertheless, this already accounted for 60.7 percent of the net profit earned by the industry for the whole year of 2008.

Dampened profitability for the period

was the result of the 2.3 percent decline in total operating income while non-interest expenses grew by 4.5 percent. The slowdown in lending activities coupled with higher problem loans affected the industry’s overall bottom line figure.

Total operating income stood at P8.3

billion, down by P0.2 billion from the same period last year. The 2.3 percent reduction in total operating income, was propelled mainly by the 16.8 percent decline in non-interest income. Non-interest income, which accounted for nearly a fourth of total operating income declined by P0.4 billion to P1.8 billion from P2.2 billion same period last year. Fee-based income, which



106

33/ The ARMM is composed of six provinces: Sulu, Tawi-Tawi, Lanao del Sur, Maguindanao, Basilan and Shariff Kabunsuan. Maguindanao is considered among the top corn and fish producers of the country. It is also among the provinces with the highest inventory of carabaos and goats. Likewise, Lanao del Sur is also among the top corn producing provinces, while Tawi-Tawi and Sulu are top fish producers. The region has always been a hotbed of Muslim insurgencies and thus, the performance of the banking system in the region is adversely affected.

accounted for 55.6 percent of non-interest income, dropped significantly by 16.8 percent or P0.3 billion.

Although net interest income

recorded a 2.8 percent year-on-year growth for the first semester of 2009, this was the lowest increment recorded by the industry so far. Fewer industry players during the semester resulted to a decline in the industry’s main core business (i.e., interest-related lending activities) which weighed down on the overall operating income. Net interest income accounted for 77.9 percent of total operating income stood P6.5 billion for the first six months of the year. Notably, annualized net interest margin widened to 10.6 from 9.6 percent same period last year brought on by higher interest rate spread during the period under review.

Non-interest expenses climbed by 4.5

percent (P0.3 billion) reaching P5.8 billion from P5.3 billion same period last year. Compensation and fringe benefits at 63.6 percent were the major component of non-interest expenses while other administrative expenses held the balance of 36.4 percent. Nonetheless, the industry consistently operated with excess total operating income over total non-interest expenses.

On a regional basis, rural banks

located in the NCR incurred the highest net profit at P429 million, followed by rural banks in CALABARZON (Region IV-A) with P244 million, Central Luzon (Region III) with P208 million, Cagayan (Region II) with P143 million and Northern Mindanao (Region X) with P119 million. On the other hand, rural banks in the ARMM33/ posted a net loss of more than half a million pesos.

Annualized net interest margin

widened to 10.6 from 9.6 percent same period last year

brought on by higher interest rate spread during the period

under review


Rural Banks


In terms of the three geographic regions,

rural banks located in Luzon had the largest

net profit at P1.2 billion (71.6 percent of the total industry net

profits)

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In terms of the three main geographic regions, rural banks located in Luzon had the largest net profit at P1.2 billion (71.6 percent of the total industry net profit) while rural banks in Visayas posted the least net profit at P0.2 billion (9.4 percent). Rural banks in Mindanao earned a moderate P0.3 billion (19.0 percent).

The annualized earning asset yield

dropped to 14.9 percent for the period ended 30 June 2009 from 15.3 percent same period last year and 16.1 percent in year 2008. The marginal drop in the industry’s earning asset yield failed to mar its substantial interest rate differential against the 91-day T-bill rate as the spread between the industry’s earning asset yield ratio and the 91-day T-bill rate remained wide at 1,051 basis points. This indicates the high lending rates of rural banks which are mostly located in the countryside.

The average funding cost tracked

down the benchmark 91-day T-bill rate from 1997 to 2001 and again in 2004. In 2002 and 2003, however, a sudden shift transpired where funding cost outpaced the T-bill rate by 180 basis points and 10 basis points, respectively. After leveling off in 2005 and 2006 at 6.4 percent, funds generated by rural banks were at a premium over the 91-day T-bill rate by 100 basis points in 2006 and by 280 basis points in 2007. In 2008, funding cost settled to 5.1 percent and further went down to 4.3 percent, 10 basis points lower that the average T-Bill rate at end-June 2009. Nonetheless, the industry’s pricing of funds remained competitive compared to universal banks and thrift banks with funding cost of 2.9 percent and 4.1 percent, respectively.

Meantime, annualized interest

spread for the period ended 30 June 2009 rose to 10.6 percent from 9.3 percent same period last year yet narrower than the 11.0 percent posted for year 2008. The industry maintained high interest spread from a low of 8.2 percent in 2003 to a peak of 11.0 percent in years 2002 and 2008.



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On account of higher non-interest expenses, rural banks were less efficient as the annualized cost-to-income ratio rose to 72.7 percent from 70.2 percent over the same period last year. Nonetheless, this was still better off by 13.1 percentage points from the peak of 85.8 percent recorded in 2002.

By regional subgroup, rural banks in

seven regions posted CTI ratios better than the industry average. These were in: NCR at 56.3 percent, Central Visayas (Region VII) at 65.5 percent, Northern Mindanao (Region X) at 65.8 percent, MIMAROPA (Region IV-B) at 66.1 percent, Cagayan (Region II) at 68.6 percent, Davao (Region XI) at 71.1 percent and Bicol (Region V) at 71.5 percent.

On the other hand, rural banks in the

following regions were least efficient: ARMM at 106.9 percent, Soccsksargen (Region XII) at 86.2 percent, Western Visayas (Region VI) at 84.4 percent, CALABARZON (Region IV-A) at 82.4 percent and CARAGA (Region XVI) at 80.9 percent. (Table 33)

As profit declined, key profitability

ratios also slid. Both annualized ROA and ROE ratios fell to 1.7 percent and 10.9 percent from year ago’s 1.9 percent and 13.6 percent, respectively.

