PHILIPPINE COUNTRY REPORT TO THE ASIAN FINANCIAL SERVICES ASSOCIATION 2017 ASIAN FINANCIAL SERVICES ASSOCIATION GENERAL MEMBERSHIP MEETING Bangkok, Thailand Submitted by: PROTACIO C. BANTAYAN, JR. President ORIX METRO LEASING AND FINANCE CORPORATION PHILIPPINES PHILIPPINE FINANCE ASSOCIATION Makati City PHILIPPINES THE PHILIPPINE ECONOMY: Philippine GDP at 6.8% in 2016, the Fastest Growth in the last Three Years The Philippine Economy grew by 6.8% in 2016, the fastest in the last three years, coming off the heels of an election year amidst a volatile global economic environment. Local economist credited the local economy’s good performance to domestic demand, particularly in terms of investment and consumption, which are largely supported by the strong remittances and more local jobs in outsourcing, tourism and construction sectors. Manufacturing and Services Sectors also contributed to the growth in 2016.

Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

GDP growth % 7.1 4.1 1.1 7.6 3.6 6.8 7.2 6.1 5.8 6.8

According to an HSBC economic report, remittance from Filipino Overseas workers have been tracking a 5% growth in 2016, higher than the original forecast of 4%, while the peso depreciation, which increased the value of these remittances, provided a further boost in local consumption. On the other hand, Fixed Capital Investments have grown 23% year-on-year with investments in construction, particularly Public Construction, growing by 23% during the year. Investments in Durable Equipment also reported robust growth with 14 out of 20 types of asset investments being tracked contributing to the 26% year-on-year expansion in this sector. Investment in road vehicles grew 32% while those for industrial machineries expanded by nearly 30%. The increase in the purchases of capital and durable goods contributed to the growths in the Manufacturing and Services Sectors. For the manufacturing sector, the Volume of Production Index (VoPI) grew 14.4% in 2016, significantly higher than the 2.5% recorded in 2015. THE PHILIPPINE FINANCIAL SERVICE SECTOR: The Philippine Banks The Philippine Financial Sector continues to be resilient, supporting the growth trajectory of the Philippine Economy. Banks, including universal and Commercial Banks, continued to dominate the sector in terms of resources and offices. As of June 2016, the total assets of the banking industry has reached Php12.5 Trillion, 12.2% higher from the previous year’s level. Loans in particular grew 15.4% to Php6.8 Trillion, and these went mostly to productive endeavors, helping to sustain the pace of growth of the local economy.

Source: BSP Philippine Banking Report 1st Semester 2016

Non-Banking Financial Institutions, including Finance Companies, also experienced sustained growths in their resources and lending portfolios. Finance Companies with Quasi-bank license, in particular, saw their total resources grew to Php206 Billion in June 2016 from Php198 Billion in the prior year. Around 54% of the total resources are loans to various sectors.

Although the total resources of Non-Bank Financial Institutions pale in comparison with those of Universal and Commercial Banks, they boast of much bigger number of players with a wide physical network, particularly in the countryside. According to a 2014 Securities and Exchange Commission Report, there are an estimated 600 active registered finance companies in the Philippines. On the other hand, the BSP reported that as of June 2016, there were 79 Commercial and Universal Banks, 26 thrift banks and 12 rural and cooperative banks. However, these banks have 10,318 offices and branches locally in selected locations internationally. Fitch ratings, in its most recent report, maintained its “Stable” rating and sector outlook for Philippine Banks, “despite a tougher year ahead as the United States adopts a protectionist stance” while China, another major Philippine Trading Partner, builds up its Corporate Debt. Fitch cites in particular, the supportive economic environment, boosted by the new Administration’s plan to accelerate infrastructure spending, that is expected to translate to robust loan demand. Fitch Ratings maintains a stable outlook for Philippine Banks in 2017 with growth drivers continuing to sustain credit demand, particularly into infrastructure, real estate and other business investment activities. On the other hand, the strong consumer confidence will continue to support household borrowings.

