Determinants of Bank Group Profitability in the Philippines ...

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Philippine Management Review 2021, Vol. 28, 81-110.

Determinants of Bank Group Profitability in the Philippines from 2008 to 2019:

A Panel Data Regression Approach

University of the Philippines, Cesar E.A. Virata School of Business, Diliman, Quezon City 1101, Philippines

Keywords

1 Introduction

body is the Bangko Sentral ng Pilipinas (BSP), which is also the country’s monetary authority. Wellcrafted regulations that enhance banks’ resilie

Determinants of Bank Group Profitability in the Philippines from 2008 to 2019: A Panel Data Regression Approach

Figure 1. GDP Growth (%)

various literature’s recommendations

2 The Philippine Bank Groups from 2008 to 2019

that enhanced the transparency and communication of the central bank’s monetary policies and policy

-3-2-1012345678

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Philippines World East Asia & Pacific

Raniel Jude A. Pamatmat

Figure 2.1. Reverse Repurchase Rates (%)

Figure 2.2. Average Lending Rates (%)

Figure 3. Deposit and Loan Values of the Philippine Banking Sector (Trillions of PhP)

Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

policy rate response to the GFC

2.03.04.05.06.07.08.09.0

101214

Trilli

Total Deposits Total Loans, gross

Figure 1. GDP Growth (%)

various literature’s recommendations

2 The Philippine Bank Groups from 2008 to 2019

that enhanced the transparency and communication of the central bank’s monetary policies and policy

-3-2-1012345678

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Philippines World East Asia & Pacific

Figure 2.1. Reverse Repurchase Rates (%)

Figure 2.2. Average Lending Rates (%)

Figure 3. Deposit and Loan Values of the Philippine Banking Sector (Trillions of PhP)

policy rate response to the GFC

2.03.04.05.06.07.08.09.0

101214

Trilli

Total Deposits Total Loans, gross

––

tters of credit (“What's the difference? ” n.d.). The

ions (“What’s the difference ” n.d.).

addition to the license to engage in underwriting and other investment house functions (“What's the ” n.

Figure 4.1. Total Assets (Trillions of PhP) Figure 4.2. Total Assets (Trillions of PhP)

Universal RuralCooperative ThriftCommercial

Rural Cooperative

Thrift Commercial

Figure 4.3. Net Profit (Billions of PhP) Figure 4.4. Net Profit (Billions of PhP)

Figure 5.1. Return on Assets (%) Figure 5.2. Return on Equity (%)

Commercial UniversalRural CooperativeThrift

Commercial RuralCooperative Thrift

––

tters of credit (“What's the difference? ” n.d.). The

ions (“What’s the difference ” n.d.).

addition to the license to engage in underwriting and other investment house functions (“What's the ” n.

Figure 4.1. Total Assets (Trillions of PhP) Figure 4.2. Total Assets (Trillions of PhP)

Rural Cooperative

Thrift Commercial

Figure 4.3. Net Profit (Billions of PhP) Figure 4.4. Net Profit (Billions of PhP)

Figure 5.1. Return on Assets (%) Figure 5.2. Return on Equity (%)

Commercial UniversalRural CooperativeThrift

Commercial RuralCooperative Thrift

Figure 6. Loan Loss Reserves to Total Loan Portfolio (%)

Figure 7. Total Capital to Total Assets (%)

1012141618

Universal Rural Cooperative Thrift Commercial

Figure 8.1. Non-Interest Expense to Total Assets (%)

Figure 8.2. Non-Interest Expense to Total Assets excluding Coop. banks (%)

Source: BSP, n.d.a.; Author’s computation

attributed to an increase in cooperative banks’ administrative costs and incurrence of consolidation

0102030405060708090

Universal Rural

Thrift Commercial

Figure 6. Loan Loss Reserves to Total Loan Portfolio (%)

Figure 7. Total Capital to Total Assets (%)

1012141618

Figure 8.1. Non-Interest Expense to Total Assets (%)

Figure 8.2. Non-Interest Expense to Total Assets excluding Coop. banks (%)

