PHILIPPINE RURAL BANKS have benefited from the entry of foreign capital following the industry’s liberalization in 2013, with these investments boosting lenders’ incomes and asset quality, according to a Bangko Sentral ng Pilipinas (BSP) discussion paper.
“Empirical analysis reveals that the presence of foreign investors and their capital infusions improved the profitability and asset quality of the recipient rural banks,” the paper said.
The study assessed the impact of foreign equity infusion on rural banks using data from the first quarter of 2010 to the fourth quarter of 2022.
In 2013, the Philippine rural banking industry was liberalized through Republic Act No. 10574, which allowed foreigners to own, acquire, or purchase up to 60% of a rural bank’s voting stocks. The law also allows foreign individuals or corporations to acquire ownership of Philippine rural banks.
As of end-December 2022, rural banks accounted for about 1.5% of the total assets of the banking system.
There were 403 rural banks in the Philippines at end-2022, down from 607 head offices in 2010, the paper said.
Of this total, 13 rural banks had foreign capital, with majority of their foreign equity stockholders coming from Asia, mainly Singapore.
The central bank said the entry of foreign investors and their capital infusion “improved the profitability and asset quality of recipient rural banks,” although the impact was not uniform across the industry.
“Of the 13 rural banks with foreign equity, five experienced improvements in profitability, albeit with some lag after the capital infusion. These improvements stemmed from changes that entailed large short-term costs but were expected to generate long-term benefits,” it said.
“With the capital infusion, these banks underwent capacity building, such as upgrading business processes, information technology, manpower skills, and data management. Additionally, although five rural banks were already operating profitably before the infusion, the foreign capital may have helped them sustain their profitability,” it added.
The discussion paper said Philippine rural banks should consider seeking capital infusion from foreign investors.
“An important caveat of these findings is that the majority of the foreign equity infusion occurred only in the last three years of the study’s sample period. Hence, the full impact on rural bank performance may not yet be fully felt,” it said.
“Another limitation is the small number of rural banks with foreign equity relative to the total number of rural banks, making it difficult to draw generalizable conclusions. Thus, another study is warranted after several years to determine if the results still hold or have changed.”
The paper also recommended that the BSP continuously monitor the performance of rural banks with foreign equity to ensure they are benefiting from foreign capital.
“An annual survey, similar to the one conducted for commercial banks (Survey on the Effects of Foreign Bank Entry into the Philippine Banking System), could be carried out.”
The discussion paper was authored by BSP Research Academy Principal Researcher Hazel C. Parcon-Santos; Researchers Marie Edelweiss G. Romarate and Joan Christine S. Allon-Pineda; Bank Officer Carl Francis C. Maliwat and Research Associate Jose Adlai M. Tancangco; and Laura B. Fermo, deputy group head and senior economist at the ASEAN+3 Macroeconomic Research Office.
Latest BSP data showed that the Philippine rural banking sector’s combined net income rose by 32.6% to P8.34 billion at end-September 2024 from P6.29 billion a year prior.
Total assets stood at P430.396 billion at end-September, up by 16.7% year on year from P368.71 billion.
Meanwhile, the sector’s total capital accounts stood at P77.92 billion as of September, with capital stock at P46.67 billion, central bank data showed.
Its solo capital adequacy ratio was at 17.74% as of September, while the total capital accounts to total assets ratio stood at 18.16%. — Luisa Maria Jacinta C. Jocson