MALAYAN Banking Bhd is going through some interesting changes in the Philippines. Herminio M Famatigan Jr, president and CEO of its subsidiary Maybank Philippines Inc (MPI), is leaving the bank after five years at the helm upon the expiry of his contract, sources say.
This new development, which comes not long after MPI slipped into a pre-tax loss as at the third quarter of last year due to high provisions, has industry observers wondering if Maybank is facing growing headwinds in the market following the strong expansion in recent years.
When contacted, Maybank confirmed that Famatigan is leaving. “The bank and Mr Famatigan mutually agreed not to renew the contract. The contract will expire on Feb 28, 2017, and Famatigan is currently on leave. He is still a board member and will remain so until his term expires in March 2017,” a spokesman says via email.
The bank has shortlisted a number of candidates and is in the process of selecting a replacement, he adds.
MPI reported a pre-tax loss of PHP87.9 million in the first nine months of the financial year ended Dec 31, 2016 (9MFY2016) compared with a profit before tax (PBT) of PHP629.7 million in the previous corresponding period.
This was despite revenue increasing 11.2% to PHP3.97 billion and loans growing 2.5% on an annualised basis. Its gross impaired loans (GIL) ratio worsened to 4.1% from 3.57% a year ago.
Only a year earlier, in FY2015, its PBT hit a record high of PHP950.5 million. MPI currently has 80 branches, compared with 55 in 2012.
The 9MFY2016 loss seems unusual considering that the Philippines is one of the fastest-growing economies in Asean, with loan growth and margins among the highest in the region. A growing number of foreign banking groups, including Malaysia’s CIMB Group, are keen to expand into the market.
Maybank blames the loss on a one-off cost of regulatory compliance, namely the BSP Circular 855 (BSP C855), which led to higher provisions. It expects MPI’s provisions to improve in FY2017.
“Based on the 9MFY2016 results, MPI’s PBT fell to a loss before tax due mainly to a one-time booking in September 2016 of an additional loan-loss provision of PHP687 million.
“This additional provision arose from the new loan-loss provisioning methodology adopted to comply with BSP C855, which was released by the Philippine central bank, Banco Sentral ng Pilipinas (BSP), on Oct 29, 2014, (and) which provides updated guidelines on sound credit risk management practices,” the spokesman says.
To put things into perspective, the additional PHP687 million provision — around RM61 million based on current exchange rates — works out to just 1.2% of its total loan portfolio of PHP58.93 billion.
Maybank explains that among other provisions, the circular requires all financial institutions to develop a sound loan-loss methodology that can reasonably estimate provisions for loans, other credit accommodations and risk assets in a timely manner to ensure that collective and individual allowances for credit losses are adequate and approximates the expected losses in their credit portfolio.
All banks in the Philippines were required to fully adopt BSP C855 by November 2016, the spokesman says.
BSP C855 is a compliance initiative implemented in the Philippine banking system as a major step towards full adoption of IFRS9, which is due for compliance by 2018.
“If we exclude the loan loss provisions for compliance with BSP C855, MPI’s normalised PBT for the 9MFY2016 would have been PHP599 million. Looking ahead, we expect our loan-loss provisions to improve in 2017 on anticipated continued improvement in the credit quality of assets,” the spokesman says.
Even at PHP599 million, MPI’s PBT would have been about 5% lower than the PHP629.7 million it made a year earlier. And it would seem to be a setback for MPI’s plan — set out in its 2015 annual report — to be among the 10 most profitable banks in the country by 2018.
In contrast, the Philippine banking industry continues to grow despite external challenges and pockets of asset-quality issues. The central bank’s data shows that local banks’ net profit grew 16.7% in the third quarter of 2016 to about PHP114.8 billion from a year ago.
As at Sept 30, 2016, the industry’s GIL ratio improved to 2.14% from 2.19% in January.
Fitch Ratings Singapore Pte Ltd financial institutions director Elaine Koh notes that so far, BSP C855 has had little impact on the profitability of the major Philippine banks as of the 3Q2016 results.
“Firstly, the implementation deadline was only in 4Q2016. Secondly, not all banks would have switched over to the internal loss estimation methodology as they are only required to do so when their models have been proven sufficiently robust and reliable. And lastly, some banks were already taking internal modelling into account when making provisions, even ahead of the ruling,” she tells The Edge.
She explains that the main effect of BSP C855 on profitability is through a change in provisioning methodology. Under the circular, banks with the resources to do so must switch to an internal loan loss methodology to calculate impairment charges, rather than the previous method of relying on standardised provisioning rates determined by the central bank.
According to Koh, the impact of the transition to internal loss estimation on individual banks will vary, as the estimates will depend much more on each bank’s portfolio mix and credit experience.
“We know that Maybank has had a challenging experience in the Philippines as its GIL ratio has risen from about 3% at end-2013 to 4.4% at end-2015. We have seen pockets of weakness within the consumer segment in the Philippines even with the generally-favourable credit backdrop there, as banks have been aggressively courting consumer borrowers over the past few years.
“These issues may translate into only a modest rise in NPL ratios for the local banks as they are much more focused on corporate loans, which generally continue to perform well. But they may be more noticeable for banks that have a greater weightage on the consumer segment,” she says.
Nevertheless, the Philippines is still a relatively small market for Maybank and contributes only marginally to group profits. Singapore and Indonesia are still its biggest overseas markets, contributing 15.8% and 3.7% respectively to the group PBT in FY2015.
Maybank was one of the early foreign players in the Philippines. In November 1997, it bought a 60% stake in PNB Republic Bank under the Foreign Bank Liberalisation Act. Being a majority shareholder, it took over the bank’s management and named it MPI.
Three years later, it increased its stake in MPI to 99.96%, becoming the first foreign financial institution to have almost 100% ownership of a commercial bank in the country.
MPI is a full-service commercial bank serving retail, commercial and corporate clients. In FY2015, the year its PBT hit an all-time high, the bank saw loans grow a solid 19% and deposits 12%.
That year, it was ranked the 14th biggest bank in terms of loans and 17th in terms of assets. Net interest margin rose to 5.4% as higher interest-earnings assets, led by consumer loans, grew strongly.
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.