Source: BSP, n.d.a.; Author’s computation

attributed to an increase in cooperative banks’ administrative costs and incurrence of consolidation

0102030405060708090

Universal Rural

Thrift Commercial

Figure 9. Cash & Due from Other Banks to Deposits (%)

variety of services (“What's the difference? ” n.d.). However, there were significant periods afte

calls and geocoding, to verify a client’s identity

101520253035404550

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

Commercial Universal Rural Cooperative Thrift

Figure 10. Non-Interest Income to Operating Income (%)

3 Literature Review and Hypotheses Development

Figure 9. Cash & Due from Other Banks to Deposits (%)

variety of services (“What's the difference? ” n.d.). However, there were significant periods afte

calls and geocoding, to verify a client’s identity

101520253035404550

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

Figure 10. Non-Interest Income to Operating Income (%)

3 Literature Review and Hypotheses Development

3.1 Internal Factors 3.1.1 Size

3.1.2 Credit Risk nk’s assets, which generally refer to a bank’s loan portfolio

(Basel Committee on Banking Supervision, 2000). Credit risk is the risk that a bank’s borrowers

bank’s credit policies.

3.1.3 Income Diversification

n the banks’ loan portfolios, interest income from loans is relatively stable,

margins from income sources outside a bank’s regular lending a

3.1.4 Management Efficiency

––

3.1.5 Capitalization

Basel 1.5 framework, a simplified version of Basel II that considers the simplicity of these banks’

– Tier 1 capital and Tier 2. Tier 1 capital consists of shareholders’

3.1 Internal Factors 3.1.1 Size

3.1.2 Credit Risk nk’s assets, which generally refer to a bank’s loan portfolio

(Basel Committee on Banking Supervision, 2000). Credit risk is the risk that a bank’s borrowers

bank’s credit policies.

3.1.3 Income Diversification

n the banks’ loan portfolios, interest income from loans is relatively stable,

margins from income sources outside a bank’s regular lending a

3.1.4 Management Efficiency

––

3.1.5 Capitalization

Basel 1.5 framework, a simplified version of Basel II that considers the simplicity of these banks’

– Tier 1 capital and Tier 2. Tier 1 capital consists of shareholders’

3.1.6 Liquidity

financial system’s liquidity risk because it greatly affects the stability and resiliency of the

“expected bankruptcy cost hypothesis”

3.1.7 Interest Spread

significant portion of a bank’s markup.

3.2 External Factors 3.2.1 Exchange Rate

argued that devaluation of a certain country’s currency would result in increased profitability

3.2.2 GDP Growth

3.2.3 Inflation

3.2.4 Interest Rate

particularly valuation of loan collateral. The lower interest rate affects banks’ provisions for default

3.1.6 Liquidity

financial system’s liquidity risk because it greatly affects the stability and resiliency of the

“expected bankruptcy cost hypothesis”

3.1.7 Interest Spread

significant portion of a bank’s markup.

3.2 External Factors 3.2.1 Exchange Rate

argued that devaluation of a certain country’s currency would result in increased profitability

3.2.2 GDP Growth

3.2.3 Inflation

3.2.4 Interest Rate

particularly valuation of loan collateral. The lower interest rate affects banks’ provisions for default

– the “retail deposits endowment effect” and the “quantity’ effect ” The “retail deposits endowment effect ” they say, is a result of banks pricing deposits

fall significantly below zero, low levels of market rates result in lower interest margins. The “quantity ” they describe, happens when the volume of bank loans and depo

4 Data and Methodology

managers profit off shareholder’s fundsceteris paribus

Table 1. Summary of variables

Variable name Variable Description Hypothesized

relationship with profitability

Dependent Profitability 𝑅𝑅𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖 annualized net profit/average total

assetsi t

𝑅𝑅𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖 annualized net profit/average capital.

i tIndependent Internal factors Bank group size 𝐿𝐿𝐿𝐿𝐿𝐿𝑅𝑅𝑖𝑖𝑖𝑖

Credit risk 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖𝑖𝑖 allowance for credit losses/total loan portfolio, gross

Liquidity 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖𝑖𝑖 cash & due from banks/ total deposits.

as the group’s basis of liquidity.

