The Philippines has a robust consumer economy, fuelled by burgeoning remittances from overseas, so domestic banks have long offered one of the safest plays on the economy. Recent changes to banking regulations have further strengthened the case for the sector on fundamental grounds. Now fuelled increasingly by renewed takeover speculation as consolidation attempts gain traction, the sector looks set to outperform.
In 2002, congress passed the Special Purpose Vehicle Act, a key reform for banks offering tax and regulatory benefits that enabled them to start to offload non-performing loans. So far, according to broker CLSA Philippines, NPLs with a face value of more than $1.1 billion have been sold (see table). Although the legislation expired this year, it is expected to be extended to 2007. Coupled with expanding loan books in an improving domestic economy, bank NPLs have been reduced from a high of 18% in 2001 to less than 11%.
"The NPL ratio in May was 10.9%," says Amando Tetangco, governor of the central bank. "Under the SPV law, a total of P96 billion in NPLs ($1.72 billion) has been approved for disposal, so the NPL ratio will come down. Unlike other Asian countries, there are no public funds used for the purchase of [these] assets."