Banks' profitability ratios decline in Q3
The banking system’s return on assets (ROA) and return on equity (ROE) ratios decreased in the third quarter compared to the previous quarter, but were higher than what was reported in the same period last year, according to central bank data.
Despite the lower ratios in the third quarter, the Bangko Sentral ng Pilipinas (BSP) said in a report that ROA and ROE – both profitability metrics – reflected the strong performance of Philippine banks during the period. This can be seen in its sustained expansion in assets, deposits, and profit, as well as stable capital, liquidity buffers and ample provision for credit losses.
As of end-September, ROA which is the percentage of net profit or loss to average assets fell to 1.48 percent from 1.56 percent in the second quarter ending in June, but higher compared to third quarter in 2022 of 1.43 percent.
Based on the latest BSP data, banks’ ROE or the percentage of net profit or loss to average capital, also dropped to 12.03 percent in the July to September months versus April to June’s 12.83 percent but were up from 11.55 percent same time last year.
Meanwhile, the industry cost-to-income ratio which measures banks’ efficiency in their operations, increased to 56.73 percent from 55.19 percent in the previous quarter and from 55.72 percent in end-September 2022.
The BSP has noted in a report that the cost-to-income ratio has been maintained at below 60 percent since the pandemic. This ratio ranged between 60.3 percent and 64.7 from 2015 to 2019 and 54.9 percent and 59.1 percent from 2020 to 2022. The percentage of non-interest expenses, net of impairment losses, to total operating income is the cost-to-income ratio.
As for banks’ net interest margin (NIM) as of end-September, this rose to 4.12 percent in the third quarter from 3.98 percent in the second quarter and from 3.62 percent in 2022. NIM is the percentage of net interest income to average earning assets.
During the period, banks’ earning asset yield stood at 5.68 percent, lower than the previous quarter of 5.27 percent but higher than 4.23 percent in the previous year.
Banks funding cost increased to 1.76 percent in the third quarter from the previous quarter of 1.47 percent and from same period last year of 0.70 percent.
As for its interest spread, taking into consideration the earning asset yield and funding cost, this went up to 3.92 percent as of end-September versus 3.80 percent in the second quarter and from 3.53 percent same time in 2022.
The percentage of interest income to average earning assets is the earning asset yield while the funding cost is the percentage of interest expenses to average interest-bearing liabilities. The difference between the two is the interest spread.
Overall, the local banking sector posted combined net profits of P270.352 billion for the first nine months of 2023, up by 10.4 percent from same period last year of P244.875 billion as loans, deposits and income continued to grow.
Banks’ cumulative net interest income increased by 20.44 percent year-on-year to P663.24 billion from P550.666 billion at the end of the third quarter period. This income is the difference between interest income and the sum of provision for losses on accrued interest income from financial assets and interest expense.
Banks’ non-interest income however fell by 21.31 percent to P165.406 billion from P210.210 billion same period in 2022. This is fee-based income, gains on financial assets and liabilities, as well as foreign exchange profits, among others.
As of end-September, the banking system’s non-interest expenses totaled P462.601 billion which was 12.2 percent higher than the previous year’s P412.357 billion. These are compensation and fringe benefits, taxes and licenses, fees and commissions, and impairment losses and provisions.
Operating income also increased by 8.9 percent to P828.646 billion versus P760.876 billion same time in 2022.
As for banks’ combined losses and recoveries on financial assets, this improved to P58.917 billion, down 6.5 percent from P63.005 billion, of which provision for credit losses amounted to P66.187 billion, 15.12 percent lower from same period in 2022 of P77.978 billion.