Rural banks located in the following

regions had the best ROA: MIMAROPA (Region IV-B) at 3.1 percent; Northern Mindanao (Region X) at 3.0 percent; Cagayan (Region II) at 2.7 percent; NCR at 2.4 percent and Western Mindanao (Region IX) at 2.1 percent. On the other hand, aside from rural banks in ARMM which posted a negative (1.2 percent) ROA, banks in Central Luzon (Region XII) had the lowest positive ROA at 0.5 percent.

Meanwhile, rural banks in the

Northern Mindanao (Region X) had the best ROE at 18.7 percent. This was followed by rural banks in Cagayan (Region II) at 16.7 percent, NCR at 16.0 percent, CARAGA (Region XVI) at 14.9 percent and MIMAROPA (Region IV-B) at 12.8 percent.


Rural Banks


109

(Amounts In Billion Pesos) Total Assets Decrease

Number of banks that closed in the Region since end-

June 2008

Asset Share of closed

banks at end-June 2008 Jun-08 Jun-09 Levels %

Central Visayas (Region VII) 12.85 5.03 (7.82) (60.83%) 9 62.90%

Bicol (Region V) 7.69 3.17 (4.52) (58.75%) 5 62.48%

NCR 28.95 25.68 (3.27) (11.29%) 1 20.98%

CALABARZON (Region IV-A) 32.78 30.84 (1.94) (5.91%) 3 9.26%

Central Mindanao (Region XII) 3.47 2.67 (0.80) (23.24%) 2 32.02%

Eastern Visayas (Region VIII) 2.04 1.58 (0.46) (22.76%) 1 24.40%

Western Visayas (Region VI) 6.73 6.61 (0.12) (1.80%) 3 9.79%

The ROA and ROE of rural banks in Mindanao were consistently better than those in Luzon and Visayas. Profitability indicators for this region were notably above the industry average at 2.0 percent and 12.8 percent, respectively.

MAJOR BALANCE SHEET TRENDS

ASSETS As of end-June 2009, total assets of

the rural banking industry declined by P13.6 billion or 8.4 percent to P147.5 billion from P161.1 billion as 31 rural banks closed since the second half of 2008. These 31 rural banks comprised 15.5 percent of the total assets of the industry at end-June 2008. On a regional basis, seven regions exhibited asset contraction as 24 of the 31 closed rural banks were located in these regions.

Rural banks located in Central

Visayas (Region VII) posted the steepest decline of P7.8 billion or 60.8 percent, followed by rural banks situated in: Bicol (Region V) with P4.5 billion or 58.8 percent, NCR with P3.3 billion or 11.3 percent, CALABARZON (Region IV-A) with P1.9 billion or 5.9 percent, Central Mindanao (region XII) with P0.8 billion or 23.2 percent, Eastern Visayas (Region VIII) with P0.5 billion or 22.8 percent and Western Visayas (Region VI) with P0.1 billion or 1.8 percent.

Based on the three main

geographical regions, the industry’s assets were still concentrated in Luzon, capturing 69.9 percent (P103.1 billion) of total assets. Rural banks situated in Mindanao accounted for 21.1 percent (P31.1 billion) share while those banks in Visayas region had the least share of 9.0 percent (P13.2 billion).

Rural banks still concentrated on

their core business of lending. Loans, net remained the principal recipient of funds as their share to total assets grew to 62.7



110

Rural Banking System: Balance Sheet Structure

2006 2007 2008 2008 2009

100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

Cash and Due from Banks 18.2 % 18.3 % 17.9 % 17.5 % 19.2 %

Financial Assets, net (Other than Loans) 5.1 % 5.0 % 4.9 % 4.8 % 4.7 %

Loans, net 58.2 % 60.1 % 63.7 % 61.1 % 62.7 %

Equity Investments, net 0.1 % 0.0 % 0.0 % 0.0 % 0.1 %

ROPA, net 8.4 % 7.6 % 5.5 % 8.1 % 5.4 %

Other Assets 10.1 % 9.1 % 7.9 % 8.4 % 7.9 %

100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

Deposits 70.3 % 72.3 % 68.2 % 72.3 % 67.9 %

Bills Payable 7.4 % 7.2 % 9.3 % 6.4 % 8.7 %

Special Financing 0.1 % 0.1 % 0.1 % 0.1 % 0.0 %

Other Liabilities 7.6 % 6.5 % 6.6 % 6.9 % 6.8 %

Capital Accounts 14.6 % 13.9 % 15.8 % 14.3 % 16.5 %

p/ Preliminary

Major AccountsEnd-December End-June

Total Liabilities and Capital

Total Assets

/p

percent or P92.4 billion from year ago’s 61.1 percent or P98.5 billion. Other components of the industry’s asset mix include the following accounts: Cash and due from banks at 19.2 percent or P28.3 billion (up from 17.5 percent or P28.2 billion a year ago), other assets at 7.9 percent or P11.7 billion (down from 8.4 percent or P13.5 billion); real and other properties acquired (ROPA), net at 5.4 percent or P8.0 billion (down from 8.1 percent or P13.1 billion); Financial assets other than loans, net at 4.7 percent or P6.9 billion (down from 4.8 percent or P7.7 billion) and equity investments, net at 0.1 percent or P0.1 billion (up from less than half of 0.1 percent or P0.1 billion).

