菲律宾银行业盈利能力分析及前景

1.Introduction:In the modern economy, finance is the core of economy system, and the banking sector as a financial intermediary is the main center of the finance. Since the financial reform from 1990s in Philippines, the banking sector adopted a number of reform measures such as deregulation and internationalization of bank market. The liberalization of market access regulation induced the banks more competitive and efficient. In the 20th century, Philippines economy was experiencing smooth and robust growth until the financial crisis at the end of 2008. Because of the outbreak of financial crisis, the economic growth of Philippines suffered significant influence, which was 1.1% in 2009. As driving factor of Philippines economic growth, banking also was severely affected by this crisis. Before and after the crisis, many performance assessments have changed in Philippines banking sectors. After the Asian financial crisis in 1997, Philippines banks’ total loans had exhibited a steady increased, and this growing tendency was broken because of the financial crisis in 2008. There is an apparent decline in the profitability of banking (ROAA, ROAE) in 2008, which are 0.68 and 6.76, respectively. It worth noting that the non-performing loans rate continued to decline, even in 2008, it was 5.5% which was significantly lower than 7.23% in 2007.During the period of crisis in 2008, the total loans and profitability of Philippines banks experienced a brief decline and then returned to normality. On the other hand, the operational risk of banks tended to continuously decrease after the crisis.It is reasonable to suppose that the financial crisis would have some impacts on the determinants of banks profitability in Philippines. Therefore, this paper aims to analyze the underlying internal and external determinants that influence profits of banks, and help regulatory authorities to make planning and policy after the financial crisis.This paper is structured as follows. The next section provides the previous literatures, followed by a section describe the data and methodology. Results section presents the empirical findings and conclusion and policy suggestion to authorities are discussed in the last section.2.Literature review:Up to date, there are limited studies that examine the determinants of bank performance in Philippines after the financial crisis in 2008, although there are some studies focused on the discussion of their performance before and after the Asian financial crisis.Unite and Sullivan (2003) examined the impacts of the relaxation of bank market access rule in Philippines commercial banks. The result indicated that the entry of foreign investors into domestic banks would increase banks’ operating costs and reduce the non-interest income.The determinants of Philippines banks performance during 1990-2005 were examined by Sufian and Chong (2008). The results indicated that financial variables are related to bank profitability, while the external factors were found to have no significant impact on the performance of Philippines banks. They also found that the profitability, efficiency and competitiveness were important for the sustainable development of Philippines banks.Lee (2012) constructed a multivariate panel regression model to compare the underlying factors between regional and national banks that influenced banks’ profits in Korea from 1994 to 2008. The results indicated that regional banks should diversify and enhance the revenue and management ability to prevent negative effects of external shocks, for instance, financial crisis, because regional banks were more likely to be influenced by external shocks than national banks.The factors of banks’ productivity after Asian financial crisis during the period of 1998 to 2008 in Philippines was examined by Suifan (2012). He found that productive banks tended to be more profitable, while various bank structures ownership was found to have no impact on financial performance.Variable selectionThe dependent variable is a measure of bank profitability. In general, bank performance is measured by the return on average assets which is Pre-tax profitdivided by average total assets (ROAA). I employ two categories determinants which are internal and external factors as explanatory variables. T able 1 lists the variables used to measure bank performance and its determinants.1)Log of total assets (LTA). It is a proxy to measure the economies ordiseconomies of scale in banking industry. Eichengreen and Gibson (2001) found that there is a certain ceiling on the effect of increasing bank’s asset on its profitability (ROAA).2)Cost to income ratio (CTI). It is used to measure the operating cost of banksand its efficient management. It is expected that higher operating cost will lead to lower profitability.3)Equity to total assets ratio (ETA). In this study, it is used as a measure ofbanks financial leverage. It is expected that bank with lower equity to total assets ratio will need higher external borrowing, therefore lower bank profits.4)Loan to assets ratio (NLTA). Since the main function of banks are financialintermediaries, bank earnings are mainly from interest income which generates from loans. The more deposits are converted into loans, the higher profits and interest margin.5)Loan loss reserve to gross loans ratio (LLRGL). It is used to measure bankasset quality. Loans are the highest risk and least liquid assets for banks. In order to have higher loan-to-assets ratio, bank may have higher risk to go bankrupt. Thus, the ratio of Loan loss reserve-to-gross loans is included to evaluate the bank risk.6)Gross domestic product growth (GDPGR). This variable is calculated as theannual % change of the GDP. It is the most common economic