Despite enjoying robust economic growth, the Philippines' retail banking sector lags behind many of its neighbouring peers, with persistently high operating costs.
The Philippine economy is on a roll and so are an emerging consumer class. The A Class customer segment with an earning power between of $3,000-15,000 is predicted to swell to 16 million, three times more than that of Singapore in 2015, around 10% of the entire population. This customer bracket will further increase to 40 million by 2030, as potential retail financial services customers continue to look for new venues to invest their money in an environment of limited choices.
The Philippines are at the start of a consumption bracket ($1-5k of real income) where rapid changes in consumption patterns are expected to take place between now and 2050, according to a HSBC report on the rise of the emerging markets’ middle class. Massive income per capita growth and a rapidly growing population in the Philippines, reaching 155 million in 2050, will help support a huge rise in consumer spending. Expenditure on housing and automobiles during this period will increase notably, benefiting financial services such as mortgages, consumer finance and automobile loans. Growth in spending on dining, recreation, and personal care will also have grown by multiples of at least 25 times the level seen today in the Philippines.
In 2013, the remittance business is predicted to grow by 7% and consumer finance by 15% YoY. Given an absence of regulation over interest rate ceilings (for consumer finance) in the foreseeable future - coupled with current interest rates of up to 30% and an ROE of between 30-40% in consumer finance and SME banking - Philippine banks enjoy high margin businesses but punch well below their potential. Retail financial services industries generate between 3-5% return on assets. This compares to 1-2% on average for the Philippines.
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