The country’s banking industry reported improved profitability ratios last year compared to 2022 as earnings grew due to the sector’s profitable operations.

Based on data from the Bangko Sentral ng Pilipinas (BSP), banks’ return on assets (ROA) and return on equity (ROE) increased on a year-on-year basis although it declined on a quarterly basis. 

The 2023 banking system ROA, which is the percentage of net profit or loss to average assets, rose to 1.45 percent from 1.41 percent in 2022, but fell when compared to 1.47 percent in the third quarter last year.

Banks’ ROE or the percentage of net profit or loss to average capital, went up to 11.82 percent versus 11.75 percent in 2022, but was lower compared to the third quarter’s 12.04 percent.

The BSP noted in a report that ROA and ROE – both profitability metrics – reflected the strong performance of Philippine banks during the period based on sustained expansion in assets, deposits, and profit, as well as stable capital, liquidity buffers and ample provision for credit losses.

As of end-2023, the industry reported combined net profits of P354.925 billion, up by 14.45 percent compared to P310.117 billion in 2022 due to higher interest income.

Last year, the banking system’s total assets also increased to a new high of P25.146 trillion compared to P23.047 trillion in 2022. Banks’ assets are funded by deposits, loans and investments which in turn when managed well translates to stable earnings, healthy capital and ample liquidity.

Meanwhile, the industry cost-to-income ratio which measures banks’ efficiency in their operations, increased to 56.70 percent in 2023 from 55.19 percent in 2022. Cost-to-income ratio was however lower than the recorded 56.74 percent in the third quarter last year.

The BSP has said that 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. Cost-to-income ratio is the percentage of non-interest expenses, net of impairment losses, to total operating income.

The BSP noted that in 2023, banks’ net interest margin (NIM) increased to four percent versus 3.65 percent in 2022, but lower than 4.05 percent in the third quarter last year. NIM is the percentage of net interest income to average earning assets.

As for banks’ earning asset yield, this improved to 5.62 percent in 2023 compared to 4.40 percent in 2022, and also from 5.58 percent in the third quarter last year.

Funding cost significantly increased to 1.86 percent last year from 0.85 percent in 2022, and from 1.74 percent in the third quarter 2023.

Banks’ interest spread, taking into consideration the earning asset yield and funding cost, rose to 3.77 percent from 3.55 percent in 2022, but fell from 3.83 percent in the third quarter period.

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.