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Monday, October 23, 2017 | MANILA, PHILIPPINES
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   banking report
Date posted: Tuesday, February 28, 2017 | Manila, Philippines

4th Quarter Banking Report (2016)

Has growth created new retail markets for banks?

TAGGED as the "most optimistic" consumers in the world, Filipino households continue to anchor growth for what is now known as Asia’s bright spot, helped in part by high liquidity in the financial system and manageable inflation.

With improved consumer confidence, banks have also taken advantage of the suitable atmosphere to grow their retail lending business. Consumer loans have been increasing by double-digit rates annually since 2010.

These have tripled to P1.2 trillion as of September last year, from P413.1 billion in 2009. The residential real estate loans sub-group also tripled to P506.3 billion from P162.6 billion seven years ago, while auto loans now stand at P364.4 billion from P94.6 billion over the same period.

Beyond the impact of low interest rates and strong buying confidence of Filipinos, lenders are also ramping up their consumer lending to take advantage of the changing demographics of their retail clientele -- a younger generation of tech-savvy consumers and a rising market of small businesses.

Take the case of BDO Unibank, Inc. The bank owned by shopping mall magnate Henry Sy cited income growth and shifting demographics as responsible for the growth in the consumer market. Income growth in turn has resulted from rising affluence coupled with dual-income families, while the change in demographics is seen from the young dynamic workforce, of which 35 million belong to the so-called “millennial” generation.

BDO has since catered to this group through co-branding as well as utilising more advanced technology for lending and other financial products and services. Its co-branded credit cards -- American Express Blue Card, Forever 21 and Bench MasterCard -- address the “young, upwardly mobile and aspirational generation.”

An affluent and tech-savvy clientele leading fast-paced lives has been fertile ground to grow BDO’s mobile banking business, which features “banking anytime, anywhere.” As well, its joint venture with Japan’s Nomura Holdings -- BDO Nomura -- has allowed the Philippine lender to offer online trading services for individual investors.

Millennials as emerging segment
Alex G. Ilagan, executive director at Credit Card Association of Philippines (CCAP), said millennials are an emerging segment for banks.

“This market is more tech-savvy and seems to be more accessible via social media than the traditional mass media, ie. print, radio, TV,” he said.

A big segment of this “new” consumer market is employed in the booming business process outsourcing (BPO) industry where entry-level incomes are on average higher than in other industries. As the BPO industry requires some familiarity, if not facility with the latest information technology and social media tools, its workforce necessarily is tech-savvy.

According to PNB Savings Bank President Jovencio D.B. Hernandez, the younger generation often avail of salary loans. It was only in 2014 when salary loans became a distinct sub-category of consumer loan data by the BSP. They have since doubled to P134.1 billion from P62.1 billion.

“Millennials like to travel. And they want it now,” Mr. Hernandez said.

Of course, the travel bug among millennials got a boost from more affordable travel options -- not only budget airlines, but also accommodations such as Airbnb, which took off only in recent years.

Normally, confidence to borrow begins when one reaches middle age, especially when one has a family to support, according to CCAP’s Mr. Ilagan.

“As one person ages, his income, spending and borrowing level naturally grows. Savings is a function of disposable income less spending. Borrowings tend to peak at middle age then start to decline [once] the children graduate from school and start employment,” he said.

But in the case of the BPO workforce, the worker is paid at a relatively higher wage rate, thus their credit profile has improved over earlier generations of new graduates, who had to toil longer to earn the income that an entry-level call center agent is offered.

“The younger generation, especially young professionals, are more aggressive and are most likely to be categorized as risk-takers who are open to understanding, and perhaps participating, in more sophisticated products,” said BSP Deputy Governor Nestor A. Espenilla, Jr.

He said 80% of complaints, inquiries and requests for assistance are received through e-mail, mostly on credit card and electronic banking concerns, “indicating a younger or tech-savvy profile of clients/complainants.”

Apart from the BPO boom, banks are faced with a maturing OFW market. Take the case of Philippine Business Bank (PBB), which has seen its auto and real estate lending business picking up among 30- to 40-year old OFWs.

“These are the present OFWs and former OFWs who now have steady source of income,” said Rolando R. Avante, PBB president.

Money sent home by OFWs has been a steady fuel for domestic consumer spending, as remittances contribute to 10% of gross domestic product (GDP). Beyond remittances per se, the OFW profile has diversified from the construction workers of the 1970s and household domestics of the 1980s onwards to the nurses, teachers and other higher-skilled labor, each of which commands higher pay abroad.