As a highly leveraged industry,

deposit liabilities accounted for 67.9 percent (P100.2 billion) share of total resources as of end-June 2009. This was 4.4 percentage points lower than year ago’s 72.3 percent (P116.5 billion) share. Total capital accounts was a far second provider of funds with a 16.5 percent share or P24.4 billion (up from 14.3 percent or P23.1 billion a year ago). The rest of the funding mix were bills payable at 8.7 percent or P12.9 billion (up from 6.4 percent or P10.3 billion); other liabilities at 6.8 percent or P10.0 billion (down from 6.9 percent or P11.1 billion) and special financing at less than 0.1 percent or P0.1 billion (down from 0.1 percent a year ago).

LOANS In the first half of 2009, credit dropped

by 5.5 percent compared to the double-digit growth in the same period last year. The decline was the result of fewer operating rural banks following the recent series of closures. The 31 closed rural banks that closed shop accounted for 13.8 percent of the total loans of the industry at end-June 2008.

Regionally, rural banks located in

Central Visayas (Region VII) incurred the largest decline in loans at P5.6 billion or 63.2 percent, followed by rural banks situated in:


Rural Banks


111

Source: Bureau of Agricultural Statistics

Bicol (Region V) with P4.3 billion or 65.2 percent, Central Mindanao (Region XII) with P0.8 billion or 33.6 percent and Eastern Visayas (Region VIII) with P0.4 billion or 29.5 percent.

On the other hand, loan expansion

cut across 12 out of the 17 regions with rural banks in the following five regions having loan increments of at least P0.5 billion each, namely: NCR with P1.4 billion or 8.2 percent growth; Northern Mindanao (Region X) with P1.0 billion or 20.5 percent; Southern Mindanao (Region XI) with P0.8 billion or 11.1 percent, Cagayan (Region II) with P0.5 billion or 10.1 percent and CARAGA with P0.5 billion or 10.2 percent. Meanwhile, rural banks in the remaining seven regions contributed an aggregate of P1.3 billion in additional loans.

The rural banking industry has been

actively involved in the promotion of microfinance in the countryside. So far, rural banks has provided a total of P4.8 billion worth of microfinance loans to 743,397 micro-borrowers as of end-June 2009. In all, there were five microfinance-oriented rural banks and 161 rural banks with some level of microfinance operations funding the credit requirements of the entrepreneurial poor.

The Department of Agriculture (DA) reported that the agricultural sector managed to grow by 1.5 percent in the first half of 2009, lower than the 4.7 percent registered in the same period last year. The slow down was brought on by the crops subsector which recorded an output decline of 1.3 percent. Nevertheless, agriculture (at current prices) grossed at P591.8 billion and higher by 2.7 percent compared to year ago’s level.

The rural banking industry continued to play a vital role in raising the agricultural output channeling a significant portion of their lending to the agricultural sector. The s l o w d o w n i n t h e g r o w t h o f agriculture-related farm output which was adversely affected by the series of



112

debilitating typhoons that hit the country in the first 6 months of the year, caused the Sector’s share to the industry’s total loans to slip to 33.3 percent (P32.3 billion) from 33.9 percent (P34.8 billion) a year ago.

Meanwhile, loans granted to all

sectors (except Private Households with Employed Persons and Education) posted a decline. Sizable decrements of more than P0.3 billion went to the following industry sectors: (1) Real Estate, Construction, Renting and Business Activities – P1.3 billion or 9.8 percent; (2) Wholesale and Retail Trade, Repair of Motor Vehicles – P0.6 billion or 2.2 percent; (3) Transportation, Storage and Communication – P0.4 billion or 13.6 percent and (4) Manufacturing – P0.4 billion or 17.1 percent.

Compliance with micro, small and

medium enterprises (MSME) credit as of end-June 2009 showed that the total amount of funds set aside for MSME development amounted to P32.2 billion. The industry far exceeded the statutory floors of eight percent (for micro and small enterprises) and two percent (for medium enterprises) at 56.3 percent or P27.2 billion and 10.2 percent or P4.9 billion, respectively.

End-March 2009 data likewise indicated that the industry surpassed the minimum 10 percent mandatory credit allocation for agrarian reform credit at 15.5 percent. The industry also exceeded the overall prescribed 25 percent agri-agra credit, posting a compliance ratio of 41.7 percent or P39.3 billion worth of allocated funds.

Meanwhile, the industry’s level of non-performing loans (NPLs) continued to trek upward since year 2004. As of end-June 2009, the industry’s NPLs peaked to P10.5 billion, 3.4 percent (P0.4 billion) higher than year ago’s P10.1 billion. As a result of the higher level of NPLs, the NPL ratio rose to 10.8 percent at end-June 2009 from year ago’s 9.9 percent. This was 6.7 percentage points higher than the system average of 4.1


Rural Banks


Rural Banking System NPAs and NPA Coverage Ratio

0.0

5.0

10.0

15.0

20.0

25.0

30.0

-

5.0

10.0

15.0

20.0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 June 2009

In PercentIn P Billion

NPAs NPA Reserves NPA Ratio NPA Coverage Ratio

113

percent for the period. Nonetheless, this delinquency ratio was still better than the ratios posted in earlier years (i.e., 19.1 percent in 1999, 17.5 percent in 2000, 15.0 percent in 2001, 13.9 percent in 2002, 12.1 percent in 2003, 11.4 percent in 2004 and 11.1 percent in 2005 and 2006).

The NPA level followed the NPL

uptrend since year 2004 to P18.2 billion as of end-June 2009. This was up by 4.0 percent from last semester’s P17.5 billion but lower by 8.0 percent than year ago’s P19.8 billion. Given these NPA movements, the NPA ratio went up to 12.0 percent from last semester’s 11.6 percent but unchanged from 12.0 percent a year ago as the year-on-year expansion in gross assets matched the rise in NPAs.

