The BSP releases the Enhanced Report of the Philippine Financial System for the first semester of 2018. The Report shows sustained growth momentum on the back of proactive implementation of financial sector reforms, strong macroeconomic fundamentals and positive investor sentiment. The Philippine financial system, with the banking system at its core, continues to provide financial intermediation to further boost the domestic economy.

The Report includes a new section on Financial Soundness of the Philippine Banking Sector1 which provides a comprehensive analysis of the soundness of the Philippine banking system. The section based on the analysis of capital adequacy, asset quality, earnings, liquidity and sensitivity to market risk (CAELS Analysis) notes that while the banking system remains stable, the BSP will continue to monitor incipient risks to the System. The Financial Supervision Sector's Surveillance Loop and Early Intervention Framework will provide guiding frameworks for supervisors in monitoring banks' risk management.

Other enhancements in the Report pertains to the inclusion of two technical box articles on factors driving the behavior of deposit interest rates and impact of macro- and bank-specific factors on the loan quality of banks. These studies indicate that greater access to banking facilities, movement in BSP's policy rates, better wages, improved weather conditions and size of aggregate bank deposit are significant drivers of the behavior of median deposit interest rates. Moreover, banks also continued to be risk-sensitive in their lending behavior as loan quality remained stable amid shocks to the macroeconomic environment and sustained credit growth.

Overall, the double-digit year-on-year growth of the banking system's assets, loans, investments, deposits, capital accounts and core income showcases resilience amid global volatilities and ensures another pillar to support the economy's progress. While the banking system continues to expand its reach to extend credit to borrowers, prudent lending resulted to satisfactory asset quality with non-performing loan ratio at a low of 1.9 percent as of end-June 2018.

Meanwhile, the foreign currency deposit system, trust operations, quasi-banks and other non-bank financial institutions also registered steady growth contributing further to the strong performance of the financial system.

Hence, the dynamism of the financial system amid uncertainties in the global setting and cyberthreats justifies the strong positive outlook for the system as reflected in the maiden conduct of the Banking Sector Outlook Survey (BSOS)2 . For its part, the BSP is committed to developing an enabling regulatory environment that will promote a stable and sound banking system that is globally competitive, dynamic and responsive to the evolving demands of economic development.

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1 This is also prepared in compliance to Monetary Board Resolution No. 656.A dated 19 April 2018.

2 The BSOS is a semestral survey that aims to gather the sentiments of the Presidents/Chief Executive Officers/ Country Managers of banks in the country within a two-year horizon. It serves as a complementary tool in validating the assessments of banking supervisors. http://www.bsp.gov.ph/publications/regular_PBSOS.asp

Source: Bangko Sentral ng Pilipinas (BSP)