Some banks have also opened up to small businesses, a segment that lenders used to avoid like the plague, even at the cost of paying fines for failure to meet the BSP’s mandatory credit quotas for the sector. Among the reasons for avoiding this segment are their opaque financial statements, spotty financial performance (which is partly a function of the first reason), and questionable collateral.

Take the case of Bank of the Philippine Islands (BPI), which last year took over BanKO, the country’s first mobile-powered microfinance-oriented savings bank. Renamed BPI Direct BanKo, Inc. it ushered micro-entrepreneurs into formal banking.

According to BPI, the acquisition allows it “to serve the unique needs of self-employed micro-entrepreneurs and to further contribute to inclusive growth by enabling more people to realize opportunities.”

PBB is no stranger to the small and medium enterprise (SME) market, which remains the bank’s main clientele. Mr. Avante said there is a “growing need” to redefine this segment to catch up with the growing economy and to avoid a mismatch between the kind of loan offered and the borrower’s needs.

“Say, a person wants to borrow half a million. Some banks would categorize this as consumer loan when in fact, what he actually need is to finance his business. For us, it is important to determine the need of the person. If you give a wrong type of product, you are contributing to the failure of the person,” he said.

With a shift in the demographic of the retail market and the affordability of mobile data, banks can no longer ignore online presence, especially since more clients transact over the Internet. Social media is also used as a marketing tool and as a way to monitor trends and needs of the market.

“Marketing online is taking shape to be a major advertising and distribution channel that banks can no longer afford to ignore,” said CCAP’s Mr. Ilagan. “Nowadays, more people not only get information online but also do their banking transactions online, primarily through their mobile devices. This has given rise to the development of mobile apps by major banks like Citibank, BDO and BPI to name a few.”

BSP’s Mr. Espenilla said banks have their own designated social media teams for monitoring and analysing relevant social media mentions.

“This serves as a useful tool in capturing customers’ complaints online and in taking note of new inclinations which have impact on the banks’ market positioning,” he said.

According to BDO, competition in the retail market has become more intense, notwithstanding the higher demand for consumer loans.

CCAP’s Mr. Ilagan said payment behaviors have improved along with the growth of the economy, but bank margins are narrowing as they let go of fee income to level with the competition.

“With more disposable income available, they are able to pay off their debts faster and on time. This results to lower levels of delinquent accounts and non-performing loans,” he said.

“A stable interest rate environment will also mean a stable margin for credit cards. However, the pressure is likely to come from the top line because stiffer competition in the market may pressure some banks to reduce interest rates via promotional offers, for example, balance transfer,” he said.

“Costs for the growing credit card use refer not only to actual expenses incurred, for example, advertising and promotions, but also to forgone revenues as a result of the lower interest rates or waived fees. No fees is now an expected feature of credit cards and no annual fees is becoming a regular feature too,” Mr. Ilagan added.

Among personal loan products in the market, credit card receivables are unsecured, meaning they require no collateral. However, at 5.4%, credit cards have a higher rate of bad debts over the total credit card loan portfolio, compared to residential real estate loans and motor vehicle loans, at 2.86% and 4.34% in their respective categories.

Notwithstanding the emergence of a tech-savvy retail clientele, much needs to improve in terms of their financial literacy.

“Financial literacy is very important for people to understand how to manage credit and funds. If you teach them financial management, that would be more lethal, more empowering,” PBB’s Mr. Avante said.

The central bank admitted that Filipinos still need to catch up with modernization of financial products in the market.

“Financial products and services are rapidly evolving, but the financial literacy levels of consumers has not been able to keep pace with the innovation,” Mr. Espenilla said.

“Some consumers are ill-equipped in understanding basic bank product terms and risks, as well as their financial implication. This might lead to purchasing of financial products that clearly do not suit the consumer’s need,” he said.

In this regard, the BSP also requires financial institutions to be “very clear and explicit in the marketing of their products.”

PBB’s Mr. Avante said the state of financial literacy may improve once the Credit Information Corp. (CIC) is established.

“The BSP with the banking sector is putting up an initiative to have a Credit Information Corp. which will do data banking on all people. Ikaw na ang gagawa ng credit-worthiness mo,” he said.

Under Republic Act 9510 or the Credit Information System Act, banks are required to submit borrowers’ information to CIC, who in turn consolidates basic credit data into a database which can be also used by other CIC-approved credit bureaus and financial institutions. CIC’s database is deemed operational within the first quarter of this year. -- Jochebed B. Gonzales

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