By region, rural banks in the

following regions exceeded the industry average ratio of 10.8 percent: ARMM at 18.6 percent; Soccsksargen (Region XII) at 16.4 percent; MIMAROPA (Region IV-B) at 16.1 percent; Western Visayas (Region VI) and Central Visayas (Region VII) both at 14.8 percent; Eastern Visayas (Region VIII) at 13.3 percent; CALABARZON (Region IV-A) at 13.1 percent; Cagayan Valley (Region II) at 11.6 percent; CARAGA and Ilocos (Region I) both at 11.2 percent and Bicol (Region V) at 11.1 percent.

On the other hand, regional rankings for NPA ratio showed that rural banks in CALABARZON (Region IV-A) posted the highest NPA ratio of 15.6 percent. These were followed by rural banks in six other regions with above industry average of 12.0 percent, namely: Soccsksargen (Region XII) at 13.8 percent, ARMM and Central Visayas (Region VII) both at 13.6 percent; Ilocos (Region I) at 13.3 percent; MIMAROPA (Region IV-B) at 13.0 percent and Central Luzon (Region III) at 12.8 percent.

Meantime, the closure of several rural banks resulted to a significant decline in the industry’s level of ROPA, gross. The



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31 rural banks that closed since the second half of 2008 held stocks of foreclosed assets equivalent to about 40.0 percent of the total ROPA of the rural bank industry at end-June 2008. Thus, as of end-June 2009, ROPA fell by 37.4 percent or P5.1 billion to P8.4 billion from year ago’s P13.5 billion.

In the same vein, restructured loans

(RLs) dropped by 19.9 percent to P0.6 billion from P0.8 billion at end-June 2008.

With higher levels of NPLs and NPAs,

the industry raised loss provisioning as both the NPL and NPA coverage ratios widened to 38.8 percent and 24.6 percent from year ago’s 37.1 percent and 20.8 percent, respectively. These are record highs for both coverage ratios.

Using an even broader indicator of

asset quality, the distressed assets ratio also moved up to 18.4 percent from 17.6 percent a year ago. This uptrend was consistent with other asset quality indicators, i.e., the NPL and NPA ratios.

DEPOSIT LIABILITIES

Resources of the industry were primarily funded by deposit liabilities, which as of end-June 2009, stood at P100.2 billion. This was 14.0 percent lower than year ago’s P116.5 billion. The decline in deposit liabilities was brought on by fewer industry participants with the closure of 31 rural banks having 17.7 percent share of the total deposit liabilities of the industry at end-June 2008. Time deposits accounted for the biggest reduction at P11.4 billion or 29.9 percent while core deposits (Demand, NOW and Savings) fell by P4.9 billion or 6.3 percent. Meantime, core deposits (Demand, NOW and Savings) still made up the bulk of deposit liabilities at 73.2 percent (up from 66.2 percent a year ago) share while time deposits held the remaining 26.8 percent (down from 338 percent) share.


Rural Banks


On a regional basis, rural banks in CALABARZON (Region IV-A), a progressive economic zone south of NCR, contributed 23.5 percent or P23.5 billion of the total deposit liabilities of the industry. Rural banks operating in the NCR, the central business region of the country, followed with 16.7 percent share or P16.7 billion, while those in Central Luzon (Region III) or the “Rice Granary of the Philippines” (the producer of one-third of the country’s total rice production) came in third with 13.6 percent share or P13.6 billion. In contrast, the ARMM region had the smallest share with less than 0.1 percent.

CAPITALIZATION

R u r a l b a n k i n g i n d u s t r y ’ s capitalization strengthened by 5.6 percent or P1.3 billion to reach P24.4 billion from year ago’s P23.1 billion on the back of the rise in retained earnings by P1.3 billion, completely offsetting the five million peso decline in paid-in capital.

The growth in capital simultaneous

with the decline in total assets raised the ratio of total capital accounts to total assets to 15.8 percent from 13.9 percent at end-June 2008. From its peak of 17.0 percent at end-year 2000, the ratio of total capital accounts to total assets exhibited a downtrend to 16.0 percent at end-year 2003 and reaching 14.6 percent at end-2008. This trend ensued as the increment in total assets surpassed the increase in total capital accounts. For the period under review, total assets declined because of the greater number of rural banks that closed since the second half of 2008.

On a regional basis, rural banks located in both NCR and CALABARZON (Region IV-A) held the biggest shares both at 18.0 percent or P4.4 billion., followed by those Central Luzon (Region III) at P3.5 billion or 14.2 percent, Davao (Region XI) at P1.7 billion or 7.1 percent, Ilocos

The growth in capital simultaneous with the decline in total assets raised the ratio of total

capital accounts to total assets

115



(Region I) at P1.5 billion or 6.2 percent, Cagayan (Region II) at P1.5 billion or 6.0 percent, Northern Mindanao (Region X) at P1.2 billion or 5.1 percent, Central Visayas (Region VII) at P1.2 billion or 4.8 percent and CARAGA at P1.0 billion or 3.9 percent. The remaining P4.1 billion or 16.8 percent was held by the other rural banks in seven regions, of which those in ARMM had the lowest capital at less than half of 0.1 percent of total capital accounts.

As of end-March 2009, the industry

remained well capitalized as the capital adequacy ratio (CAR) stood at 18.3 percent. This is higher than the 17.6 percent ratio as of end-year 2008.

Even with a relatively high capital

adequacy ratio, there were only 528 (81.5 percent) out of 648 rural banks which were able to comply with the required minimum amount of capital. Non-compliant banks are encouraged to consolidate or merge with stronger banks or increase capitalization.

116

Rural Banking System

Comparative CAR Under Circular No. 280

2006 2007 2008

(In P Billion)

Tier 1 15.0 16.6 21.2 21.9

Tier 2 1.4 1.6 2.1 2.1

Deductions . . . . . . . . . . . .