Income diversification

𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑖𝑖𝑖𝑖 annualized non-interest income/ annualized operating income

Management efficiency

𝑁𝑁𝑁𝑁𝑁𝑁𝐿𝐿𝑁𝑁𝑖𝑖𝑖𝑖 annualized non-interest expenses/ average total assets

Capitalization 𝐿𝐿𝐶𝐶𝐿𝐿𝑁𝑁𝑖𝑖𝑖𝑖 total capital/total assets

Interest spread 𝑖𝑖𝑖𝑖𝑖𝑖_𝑠𝑠𝐶𝐶𝑠𝑠𝐶𝐶𝑠𝑠𝑠𝑠𝑖𝑖𝑖𝑖t i.

External factors Exchange rate 𝐹𝐹𝐹𝐹𝐹𝐹𝑁𝑁𝐿𝐿𝑁𝑁𝑖𝑖

GDP growth 𝐺𝐺𝐶𝐶𝐿𝐿𝐺𝐺𝑖𝑖 t

Inflation 𝑁𝑁𝑁𝑁𝐹𝐹𝐿𝐿𝑖𝑖 t t

Interest rate 𝑙𝑙𝑠𝑠𝑠𝑠𝑖𝑖𝐶𝐶𝑖𝑖 t

Table 2. Descriptive statistics of variables used Variable Mean S.D. Min Max 𝐹𝐹𝑁𝑁𝑁𝑁𝑖𝑖𝑖𝑖 𝐹𝐹𝑁𝑁𝑁𝑁𝑖𝑖𝑖𝑖 𝐿𝐿𝑁𝑁𝐿𝐿𝑁𝑁𝑖𝑖𝑖𝑖 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖𝑖𝑖 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖𝑖𝑖 𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑖𝑖𝑖𝑖𝑁𝑁𝑁𝑁𝑁𝑁𝐿𝐿𝑁𝑁𝑖𝑖𝑖𝑖 𝐿𝐿𝐶𝐶𝐿𝐿𝑁𝑁𝑖𝑖𝑖𝑖

𝑖𝑖𝑖𝑖𝑖𝑖_𝑠𝑠𝐶𝐶𝑠𝑠𝐶𝐶𝑠𝑠𝑠𝑠𝑖𝑖𝑖𝑖𝐹𝐹𝐹𝐹𝐹𝐹𝑁𝑁𝐿𝐿𝑁𝑁𝑖𝑖 𝐺𝐺𝐶𝐶𝐿𝐿𝐺𝐺𝑖𝑖𝑁𝑁𝑁𝑁𝐹𝐹𝐿𝐿𝑖𝑖 𝑙𝑙𝑠𝑠𝑠𝑠𝑖𝑖𝐶𝐶𝑖𝑖

+ Values for ROAit, ROEit, LLTPit, CDepit, NIIOIit, NIETAit, TCTAit, int_spreadit, GDPgt, INFLt, and lratet are expressed in percentage (%).

– the “retail deposits endowment effect” and the “quantity’ effect ” The “retail deposits endowment effect ” they say, is a result of banks pricing deposits

fall significantly below zero, low levels of market rates result in lower interest margins. The “quantity ” they describe, happens when the volume of bank loans and depo

4 Data and Methodology

managers profit off shareholder’s fundsceteris paribus

Table 1. Summary of variables

Dependent Profitability 𝑅𝑅𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖 annualized net profit/average total

assetsi t

𝑅𝑅𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖 annualized net profit/average capital.

i tIndependent Internal factors Bank group size 𝐿𝐿𝐿𝐿𝐿𝐿𝑅𝑅𝑖𝑖𝑖𝑖

Credit risk 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖𝑖𝑖 allowance for credit losses/total loan portfolio, gross

Liquidity 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖𝑖𝑖 cash & due from banks/ total deposits.

as the group’s basis of liquidity.