indicator variable that used to measure the economic activity within a country. In a favorable economic circumstance, the demand for loans increases, thus increasing bank earnings.7)Stock market capitalization to total assets of the banks ratio (MACPTA). Sincecorporations can either finance funds from bank or stock market, there are substitutive and complementary relations between these two markets. It is expected that this ratio is negatively related to bank profitability.8)Total assets of the banks to gross domestic product ratio (TAGDP). This variableis a measure of the importance of banking sector in Philippines economy.Demirguc-Kunt and Huizinga (1999) stated that other things constant, higher ratio of banking assets to gross domestic product lead to smaller margins and lower profits.Table 1 Descriptive of the variables used in the regression models.Hypothesized Variable Description relationship withprofitability DependentROAA The return on average total assets of NAthe bank in year t.IndependentInternal factorsLTA The natural logarithm of the accounting +/-value of the bank’s total asset in year t.CTI Cost to income ratio. A measure of efficiency -of management of bank.ETA A measure of capital adequacy and financial +/-leverage of bank, calculated as equity tototal assets.NLTA Calculated as loans to assets and provides +information on the bank earnings.LLRGL A measure of bank assets quality and risk, -calculated as loan loss reserve to gross loans.External factorsGDPGR The annual change in the GDP. + MACPTA The ratio of stock market capitalization. It is -used as a proxy of financial developmentTAGDP The variable serves to measure the importance +of banking sector in the economy, calculatedas total bank assets to GDPSource: The data for internal variables are sourced from BankScope databases. The data for the external variables are acquired from World Bank databases.Data and MethodologyDataThis paper uses annual bank level accounting data and banking sector concentration from BankScope Database for the period of 2010-2013, while macroeconomic data such as GDP, GDP growth and market capitalization were sourced from World Bank Database. In order to be selected into the sample, banks should meet two criteria. First, they should be commercial banks. Second, they should have yearly accounting statements over the period of 2010-2013. Due to these two conditions, a balanced panel data of 18 commercial banks over the period 2010 to 2013 are included, the number of bank-year observations are 72.Model formulationTo examine the relationship between bank profitability and banks’ specific characteristics and external factors described earlier, the following regression equation is estimated:Where i refer to an individual bank, t refers to year; Y it refers to the return on average assets (ROAA); X m represents the internal factors of individual bank and X d refers external factors of individual bank; β0it is a constant, and εis an error term. The model (1) is estimated through random effects regression. The least square method is applied to a random effects model. To control the cross-section heteroscedasticity, White’s transformation is utilized to calculate the standarderrors. The opportunity of using a random effects model rather than a fixed effects model is based on Hausman test.ResultsThis section exhibited the empirical findings of the regression. T able 2 presents the results of the regressions. In order to conserve space, the full regression results are not presented in the paper. The first column shows the results when only internal variables are included while the second reports when macroeconomic indicators are considered. When external variables are included into the equation, the coefficients and significance of the variables are remaining stable. The explanatory power of the models is also slightly different with the introducing of the external factors.Table 2Concerning the impact of bank size, the relation is negative and significant with bank profitability in Philippines. The negative relationship implies that larger banks appear to have lower profitability. This is consistent with previous studies (Pasiouras & Kosmidou, 2007) and indicated that exist economies of scale for smaller banks and diseconomies of scale for larger banks. Lee (2012) speculated that diversification effects which larger banks have better risk-diversified assets than smaller banks might offset the effect of economies of scale.As expected, the ratio cost to income ratio is negatively related to bank profitability and is statically significant at the one percent level in the regression models. It implies that other things constant bank with higher operating costs would have lower performance. Pasiouras and Kosmidou (2007) also found poor expanses management may contribute to poor profitability of banks. Since the Philippines banks were affected by financial crisis in 2008, Dacanay (2007) analyzed another potential explanation that external shocks may influence banks measured efficient management. Kwan (2006) also suggested that because the financial crisis cause rapid decline of loan demand, banks may not have the ability to adjust labor and capital inputs over a period of time.The ratio equity to assets exhibited a positively relation on Philippines banks’ performance. It implies that Well–capitalized banks have lower risks of going bankruptcy and lower costs of funding, therefore better performance. It should bementioned that the effects of capital adequacy are insignificant for banks’ performance when macroeconomic and financial variables are included or only bank specific indicators are considered. Blum (1999) stated that the requirement of excessive capital adequacy may cause the reduction of bank’s