Qualifying Capital 16.4 18.1 23.3 24.0

Risk Weighted Assets (RWA) -

net 109.1 134.4 132.0 131.1

(In Percent)

Capital Adequacy Ratio 15.0 13.5 17.6 18.3

. . . Less than P50 million

Solo

End-

Mar

2009

End-December


Cooperative Banks


The cooperative banking industry

continued to perform positively

amid the slowdown in the

economy

COOPERATIVE BANKS

117

Cooperative Banking System

Market Structure of Assets

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

June 2009

Luzon Visayas Mindanao

OVERVIEW

The cooperative banking industry continued to perform positively amid the slowdown in the economy. The industry’s favorable condition in the first half of 2009 was characterized by double-digit growths in assets, loans, deposit liabilities and capital accounts; better loan and asset quality; adequate liquidity and solvency; better cost-eff iciency ratio and marked improvement in bottom line figures.

Cooperative banks posted an

impressive growth in earnings for the first semester of 2009 as net profit mounted to P198 million, up by 62.4 percent (P76 million) from P122 million same period last year. As a result, the industry achieved higher annualized return on assets (ROA) and return on equity (ROE) at 2.9 percent and 20.6 percent, respectively.

As of end-June 2009, total assets

grew by 18.2 percent reaching P13.6 billion, the highest ever recorded by the industry. In terms of the three main geographical regions, cooperative banks situated in Luzon held the 74.8 percent share of the industry’s total assets while cooperative banks in Mindanao and Visayas accounted for only 18.2 percent and 7.0 percent, respectively. Notably, this was a different scenario than the years 1997 and 1998, when cooperative banks located in Mindanao held most of the industry’s assets until the biggest share shifted to cooperative banks located in Luzon beginning year 1999.

The growth in total loan portfolio,

gross by 19.9 percent to P9.9 billion from year ago’s P8.3 billion was complemented by improvements in loan and asset quality. This was manifested by better NPL and NPA ratios at 8.7 percent (from year ago’s 10.2 percent) and 9.5 percent (from 10.5 percent), respectively.

Cooperative Banks STATUS REPORT ON THE PHILIPPINE FINANCIAL SYSTEM, FIRST SEMESTER 2009


118

Cooperative Banking Offices

As of End-June 2009

Cooperative Banks 140 44 96

TotalHead

Offices

Branches/

Other

Offices

Table 49 . Rural Banking Offices

Cooperative Banks: Regional Distribution of Banking Offices

As of End-June 2009

-

0.7%

8.6%

10.0%

25.0%

11.4%

4.3%

3.6%

2.9%

2.1%

7.1%

1.4%

0.7%

14.3%

2.1%

3.6%

2.1%

0.0 5.0 10.0 15.0 20.0 25.0 30.0

NC R

R egion I

R egion II

R egion III

R egion IV -A

R egion IV -B

R egion V

C A R

R egion V I

R egion V II

R egion V III

R egion IX

R egion X

R egion XI

R egion XII

A R MM

C A R A G A

% to T ota l Na tionw ide B a nking Ne twork

Top Five Regions of Cooperative Banks

Based on Consolidated Statement of Condition as of End-June 2009 p/

Amounts in P Billion


2 Cagayan Valley (Region II) 1.5 2 Northern Mindanao (Region X) 0.9

3 Northern Mindanao (Region X) 1.2 3 Cagayan Valley (Region II) 0.9 4 National Capital Region 0.9 4 Central Visayas (Region VII) 0.5

5 Western Visayas (Region VI) 0.1 5 Western Visayas (Region VI) 0.1

Total 8.3 Total 5.8


1 Central Luzon (Region III) 2.3 1 Central Luzon (Region III) 0.4 2 National Capital Region 0.7 2 Cagayan Valley (Region II) 0.2

3 CALABARZON (Region IV−A ) 0.7 3 Northern Mindanao (Region X) 0.2

4 Central Visayas (Region VII) 0.5 4 Central Visayas (Region VII) 0.2 5 Western Visayas (Region VI) 0.1 5 National Capital Region 0.2

Total 4.2 Total 1.2


p/ Preliminary

Amount

Assets Loans

Deposits Capital Accounts

Amount Rank Region

Rank

Rank


Region

Meanwhile, deposits liabilities continued to post a double digit growth of 15.3 percent to reach P8.1 billion from P7.1 billion a year ago. Adequate liquidity position was maintained by the industry with liquid assets-to-deposits ratio kept at 32.4 percent.

T h e i n d u s t r y r e m a i n e d

well-capitalized, with the capital adequacy ratio (CAR) strengthening to 15.3 percent as of end-March 2009 (from 15.1 percent as of end-June 2008, well above the minimum 10 percent regulatory floor. Total capital accounts continued to expand by 14.9 percent to P1.9 billion from year ago’s P1.6 billion. This is the highest capital posted by the industry.

Geographically, cooperative banks

situated in Central Luzon (Region III) continued to lead in terms of having the highest assets, loan portfolio, deposit liabilities and capital accounts. Moreover, cooperative banks in the top five regions held more than 50 percent share of total assets, loans, deposit liabilities and capital accounts of the industry.

OPERATING NETWORK The closure of Cooperative Bank of

Zamboanga del Sur located in Zamboanga Peninsula on 6 March 2009 brought down the number of operating cooperative banks in the country to 44 from 45 at end-June 2008. On the other hand, network expansion accelerated as 21 additional branches/other offices were established since end-June 2008 for a total of 96 branches/other offices in the first half of 2009. Nonetheless, the cooperative banking industry still had the least number of banking offices among the major banking categories.

Meantime, the industry continued to

contribute to the growth and dynamism of the Philippine microfinance industry with 25 cooperative banks engaged in microlending activities as of end-June 2009.