Income diversification

𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑖𝑖𝑖𝑖 annualized non-interest income/ annualized operating income

Management efficiency

𝑁𝑁𝑁𝑁𝑁𝑁𝐿𝐿𝑁𝑁𝑖𝑖𝑖𝑖 annualized non-interest expenses/ average total assets

Capitalization 𝐿𝐿𝐶𝐶𝐿𝐿𝑁𝑁𝑖𝑖𝑖𝑖 total capital/total assets

Interest spread 𝑖𝑖𝑖𝑖𝑖𝑖_𝑠𝑠𝐶𝐶𝑠𝑠𝐶𝐶𝑠𝑠𝑠𝑠𝑖𝑖𝑖𝑖t i.

External factors Exchange rate 𝐹𝐹𝐹𝐹𝐹𝐹𝑁𝑁𝐿𝐿𝑁𝑁𝑖𝑖

GDP growth 𝐺𝐺𝐶𝐶𝐿𝐿𝐺𝐺𝑖𝑖 t

Inflation 𝑁𝑁𝑁𝑁𝐹𝐹𝐿𝐿𝑖𝑖 t t

Interest rate 𝑙𝑙𝑠𝑠𝑠𝑠𝑖𝑖𝐶𝐶𝑖𝑖 t

Table 2. Descriptive statistics of variables used Variable Mean S.D. Min Max 𝐹𝐹𝑁𝑁𝑁𝑁𝑖𝑖𝑖𝑖 𝐹𝐹𝑁𝑁𝑁𝑁𝑖𝑖𝑖𝑖 𝐿𝐿𝑁𝑁𝐿𝐿𝑁𝑁𝑖𝑖𝑖𝑖 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖𝑖𝑖 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖𝑖𝑖 𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑖𝑖𝑖𝑖𝑁𝑁𝑁𝑁𝑁𝑁𝐿𝐿𝑁𝑁𝑖𝑖𝑖𝑖 𝐿𝐿𝐶𝐶𝐿𝐿𝑁𝑁𝑖𝑖𝑖𝑖

𝑖𝑖𝑖𝑖𝑖𝑖_𝑠𝑠𝐶𝐶𝑠𝑠𝐶𝐶𝑠𝑠𝑠𝑠𝑖𝑖𝑖𝑖𝐹𝐹𝐹𝐹𝐹𝐹𝑁𝑁𝐿𝐿𝑁𝑁𝑖𝑖 𝐺𝐺𝐶𝐶𝐿𝐿𝐺𝐺𝑖𝑖𝑁𝑁𝑁𝑁𝐹𝐹𝐿𝐿𝑖𝑖 𝑙𝑙𝑠𝑠𝑠𝑠𝑖𝑖𝐶𝐶𝑖𝑖

+ Values for ROAit, ROEit, LLTPit, CDepit, NIIOIit, NIETAit, TCTAit, int_spreadit, GDPgt, INFLt, and lratet are expressed in percentage (%).