THE PHILIPPINE FINANCE SECTOR: The Leasing and Financing Industry

To regulate and promote the activities of the financing and leasing companies in the country, the Republic Act No. 5980 or “The Financing Company Act“ was promulgated in 1969 (later amended through Republic Act No. 8556 in 1998). The Act also established the supervisory authority of the Securities and Exchange Commission (SEC) over the industry. From the 1970s onwards, the industry has grown considerably in terms of the number of active players and the total volume of business generated by these firms. From a sector dominated by purely financing companies, the industry now counts among its members the subsidiaries or affiliates of major commercial banks and foreign leasing companies. The issuance by the Securities and Exchange Commission (SEC) Circular 13 in 2001, which required the conversion of lending companies into financing companies, saw the ranks of the Philippine Leasing and Finance industry swell to around 600 players, however, only a handful of these companies are actively engaged in the business of leasing. Based on available data as of end of 2015, the Top fifteen (15) players in the industry reported combined assets of Php148.1 Billion, up 17.6% from the 2014 total of Php126.0 Billion. Toyota Financial Services (TFS) retained its top position in terms of total assets with Php45.3 Billion accounting for about 30% of the total for the top 15 players.

2015 2014 2015-2014

1 TOYOTA FINANCIAL 45,259,667,907.00 40,491,396,517.00 11.78

2 BDO LFI 34,517,600,000.00 29,249,900,000.00 18.01

3 ORIX METRO LEASING 27,428,328,818.00 21,991,728,315.00 24.72

4 BPI CENTURY TOKYO LFC 8,758,707,000.00 8,135,952,000.00 7.65

5 PNBIBJL LFC 6,742,171,000.00 5,439,803,000.00 23.94

6 UCPB LFC 4,483,550,290.00 3,934,508,847.00 13.95

7 RCBC LFC 4,201,061,356.00 3,216,121,107.00 30.63

8 LBP LEASING 3,974,468,889.00 4,005,368,716.00 (0.77)

9 BOTLFC 3,420,805,386.00 2,359,604,634.00 44.97

10 ALGO LEASING 2,050,949,401.77 1,354,427,392.57 51.43

11 DBP LEASING 2,042,322,463.25 1,206,049,077.12 69.34

12 WORLD PARTNERS FINANCE 1,674,952,743.00 1,388,842,913 20.60

13 SBM 1,460,509,771.00 1,133,433,000.00 28.86

14 FIRST UNITED FINANCE 1,091,545,000.00 1,029,484,267.00 6.03

15 ASIA UNITED LFC 1,053,800,000.00 1,069,185,000.00 (1.44)

148,160,440,025.02 126,005,804,785.69 17.58

RANK

TOTAL ASSETS

GROWTH (%)COMPANY NAME

TOTAL ASSETS

The growth of the industry’s total resources was fueled primarily by the expansion in the leasing and financing portfolio, particularly for automobiles, transport equipment, construction and heavy equipment, and other industrial and manufacturing equipment. Below are the Loans receivables portfolio of the top 15 finance companies for the years 2014 and 2015. Meanwhile, there are two types of leases recognized in the country: operating lease and financial lease. In the Philippines, operating leases are mostly offered by construction equipment dealers, rent-a-car companies, and lately, by computer dealers. Financial leases, on the other hand, are extended mainly by leasing and financing companies, majority of which are affiliated with commercial and universal banks. Below are the Leasing portfolios of the top industry players for the years 2014 and 2015:

2015

Rank 2015 2014 # 2015-2014

1 ORIX METRO LEASING 15,238,354,814.00 11,343,068,722.00 34.34

2 BDO LFI 12,106,300,000.00 10,573,000,000.00 14.50

3 TOYOTA FINANCIAL 3,711,741,566.84 4,878,733,183.24 (23.92)

4 PNBIBJL LFC 3,062,406,144.00 2,717,061,795.00 12.71

5 UCPB LFC 2,228,125,234.00 1,647,689,242.00 35.23

6 LBP LEASING 1,805,577,463.21 1,559,926,581.35 15.75

7 RCBC LFC 1,571,894,000.00 1,557,999,332.00 0.89

8 WORLD PARTNERS BANK 1,487,433,484.00 1,321,681,248 # 12.54

9 ALGO LFC 1,238,245,163.81 997,923,996.34 24.08

10 ASIA UNITED LFC 1,230,898,000.00 1,392,310,000.00 (11.59)

11 FIRST UNITED FINANCE 977,789,320.45 941,918,227.00 3.81

12 DBP LEASING 740,716,685.73 122,117,865.92 506.56

13 BPI CENTURY TOKYO LFC 691,986,118.96 280,366,000.00 146.82

14 UNIVERSAL LMS FLC 594,728,000.00 535,027,000.00 11.16

15 AEON CREDIT SERVICE 382,251,028.50 182,641,956.29 109.2947,068,447,023.50 40,051,465,149.14 17.52

Total Loans & Other

Receivables (%)Company Name

Loans & Other Receivables

2015

Rank 2015 2014 # 2015-2014

1 TOYOTA FINANCIAL 32,340,128,272.51 27,604,806,117.88 17.15

2 BDO LFI 15,937,100,000.00 13,570,400,000.00 17.44

3 BPI CENTURY TOKYO LFC 8,147,168,938.23 7,257,954,000.00 12.25

4 ORIX METRO LEASING 5,108,613,234.00 4,870,084,781.00 4.90

5 PNBIBJL LFC 3,213,674,225.00 2,314,885,637.00 38.83

6 BOTLFC 2,845,679,149.00 2,208,072,408.00 28.88

7 RCBC LFC 1,934,912,000.00 1,119,957,986.00 72.77

8 LBP LEASING 1,570,740,082.00 1,900,471,909.88 (17.35)

9 SBM 1,224,208,294.00 903,672,000.00 35.47

10 DBP LEASING 1,136,818,248.00 647,822,416.20 75.48

11 ASIA UNITED LFC 1,043,342,000.00 1,172,675,000.00 (11.03)

12 UCPB LFC 849,864,576.00 1,602,157,158.00 (46.95)

13 ALGO LEASING 463,356,539.90 356,503,396.23 29.97

14 UNIVERSAL LMS FLC 457,931,000.00 460,556,000.00 (0.57)

15 SUMMIT LFC 168,220,000.00 188,358,810.00 (10.69)

76,441,756,558.64 66,178,377,620.19 15.51

Total Lease

Receivables (%)Company NameLease Receivables

In terms of Funding, Leasing and Finance companies, except those authorized by the Bangko Sentral ng Pilipinas (BSP) to operate with a quasi-banking license, are not permitted to accept deposits and are limited by the 19-lender requirement under the R.A. No. 8556. They may, however, issue bonds provided the issuer satisfies the requirements of the Securities and Exchange Commission (SEC). The new rules under the R.A. No. 8556 leave the discretion to the SEC, in consultation with the BSP, to prescribe financial ratio requirements including Debt-to-Equity and Risk Asset-to-Capital ratios. Currently, the SEC prescribes a maximum Debt-to-Equity ratio of 3:1 for short-term commercial papers; 4:1 for long term commercial paper issuers; and, 5:1 for non-commercial issuers. For majority of the Leasing and Finance companies, however, bank loans account for bulk of their funding. These are either short-term or medium term with rates currently ranging between 3% and 6%. This reliance on short- and medium-term funding underscores the lack of adequate long-term fund sources in the country’s financial markets. This situation results in the leasing firms being exposed to interest and liquidity mismatches. Nevertheless, for the major leasing companies, which are mostly affiliated with banks from where they source most of their funds, these risks are somehow mitigated. Then again, this highlights the overarching need for the industry to seek out alternative sources of liquidity. Presented below are the Liabilities and Equity profiles of the top industry players for the years 2014 and 2015:

2015 2014

1 TOYOTA FINANCIAL 40,732,060,694.00 36,472,888,701.00

2 BDO LFI 29,294,900,000.00 24,264,100,000.00

3 ORIX METRO LEASING 22,929,408,393.00 18,315,866,150.00

4 BPI CENTURY TOKYO LFC 6,775,765,000.00 6,263,618,000.00

5 PNBIBJL LFC 6,002,036,000.00 4,786,251,000.00

6 RCBC LFC 3,562,514,178.00 2,600,783,641.00

7 UCPB LFC 2,797,311,014.00 2,421,607,732.00

8 LBP LEASING 2,572,588,820.00 2,678,922,432.00

9 BOTLFC 2,414,197,607.00 1,860,649,812.00

10 ALGO LEASING 1,828,397,216.43 1,159,275,819.19

11 WORLD PARTNERS FINANCE 1,369,230,705.00 1,206,868,794.00

12 SBM 1,115,585,040.00 816,971,000.00

13 DBP LEASING 1,048,565,615.16 358,075,121.97

14 FIRST UNITED FINANCE 909,147,000.00 864,265,597.00

15 ASIA UNITED LFC 842,840,000.00 841,957,000.00

124,194,547,282.59 104,912,100,800.16

COMPANY NAME TOTAL LIABILITIESRANK

2015 2014

1 BDO LFI 5,222,700,000.00 4,985,800,000.00

2 TOYOTA FINANCIAL 4,527,607,213.00 4,018,507,816.00

3 ORIX METRO LEASING 4,498,920,425.00 3,675,862,165.00

4 BPI CENTURY TOKYO LFC 1,982,942,000.00 1,872,334,000.00

5 UCPB LFC 1,686,239,276.00 1,512,901,115.00

6 LBP LEASING 1,401,880,069.00 1,326,446,284.00

7 BOTLFC 1,006,607,779.00 498,954,822.00

8 DBP LEASING 993,756,848.09 847,973,954.78

9 PNBIBJL LFC 740,135,000.00 653,552,000.00

10 RCBC LFC 638,547,178.00 615,337,466.00

11 SBM 344,924,731.00 316,461,000.00

12 WORLD PARTNERS FINANCE 305,722,038.00 181,974,119.00

13 ALGO LEASING 222,552,185.34 195,151,573.38

14 ASIA UNITED LFC 220,960,000.00 227,228,000.00

15 FIRST UNITED FINANCE 182,398,000.00 165,218,670.00

23,975,892,742.43 21,093,702,985.16

RANK

COMPANY NAMEEQUITY

THE PHILIPPINE FINANCE SECTOR: Recent Developments, Constraints ad Opportunities

The Philippine Finance Sector is currently riding high on the solid performance of the local economy. The robust consumer confidence continued to support household borrowings while demand for credit remained strong, supporting in particular public and private sector investments in infrastructure, construction/real estate development and expansion in manufacturing capacities. Analysts predict the average GDP in 2017 to grow between 6.5% to 7.5%, but that the growth will largely hinge on the realization of the government’s infrastructure spending initiatives. The multiplier effect that will result from these government initiatives will not only help spur further economic growth, but will drive corresponding demand for services from the sectors supporting these projects, such as construction service companies, hauling and transport service providers, among others. This augurs well for the finance and leasing industry, which has been supporting these sectors for the longest time. However, the industry continues to face the following constraints and possible threats:

New Law allowing Full Foreign Ownership in Finance Companies Republic Act 10881 or an Act amending the investment restriction on adjustment, lending and financing companies as well as investment houses lapsed into law in July 2016. This new law allows full or 100% foreign ownership in lending and finance companies, as previously, foreign investors were only allowed to own up to 60% of finance and landing companies. Although this Act is expected to boost the attractiveness of the country as an investment destination, local financing and lending companies, particularly the smaller players are threatened by this development citing that they may be eased out considering the financial muscle and sophistication of foreign players. The recent liberalization of the foreign investment in finance companies was followed shortly by the rationalization of SEC procedures for registering finance and lending companies. These included the streamlining of processes related to securing of certificate to operate as a finance or lending company. It reduced the number of documents to be submitted from 23 to 15. Tax Reform Bill may have Potential Impact on Automobile Sales and Financing The Philippine Congress is currently deliberating on a proposed Comprehensive Tax Reform (CTRP) Bill that will reduce both personal and corporate income tax rates to spur higher consumption and induce more investments. However, the said Bill also contains compensating revenue sourcing measures that includes increasing excise taxes on fuel and automobiles, and expanding the Value Added Tax (VAT) base by limiting exemptions to raw foods and other necessities. Under the Bill, the excise tax on petroleum products will increase between 2017 and 2019. The Bill also imposes an ad valorem tax on automobiles based on the manufacturers’ or importers’ selling price, net of excise tax and VAT. This tax reform package for automobiles will more than double existing excise tax of 2% to 5% for automobiles with prices below Php600,000; 20% for those selling for Php600,000 to Php1.1 Million; 40% for those with prices ranging from Php1.1 Million to Php2.1 Million; and 60% for vehicles selling above Php2.1 Million.