Cooperative Banks


119

Table 52. Cooperative Banking Offices: Regional Profile

128 140 44 96

1 1 1

82 92 23 69

Region I - Ilocos 10 12 3 9

Region II - Cagayan 14 14 3 11

Region III - Central Luzon 31 35 7 28

Region IV-A - CALABARZON 13 16 3 13

Region IV-B - MIMAROPA 5 6 2 4

Region V - Bicol 5 5 3 2

4 4 2 2

15 15 9 6

Region VI - Western Visayas 3 3 3 -

Region VII - Central Visayas 10 10 4 6

Region VIII - Eastern Visayas 2 2 2 -

30 32 11 21

Region IX - Zamboanga Peninsula 2 1 1 -

Region X - Northern Mindanao 19 20 5 15

Region XI - Davao Region 1 3 1 2

Region XII - Soccsksargen 5 5 1 4

- - - -

3 3 3 -

End-June 2009

Branches/

Other

Offices

CARAGA

Nationwide

Head

Offices

Autonomous Region of Muslim Mindanao (ARMM)

End-

December

2008Total

1/ Composed of the provinces of North Cotabato, South Cotabato, Sultan Kudarat and Sarangani, and the cities of General Santos, Koronadal,

Tacurong and Kidapawan.

Mindanao

Cordillera Administrative Region (CAR)

National Capital Region (NCR)

Luzon

Visayas

For the first half of 2009, profitability of

cooperative banks improved significantly as bottomline figures grew by 62.4 percent (P76 million) over the same period last year

On a regional basis, cooperative banks in Central Luzon (Region III) had the biggest number of banking network with 35 offices (seven head offices and 28 other offices) comprising 25.0 percent of total banking offices of the industry. These were followed by cooperative banks in Northern Mindanao (Region X) with 20 offices (five head offices and 15 other offices) for a 14.3 percent share. Cooperative banks situated in CALABARZON (Region IV-A) placed third with 16 offices (three head offices and 13 other offices) for an 11.4 percent share. These three regions cornered half or 50.7 percent of the industry’s banking network. Meantime, there is still no presence of a cooperative bank in the Autonomous Region of Muslim Mindanao (ARMM).

RESULTS OF OPERATIONS

For the first half of 2009, profitability of cooperative banks improved significantly as bottom line figures grew by 62.4 percent (P76 million) over the same period last year. Net profit rose to P198 million from P122 million driven by the P89 million (14.7 percent) rise in total operating income which surpassed the P46 million (11.1 percent) increase in non-interest expenses. Likewise, the 48.8 percent cut in the industry’s provisions for credit losses boosted profit by P33 million.

Total operating income reached P695 million, up from P606 million over the same period last year. The key drivers of growth came from both net interest income and non-interest income. Net interest income posted an increment of P60 million (18.4 percent) to P384 million due to stronger lending activities coupled with improving loan and asset quality. Consequently, the annualized net interest margin increased to 7.4 percent from 6.8 percent same period last year.

Non-interest income stood at P311

million, up by P30 million (10.5 percent) over the same period last year. This accounted for 44.8 percent of total



120

operating income and consisted of fee-based income and other non-interest income derived principally from lending activities.

Non-interest expenses climbed by P46 million or 11.1 percent reaching P464 million from P418 million last year. Compensation and fringe benefits were the major non-interest expenses for the industry.

Meantime, reduced bad debt

write-offs and provisions for credit losses due to improving loan and asset quality further lifted net profit over the same period last year. Said account went down by half or 50.6 percent to P33 million from P66 million.

The average funding cost fluctuated

from years 1997 to 2001. Funding cost was lower than the average 91-day T-bill rate in 1997, 1998 and 2001. On the other hand, funding cost got the upper hand in 1999, 2000 and 2002 up to end-June 2009. The premium over the 91-day T-bill rate came to as high as 429 basis points in 2007 to as low as 99 basis points in 2000. The premium widened to 276 basis points for the one year period ended 30 June 2009 from 177 basis points in 2008 indicating that the depositors got higher yield than the risk free benchmark T-bill rate. Compared with other banking categories, cooperative banks provided better yield to depositors than universal, commercial, thrift and rural banks.

The average earning asset yield consistently stood higher than the average benchmark T-bill rate since 1997 ranging from a low gap of 165 basis points in year 1998 to as high as 1,165 basis points in 2002 before settling to 1,000 basis points by end-June 2009. The earning asset yield had been hovering around a high level as the industry preferred to lend than invest in government securities in line with improving loan and asset quality.

Notwithstanding the competitive

interest rates that cooperative banks offer to depositors compared with the other banking categories, the industry managed to sustain


Cooperative Banks


121

substantial mark-ups. Interest spread continued to broaden as the gap between earning asset yield and funding cost widened. From a low of 4.1 percent in year 2000, interest spread steadily increased to 6.5 percent in 2001 and 7.7 percent in 2002 as both loan and asset quality began to improve in 2001. In 2004, interest spread settled to 5.8 percent then rose anew to 5.9 percent in 2005 and reached 7.2 percent at end-June 2009.

The industry’s cost efficiency further

improved as the annualized cost-to-income (CTI) ratio settled to 69.9 percent from 71.6 percent over the same period last year. This period’s CTI ratio is the lowest from a high of 95.5 percent in 2000.

Cooperative banks in Mindanao

posted an above industry average CTI ratio of 66.4 percent. Meanwhile, cooperative banks in Luzon and Visayas continued to have above average CTI ratio at 70.6 percent and 75.4 percent, respectively.

With substantially higher earnings,

both annualized ROA and ROE of the industry rose to 2.9 percent and 20.6 percent, respectively, from the 2.4 percent and 16.8 percent posted over the same period last year.