𝑃𝑃𝑖𝑖𝑖𝑖 = 𝛿𝛿0 + 𝛼𝛼′(𝐼𝐼𝑖𝑖𝑖𝑖) + 𝛽𝛽′(𝐸𝐸𝑖𝑖) + 𝜀𝜀𝑖𝑖𝑖𝑖𝑃𝑃𝑖𝑖𝑖𝑖 i t, 𝛿𝛿0 𝐼𝐼𝑖𝑖𝑖𝑖

i t, 𝐸𝐸𝑖𝑖 t, 𝛼𝛼′ 𝛽𝛽′

𝜀𝜀𝑖𝑖𝑖𝑖–

𝑅𝑅𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖 = 𝛿𝛿0 + 𝛼𝛼1(𝐿𝐿𝐿𝐿𝐿𝐿𝑅𝑅𝑖𝑖𝑖𝑖) + 𝛼𝛼2(𝐿𝐿𝐿𝐿𝐿𝐿𝑃𝑃𝑖𝑖𝑖𝑖) + 𝛼𝛼3(𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖𝑖𝑖) + 𝛼𝛼4(𝐿𝐿𝐼𝐼𝐼𝐼𝑅𝑅𝐼𝐼𝑖𝑖𝑖𝑖) + 𝛼𝛼4(𝐿𝐿𝐼𝐼𝐸𝐸𝐿𝐿𝑅𝑅𝑖𝑖𝑖𝑖)+ 𝛼𝛼5(𝑖𝑖𝑖𝑖𝑖𝑖_𝑠𝑠𝐶𝐶𝑠𝑠𝐶𝐶𝑠𝑠𝑠𝑠𝑖𝑖𝑖𝑖) + 𝛽𝛽1(𝐹𝐹𝐹𝐹𝑅𝑅𝑅𝑅𝐿𝐿𝐸𝐸𝑖𝑖) + 𝛽𝛽2(𝐺𝐺𝐶𝐶𝑃𝑃𝐺𝐺𝑖𝑖) + 𝛽𝛽3(𝐼𝐼𝐿𝐿𝐹𝐹𝐿𝐿𝑖𝑖)+ 𝛽𝛽4(𝑙𝑙𝑠𝑠𝑠𝑠𝑖𝑖𝐶𝐶𝑖𝑖) + 𝜀𝜀𝑖𝑖𝑖𝑖

𝑅𝑅𝑅𝑅𝐸𝐸𝑖𝑖𝑖𝑖 = 𝛿𝛿0 + 𝛼𝛼1(𝐿𝐿𝐿𝐿𝐿𝐿𝑅𝑅𝑖𝑖𝑖𝑖) + 𝛼𝛼2(𝐿𝐿𝐿𝐿𝐿𝐿𝑃𝑃𝑖𝑖𝑖𝑖) + 𝛼𝛼3(𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖𝑖𝑖) + 𝛼𝛼4(𝐿𝐿𝐼𝐼𝐼𝐼𝑅𝑅𝐼𝐼𝑖𝑖𝑖𝑖) + 𝛼𝛼4(𝐿𝐿𝐼𝐼𝐸𝐸𝐿𝐿𝑅𝑅𝑖𝑖𝑖𝑖)+ 𝛼𝛼5(𝑖𝑖𝑖𝑖𝑖𝑖_𝑠𝑠𝐶𝐶𝑠𝑠𝐶𝐶𝑠𝑠𝑠𝑠𝑖𝑖𝑖𝑖) + 𝛽𝛽1(𝐹𝐹𝐹𝐹𝑅𝑅𝑅𝑅𝐿𝐿𝐸𝐸𝑖𝑖) + 𝛽𝛽2(𝐺𝐺𝐶𝐶𝑃𝑃𝐺𝐺𝑖𝑖) + 𝛽𝛽3(𝐼𝐼𝐿𝐿𝐹𝐹𝐿𝐿𝑖𝑖)+ 𝛽𝛽4(𝑙𝑙𝑠𝑠𝑠𝑠𝑖𝑖𝐶𝐶𝑖𝑖) + 𝜀𝜀𝑖𝑖𝑖𝑖

5 Results

Table 3. Correlation matrix for independent variables 𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝒊𝒊𝒊𝒊 𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝒊𝒊𝒊𝒊 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝒊𝒊𝒊𝒊 𝑳𝑳𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝒊𝒊𝒊𝒊 𝑳𝑳𝑵𝑵𝑵𝑵𝑳𝑳𝑳𝑳𝒊𝒊𝒊𝒊 𝑳𝑳𝑪𝑪𝑳𝑳𝑳𝑳𝒊𝒊𝒊𝒊 𝒊𝒊𝒊𝒊𝒊𝒊_𝒔𝒔𝑪𝑪𝒔𝒔𝑪𝑪𝒔𝒔𝒔𝒔𝒊𝒊𝒊𝒊𝒊𝒊 𝑭𝑭𝑭𝑭𝑭𝑭𝑳𝑳𝑳𝑳𝑵𝑵𝒊𝒊𝒊𝒊 𝑮𝑮𝑪𝑪𝑳𝑳𝑮𝑮𝒊𝒊𝒊𝒊 𝑵𝑵𝑳𝑳𝑭𝑭𝑳𝑳𝒊𝒊𝒊𝒊 𝒍𝒍𝒔𝒔𝒔𝒔𝒊𝒊𝑪𝑪𝒊𝒊𝒊𝒊

𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝒊𝒊𝒊𝒊 1.00

𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝒊𝒊𝒊𝒊 -0.77 1.00 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝒊𝒊𝒊𝒊 -0.37 0.44 1.00

𝑳𝑳𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝒊𝒊𝒊𝒊 -0.06 -0.03 0.25 1.00

𝑳𝑳𝑵𝑵𝑵𝑵𝑳𝑳𝑳𝑳𝒊𝒊𝒊𝒊 -0.56 0.51 0.21 -0.10 1.00 𝑳𝑳𝑪𝑪𝑳𝑳𝑳𝑳𝒊𝒊𝒊𝒊 -0.58 0.64 0.62 -0.15 0.31 1.00

𝒊𝒊𝒊𝒊𝒊𝒊_𝒔𝒔𝑪𝑪𝒔𝒔𝑪𝑪𝒔𝒔𝒔𝒔𝒊𝒊𝒊𝒊𝒊𝒊 -0.62 0.58 0.24 -0.40 0.42 0.65 1.00

𝑭𝑭𝑭𝑭𝑭𝑭𝑳𝑳𝑳𝑳𝑵𝑵𝒊𝒊 0.09 0.02 -0.09 -0.38 -0.10 0.16 -0.02 1.00 𝑮𝑮𝑪𝑪𝑳𝑳𝑮𝑮𝒊𝒊 0.00 -0.01 0.05 0.00 -0.01 -0.03 0.03 0.01 1.00

𝑵𝑵𝑳𝑳𝑭𝑭𝑳𝑳𝒊𝒊 -0.06 -0.13 -0.32 0.12 0.01 -0.19 0.03 0.04 0.01 1.00

𝒍𝒍𝒔𝒔𝒔𝒔𝒊𝒊𝑪𝑪𝒊𝒊 -0.07 -0.20 -0.41 0.16 -0.09 -0.22 0.04 0.08 -0.05 0.63 1.00

Table 4. Multivariate regression results Model 1 – Dependent variable: ROA

Variables Coefficient S.E. t-stat p>|t|

constant Internal factors

LNTA LLTP CDep NIIOI NIETA TCTA

int_spread External

FXRATE GDPg INFL lrate

Model 2 – Dependent variable: ROE Variables Coefficient S.E. t-stat p>|t|

constant Internal

int_spread External

5.1 Effects of Internal Factors on Profitability