These new tax measures is aimed at raising revenues for the government, but the new automobile tax will raise the costs of new vehicles by up to Php400,000 to Php600,000, posing a downside risk to vehicle sales and therefore vehicle financing once the law is passed. Automobile financing accounts for a fairly significant portion of the financing companies’ portfolios. The Chamber of Automotive Manufacturers of the Philippines, Inc. (CAMPI) has prepared a position paper against the imposition of the additional tax on vehicles, citing its possible impact on their production capacities. Regulatory and Accounting Concerns The Philippine leasing and financing industry continues to lag behind its counterparts in the more developed economies as a result of the absence of any concrete government program to support the industry. For one, the leasing industries in the US, Japan and Korea benefit from the tax incentives provided to their lessees, which tend to spur demand for their leasing products. Needless to say, the lack of knowledge on the concept of leasing among regulators tends to limit their appreciation of the benefits of the leasing to the national development. Looming large in the horizon is the impending adoption and implementation of IFRS16 on Leases, slated in 2019, which requires full disclosure on lease transactions and the recording of the corresponding assets and liabilities on the books of the lesees. This could significantly impact the market for leases as the off-books advantage of operating leases will no longer be a benefit to clients. Lack of Long Term and Low Cost Fund Sources. A perennial problem that has hounded the industry is the lack of accessible long term and low cost fund sources. The majority of funds raised by the industry are short- to medium-term, thus restricting the terms of leases to 2 to 3 years. Likewise, other sources of funding such as commercial papers, insurance money and trust money have high costs vis-a-vis the deposit funds generated by banks.

The lifting of the moratorium on the granting of Quasi-banking (QB) license has given financing companies the opportunity to explore fund sources beyond the 19-lender rule mandated by the Financing Company Act (RA 8556), which puts a cap on the number of creditors, including institutional lenders that the leasing companies should have. A QB licensed company is allowed to issue deposit substitutes in the form of Promissory notes to an unlimited number of creditors, or the public at large. Limited Market Appreciation on the Benefits of Leasing The growth of leasing in the country is dependent, in large part, on the level of awareness among potential lessees. Unfortunately, the level of market knowledge of leasing remains limited. Although no reliable data is available, the percent of equipment leasing activities against all modes of equipment acquisition has been estimated at only 3% to 5%. In fact, the total outstanding leasing portfolio as of end of 2015 account for less than 1% of the total outstanding loans of commercial banks. Competition from non-traditional players for both Loans and Leases The recent general downtrend in funding rates, resulting from the vastly improved market and economic condition in the country and the resulting high level of liquidity in the market, have intensified competition not only from among industry players, but also from Banks who have become more aggressive in pursuing consumer and retail markets for trucks and equipment, assets which they didn’t normally finance. In-house financing offered by well-capitalized dealers and suppliers are also becoming a real threat to Finance companies’ business.

REFERENCES:

Philippine Finance Association. “2015 financial information on top leasing and finance industry players.”

“New Law now allows full Foreign Ownerships in Finance Companies”. Lawrence Agcaoili. The Philippine Star. August 2,

2016

“Financing Business made Easier”. Angela M. Pascua. Business World on-Line, March 1, 2017

www.bsp.gov.ph. Bangko Sentral ng Pilipinas – Status Report on the Financial System, 1st Semester 2016

www.rappler.com. “Fitch keeps stable outlook for PH Banks in 2017.” Chrisee Dela Paz, Dec. 13, 2016

www.rappler.com. “How did the PH Economy perform in 2016.” JC Punongbayan, Dec. 26, 2016

“Philippine Economy posts 6.6 percent GDP Growth in the Fourth Quarter of 2016; 6.8% in 2016.” Lisa Grace Bersales,

Philippine Statistics Authority

www.cnnphilippines.com. “2016 Economic Growth Fastest in Three years.” CN Philippines Staff, January 26, 2017.

“The Philippine Banking System: the Past, the Present and the Future.” BSP Governor Amando M. Tetangco, Jr. January

10, 2017

“2017 Vehicle Forecast: More Taxes, Less Vehicle Sales, but Traffic the Same.” Raymond Gregory, Malaya Business

Insights, January 3, 2017

“Industry Position Paper vs. Automobile Tax Readied.” Roy Stephen Canivel, Business World on-Line, Nov. 19, 2016