Geographically, cooperative banks

located in Mindanao exhibited the highest annualized ROA at 4.0 percent while cooperative banks situated in Luzon and Visayas both posted 2.7 percent and 2.4 percent, respectively. Likewise, Mindanao based cooperative banks posted the highest annualized ROE at 22.4 percent, followed by Luzon based cooperative banks at 21.7 percent whereas cooperative banks in the Visayas had only 11.1 percent.

MAJOR BALANCE SHEET TRENDS ASSETS

Total assets of the industry reached P13.6 billion at end-June 2009, a double-digit growth of 18.2 percent from



122

P11.5 billion at end-June 2008. The expansion in assets largely came from cooperative banks in Luzon, which posted a P1.6 billion increment (contributing 76.7 percent of total asset growth). Meantime, cooperative banks situated in Mindanao added P0.5 billion (22.7 percent) while cooperative banks in Visayas provided only P12 million (0.6 percent).

Cooperative banks in Luzon still held

the biggest share of cooperative banks’ total assets at 74.8 percent, up from 74.4 percent last year. This was followed by the cooperative banks in Mindanao with a share of 18.2 percent (up from 17.4 percent) and those in Visayas at 7.0 percent (down from 8.1 percent).

The industry continued to prioritize

lending activities. The share of loans to total assets rose to 69.5 percent or P9.4 billion from 68.4 percent at end-June 2008. Meantime, cash and due from banks, at 17.1 percent or P2.3 billion, ROPA at 3.4 percent or P0.5 billion and financial assets at 2.3 percent or P0.3 billion, were on the downtrend from 17.8 percent, 3.8 percent and 2.9 percent, respectively. Other assets had 7.3 percent share or P1.0 billion (up from 6.9 percent). Equity investments comprised the remaining share at 0.4 percent or P0.1 billion (up from 0.2 percent).

The consistent growth in resources

was mainly funded by continued inflows of deposit liabilities, borrowings and capital. The primary funding source was still deposit liabilities, which contributed 59.9 percent (or P8.2 billion) of the industry’s total resources whereas bills payable provided 20.0 percent (or P2.7 billion). Meantime, capital accounts and other liabilities delivered P1.9 billion and P0.8 billion, holding 13.7 percent and 6.0 percent, respectively while special financing was kept at a low level of less than P0.1 billion or 0.4 percent of total funding sources.


Cooperative Banks


123

The lending activities of the industry

remained robust as total loan portfolio, gross increased by 19.9 percent or P1.6 billion to P9.9 billion

from P8.3 billion a year ago

LOANS The lending activities of the industry

remained robust as total loan portfolio, gross increased by 19.9 percent or P1.6 billion to P9.9 billion from P8.3 billion a year ago. Loan expansion cut across all major regions: cooperative banks in Luzon granted additional loans of P1.1 billion (18.8 percent), those in Mindanao extended new loans amounting to P0.4 billion (28.6 percent) while cooperative banks in the Visayas posted a P0.1 billion (9.5 percent) increment.

Meantime, cooperative banks in

Luzon accounted for the biggest slice of the loan pie at 72.6 percent (P7.2 billion). This was followed by those in Mindanao with a share of 20.0 percent (P2.0 billion) and those in Visayas with 7.4 percent (P0.7 billion).

In April 2008, the Department of

Agriculture (DA), the Cooperative Banks Federation of the Philippines and the Agricultural Credit Policy Council (ACPC) agreed to stimulate small agricultural financing in the countryside by tapping cooperative banks as a source of loans for small farmers and fisherfolks under the Cooperative Bank Agri Lending Program (CBAP). The DA reported that as of April 2009, one year after the launch of the program, about 4,800 small farmers have already benefited from this agricultural lending program. In fact, cooperative banks channeled a significant portion of their lending to the agricultural sector totaling to P2.7 billion (up by 22.8 percent from P2.2 billion a year ago). This is equivalent to 27.3 percent (up from 26.7 percent) of total loans of the industry.

Notably, the following industry

sectors had loan increments from year ago of more than P100 million: (a) Other community, social & personal services Activities – P316 million or 16.5 percent; (b) Real estate, construction, renting & business activities – P259 million or 30.9



124

percent; (c) Wholesale & retail trade, repair of motor vehicles – P248 million or 10.1 percent and (d) Private households with employed persons – P135 million or 87.3 percent.

The cooperative banking industry

continued to bring much needed financial services to the microenterprise sector through intensified microfinance activities. As of end-June 2009, the industry provided a total of P0.9 billion worth of microfinance loans to 85,528 micro-borrowers. As of end-June 2009, the industry extended loans to the micro, small and medium enterprises at P2.1 billion for micro and small enterprises and at P0.9 billion for medium enterprises. The industry exceeded the statutory floors of eight percent (for micro and small enterprises) and two percent (for medium enterprises) at 33.8 percent and 14.9 percent, respectively.

There was no problem complying with

the prescribed minimum requirement for agrarian reform credit (10 percent) and agricultural credit in general (25 percent). As of end-March 2009, the industry registered 15.2 percent compliance with agrarian reform credit and 38.5 percent compliance with the overall prescribed 25 percent agri-agra credit. This aggregated to P3.6 billion worth of allocated funds.

The level of NPLs reached its peak in

year 2007 at P1.0 billion after declining to as low as P0.5 billion in 2003 from a previous high of P1.0 billion in 2000. In 2008, the NPL level contracted to P0.8 billion and settled at P0.9 billion at end-June 2009.