profits, and he further explained that the lower future profits may diminish the incentive of bank to avoid default. Therefore, the reason why capital adequacy in Philippines banks is not significantly related to ROAA is excessive cost to income ratio might reduce their profits and incentive.As expected, the loan to total assets has a positive sign for the measure of bank earnings, since banks have long reliance on earning profits from loans interest income. However, this variable is insignificant with ROAA. Smith et.al (2003) pointed out that fees income such as electronic funds transfer fees and credit card fees have recently occupied a dominant position in the banks business strategies. Canal (1993) also found that income generated from new business units have make a significant contribution on bank performance. Thus, for banks to maintain competition in financial markets, managers might start to expand product breadth on generating non-interest revenue, and cause loan to total assets ratio is not significant to Philippines bank performance.The loan loss reserve is an indication of bank’s assets quality and the level of credit risk. It represents bank’s forecast of the bad loans in bank’s assets portfolio over aperiod of time. In Philippines, this ratio is negatively related to the profits of banks but not significant. It is consistent with the expectation that bad loans would reduce the bank’s profitability. Previous study (Miller and Noulas, 1997) also found that with the increase of risky loans, the accumulation of bad loans would rise, therefore reduce the bank’s future performance. As the scale of loan loss reserves follows the economic cycle, the loan loss ratios tend to decrease after the financial crisis in Philippines banks. Kosmidou (2008) pointed out that banks management could smooth out income by using provision charges to reduce variability of profits. Similarly, managements also could overstate or underestimate income by using loan loss reserves. Thus, the manipulation of bank earnings could lead the insignificant relationship between the loan loss ratio and the Philippines banks performance.The impacts of macroeconomic indicators (GDP growth) are negatively related to bank profitability, while financial industry variables (stock market capitalization and importance of banking sector) on ROAA are positive. After the financial crisis, Philippines economy realized rapid recovery and sustained fast growth at 6% until now. Many previous studies (Neely and Wheelock, 1997; Kosmidou, 2008) found that GDP growth has a strong effect on bank profitability, but Suifan (2009) claimed economic growth has a negative impact on Malaysian bank performance. However, in Philippines, it should be mentioned that GDP growth is not significantly related to ROAA. The study examined by Naceur (2003) argued that GDP growth rateshave no effect on banks’ performance and interest margin s in Tunisian banks. The banks’ assets to GDP is not significant related to ROAA. It implies that the importance of banking sector in Philippines economy has no significant impacts on banks performance. Referring to stock market capitalization on bank performance, it is not significant related to ROAA. It is consistent with the findings of Sufian and Chong (2008) who found that Philippines stock market development does not provide substitution possibilities to borrowers.Conclusion and policy suggestionThis paper seeks to analyze the factors including bank’s management decisions and macroeconomic condition that affect the profitability of Philippines commercial banks during the period of 2010-2013.During the period of the study, the empirical findings indicate that bank size and efficient management have a significantly and negative impact on the performance of banks in Philippines. The capital adequacy and interest income are positively related to ROAA, while the credit risk has a negative impact. On the other hand, macroeconomic and financial structure indicators including GDP growth, market capitalization and banking sector development have not significantly explained the variations in the Philippines banks performance.The finding of this study could offer some suggestions to bank managers andregulatory authorities. To sustain the development and improve the profitability of Philippines banking industry, bank managements, as well as the regulatory authorities should focus on improving its scale efficiency and X efficiency. Bank managements should find means to take full advantage of their resources during the operation of the banks. Because the interest income from loans is currently the main source of profits of the banks, managers should enforce the system of risk management and control to reduce the ratio of bad assets. However, since interest incomes are easily affected by the business cycle and interest rate move, banks should also reduce the dependency on traditional loan business, and increase the proportion of non-interest incomes to seek new profit growth point in the future.ReferenceBlum, J. (1999). Do capital adequacy requirements reduce risks in banking?. Journal of Banking & Finance, 23(5), pp.755-771.Dacanay, S. (2007). Profit and cost efficiency of Philippine commercial banks under periods of liberalization, crisis and consolidation. The Business Review, 7, pp.315-322.Eichengreen, B. and Gibson, H. (2001). Greek banking at the dawn of the new millennium. London: Centre for Economic Policy Research.Lee, S. (2012). Profitability determinants of Korean banks. Economics and Finance Review, 2(9), pp.6-18.Manlagñit, M. (2011). Cost efficiency, determinants, and risk preferences in banking: A case of stochastic frontier analysis in the Philippines. 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