𝑃𝑃𝑖𝑖𝑖𝑖 = 𝛿𝛿0 + 𝛼𝛼′(𝐼𝐼𝑖𝑖𝑖𝑖) + 𝛽𝛽′(𝐸𝐸𝑖𝑖) + 𝜀𝜀𝑖𝑖𝑖𝑖𝑃𝑃𝑖𝑖𝑖𝑖 i t, 𝛿𝛿0 𝐼𝐼𝑖𝑖𝑖𝑖

i t, 𝐸𝐸𝑖𝑖 t, 𝛼𝛼′ 𝛽𝛽′

𝜀𝜀𝑖𝑖𝑖𝑖–

𝑅𝑅𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖 = 𝛿𝛿0 + 𝛼𝛼1(𝐿𝐿𝐿𝐿𝐿𝐿𝑅𝑅𝑖𝑖𝑖𝑖) + 𝛼𝛼2(𝐿𝐿𝐿𝐿𝐿𝐿𝑃𝑃𝑖𝑖𝑖𝑖) + 𝛼𝛼3(𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖𝑖𝑖) + 𝛼𝛼4(𝐿𝐿𝐼𝐼𝐼𝐼𝑅𝑅𝐼𝐼𝑖𝑖𝑖𝑖) + 𝛼𝛼4(𝐿𝐿𝐼𝐼𝐸𝐸𝐿𝐿𝑅𝑅𝑖𝑖𝑖𝑖)+ 𝛼𝛼5(𝑖𝑖𝑖𝑖𝑖𝑖_𝑠𝑠𝐶𝐶𝑠𝑠𝐶𝐶𝑠𝑠𝑠𝑠𝑖𝑖𝑖𝑖) + 𝛽𝛽1(𝐹𝐹𝐹𝐹𝑅𝑅𝑅𝑅𝐿𝐿𝐸𝐸𝑖𝑖) + 𝛽𝛽2(𝐺𝐺𝐶𝐶𝑃𝑃𝐺𝐺𝑖𝑖) + 𝛽𝛽3(𝐼𝐼𝐿𝐿𝐹𝐹𝐿𝐿𝑖𝑖)+ 𝛽𝛽4(𝑙𝑙𝑠𝑠𝑠𝑠𝑖𝑖𝐶𝐶𝑖𝑖) + 𝜀𝜀𝑖𝑖𝑖𝑖

𝑅𝑅𝑅𝑅𝐸𝐸𝑖𝑖𝑖𝑖 = 𝛿𝛿0 + 𝛼𝛼1(𝐿𝐿𝐿𝐿𝐿𝐿𝑅𝑅𝑖𝑖𝑖𝑖) + 𝛼𝛼2(𝐿𝐿𝐿𝐿𝐿𝐿𝑃𝑃𝑖𝑖𝑖𝑖) + 𝛼𝛼3(𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖𝑖𝑖) + 𝛼𝛼4(𝐿𝐿𝐼𝐼𝐼𝐼𝑅𝑅𝐼𝐼𝑖𝑖𝑖𝑖) + 𝛼𝛼4(𝐿𝐿𝐼𝐼𝐸𝐸𝐿𝐿𝑅𝑅𝑖𝑖𝑖𝑖)+ 𝛼𝛼5(𝑖𝑖𝑖𝑖𝑖𝑖_𝑠𝑠𝐶𝐶𝑠𝑠𝐶𝐶𝑠𝑠𝑠𝑠𝑖𝑖𝑖𝑖) + 𝛽𝛽1(𝐹𝐹𝐹𝐹𝑅𝑅𝑅𝑅𝐿𝐿𝐸𝐸𝑖𝑖) + 𝛽𝛽2(𝐺𝐺𝐶𝐶𝑃𝑃𝐺𝐺𝑖𝑖) + 𝛽𝛽3(𝐼𝐼𝐿𝐿𝐹𝐹𝐿𝐿𝑖𝑖)+ 𝛽𝛽4(𝑙𝑙𝑠𝑠𝑠𝑠𝑖𝑖𝐶𝐶𝑖𝑖) + 𝜀𝜀𝑖𝑖𝑖𝑖

5 Results

Table 3. Correlation matrix for independent variables 𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝒊𝒊𝒊𝒊 𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝒊𝒊𝒊𝒊 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝒊𝒊𝒊𝒊 𝑳𝑳𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝒊𝒊𝒊𝒊 𝑳𝑳𝑵𝑵𝑵𝑵𝑳𝑳𝑳𝑳𝒊𝒊𝒊𝒊 𝑳𝑳𝑪𝑪𝑳𝑳𝑳𝑳𝒊𝒊𝒊𝒊 𝒊𝒊𝒊𝒊𝒊𝒊_𝒔𝒔𝑪𝑪𝒔𝒔𝑪𝑪𝒔𝒔𝒔𝒔𝒊𝒊𝒊𝒊𝒊𝒊 𝑭𝑭𝑭𝑭𝑭𝑭𝑳𝑳𝑳𝑳𝑵𝑵𝒊𝒊𝒊𝒊 𝑮𝑮𝑪𝑪𝑳𝑳𝑮𝑮𝒊𝒊𝒊𝒊 𝑵𝑵𝑳𝑳𝑭𝑭𝑳𝑳𝒊𝒊𝒊𝒊 𝒍𝒍𝒔𝒔𝒔𝒔𝒊𝒊𝑪𝑪𝒊𝒊𝒊𝒊

𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝒊𝒊𝒊𝒊 1.00

𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝒊𝒊𝒊𝒊 -0.77 1.00 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝒊𝒊𝒊𝒊 -0.37 0.44 1.00

𝑳𝑳𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝒊𝒊𝒊𝒊 -0.06 -0.03 0.25 1.00

𝑳𝑳𝑵𝑵𝑵𝑵𝑳𝑳𝑳𝑳𝒊𝒊𝒊𝒊 -0.56 0.51 0.21 -0.10 1.00 𝑳𝑳𝑪𝑪𝑳𝑳𝑳𝑳𝒊𝒊𝒊𝒊 -0.58 0.64 0.62 -0.15 0.31 1.00

𝒊𝒊𝒊𝒊𝒊𝒊_𝒔𝒔𝑪𝑪𝒔𝒔𝑪𝑪𝒔𝒔𝒔𝒔𝒊𝒊𝒊𝒊𝒊𝒊 -0.62 0.58 0.24 -0.40 0.42 0.65 1.00

𝑭𝑭𝑭𝑭𝑭𝑭𝑳𝑳𝑳𝑳𝑵𝑵𝒊𝒊 0.09 0.02 -0.09 -0.38 -0.10 0.16 -0.02 1.00 𝑮𝑮𝑪𝑪𝑳𝑳𝑮𝑮𝒊𝒊 0.00 -0.01 0.05 0.00 -0.01 -0.03 0.03 0.01 1.00

𝑵𝑵𝑳𝑳𝑭𝑭𝑳𝑳𝒊𝒊 -0.06 -0.13 -0.32 0.12 0.01 -0.19 0.03 0.04 0.01 1.00

𝒍𝒍𝒔𝒔𝒔𝒔𝒊𝒊𝑪𝑪𝒊𝒊 -0.07 -0.20 -0.41 0.16 -0.09 -0.22 0.04 0.08 -0.05 0.63 1.00

Table 4. Multivariate regression results Model 1 – Dependent variable: ROA

Variables Coefficient S.E. t-stat p>|t|

constant Internal factors

int_spread External

Model 2 – Dependent variable: ROE Variables Coefficient S.E. t-stat p>|t|

constant Internal

int_spread External

5.1 Effects of Internal Factors on Profitability

An assessment of the bank groups’ interest spread provides more evidence of the exis– –

of the banks’ client base. Universal and commercial banks deal with much larger companies, which

Figure 11. Range of Interest Spread of the Bank Groups from 2008 to 2019

3.37 3.23

6.705.13

Mean Interest Spread

*Interest Spread = Earning Asset Yield - Funding Cost

5.2 Effects of External Factors on Profitability

It is important to understand these results in the context of the Philippines’ current account. For

An assessment of the bank groups’ interest spread provides more evidence of the exis– –

of the banks’ client base. Universal and commercial banks deal with much larger companies, which

Figure 11. Range of Interest Spread of the Bank Groups from 2008 to 2019

3.37 3.23

6.705.13

Mean Interest Spread

*Interest Spread = Earning Asset Yield - Funding Cost

5.2 Effects of External Factors on Profitability

It is important to understand these results in the context of the Philippines’ current account. For

Figure 12. Balance of Payments, Philippines

re GDP growth and inflation are increasing, the central bank’s main policy

Kohlscheen et al. (2018) argue that credit demand growth wins the “horse race” over GDP growth in

6 Conclusion

––

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Billio

– –

Figure 12. Balance of Payments, Philippines

re GDP growth and inflation are increasing, the central bank’s main policy

Kohlscheen et al. (2018) argue that credit demand growth wins the “horse race” over GDP growth in

6 Conclusion

––

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Billio

– –

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Financial inclusion in the Philippines.

Banking statistics - Banking selected performance indicators

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Financial system accounts, Number of financial institutions

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