Nonetheless, continued growth in

lending which either surpassed or complemented the increase or decrease in NPLs, resulted to a better NPL ratio. Thus, the NPL ratio from its peak at 25.4 percent in 1999, declined to 24.7 percent in 2000, 16.3 percent in 2001, 14.9 percent in 2002, 12.0 percent in 2003 and to 11.0 percent in 2005. Thereafer, the NPL ratio climbed anew to 11.9 percent in 2006 and 13.1 percent in


Cooperative Banks


125

2007 before easing to 9.1 percent in 2008 and settled to its lowest recorded at 8.7 percent at end-June 2009.

Based on the three major

geographical regions, cooperative banks in Luzon has the best loan quality with an NPL ratio of 6.8 percent, followed by those in Visayas at 12.5 percent. Cooperative banks in Mindanao registered the highest NPL ratio at 14.4 percent, apparently affected by insurgencies in certain parts of the region.

The industry exerted efforts to

reduce delinquent loans through foreclosure proceedings. ROPA, gross increased by 6.6 percent to P474 million from year ago’s P444 million. Likewise, restructured loans posted a 30.6 percent growth to P217 million from P166 billion.

Meanwhile, the level of NPAs from

year 1997 had a roller coaster movement. Climbing to P1.2 billion in 2000, NPAs rolled down to P0.7 billion in 2003 and moved up to peak at P1.4 billion in 2007 before settling to P1.3 billion at end-June 2009. In spite of such movement, the NPA ratio favorably trended down from the height of 23.6 percent in 1999 to a low of 9.5 percent at end-June 2009. This developed as the yearly double-digit expansion in gross assets either outmatched or complemented the rise or fall in NPAs.

Based on regional rankings for NPA

ratio, cooperative banks in Luzon had the best asset quality with an NPA ratio of 7.8 percent. Cooperative banks in Visayas was a far second best at 14.5 percent, closely followed by those in Mindanao at 14.5 percent.

The industry has taken strides to

reduce vulnerability from bad loans and assets. Loan loss reserves as well as loss provisions for ROPA continued to mount through the years resulting to wider coverage ratios for both NPLs and NPAs.



126

As of end-June 2009, the NPL coverage ratio (at 56.0 percent) and the NPA coverage ratio (at 37.1 percent) were at record high.

The distressed assets ratio, a broader

definition of asset quality, also improved to 14.4 percent from 15.7 percent a year ago and was significantly lower from its peak of 31.2 percent at end-year 2000. By major regional group, cooperative banks in Luzon reported the best distressed asset ratio at 12.6 percent. This was followed by cooperative banks in the Visayas with 18.7 percent and by those in Mindanao at 19.2 percent.

DEPOSIT LIABILITIES

The expansion in resources were funded mostly by deposit liabilities which grew by 15.3 percent to P8.1 billion from P7.1 billion as of end-June 2008. Deposit liabilities accounted for 69.4 percent (down from 71.5 percent a year ago) of total liabilities of the industry.

Time deposits still made up the bulk

of deposit liabilities at 52.8 percent (up from 51.7 percent a year ago) share while no fixed tenure deposits held the remaining 47.2 percent (up from 48.3 percent) share

The deposit liabilities were mostly

generated by cooperative banks in Luzon at P6.3 billion (77.0 percent) of total deposit liabilities, while those in the Mindanao and Visayas had only P1.2 billion (15.2 percent share) and P0.6 billion (7.8 percent), respectively.

CAPITALIZATION

The industry’s total capital accounts at P1.9 billion registered a 14.9 percent growth from P1.6 billion a year ago. This came about as both paid-in capital and retained earnings increased by P0.1 billion or 11.4 percent and P0.1 billion or 21.3 percent, respectively


Cooperative Banks


The 18.2 percent expansion in total assets outmatched the rise in total capital accounts, pushing the ratio of total capital accounts to total assets slightly down to 14.1 percent from 14.3 percent at end-June 2008.

Among the main geographical regions, cooperative banks in Luzon still accounted for majority of the industry’s capital at P1.3 billion (66.7 percent). Trailing behind were cooperative banks in Mindanao with P0.4 billion (22.4 percent) and Visayas with P0.2 billion (10.9 percent) of total capital.

The industry was able to comply with

the 10 percent minimum requirement with a capital adequacy ratio (CAR) of 15.3 percent as of end-March 2009.

Of the 44 operating cooperative

banks, 38 banks or 86.4 percent complied with the minimum amount of capital requirement as of end-June 2009. Non-compliant banks were encouraged to increase capitalization or, whenever possible, consolidate or merge with stronger banks.

127


Comparative CAR Under Circular No. 280

2006 2007 2008

(In P Billion)

Tier 1 0.8 1.1 1.4 1.4

Tier 2 0.2 0.3 0.5 0.5

Deductions . . . . . . . . . . . .

Qualifying Capital 1.0 1.4 1.8 1.9

Risk Weighted Assets

(RWA) - net8.4 9.9 11.9 12.3

(In Percent)

Capital Adequacy Ratio 12.1 14.1 15.3 15.3

. . . Less than P50 million

End-December

Solo

End-

Mar

2009


Status of Banks' Compliance with the Minimum Amount of Capital

As of End-June 2009

A. Number of Operating Banks 44

Cooperative Banks

- National Cooperative Bank

- Within Metro Manila 2

- Cities of Davao and Cebu

- Other Cities

- 1st Cooperative bank in province located in a city 38

- Others 4

B. Banks with Capital (K) Equal to or in Excess of

the Minimum Required

Cooperative Banks

- National Cooperative Bank (K ≥ P200.0M)

- Within Metro Manila (K ≥ P20.0M) 2

- Cities of Davao and Cebu (K ≥ P10.0M)

- Other Cities

- 1st Cooperative bank in province located in a city 32

(K ≥ P1.25M)

- Others 4

38

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