House of the year, Philippines: Bank of the Philippine Islands

Asia Risk Awards 2020

With the ongoing threat of the Covid-19 pandemic and the reality of a new normal, the Bank of the Philippine Islands (BPI) activated business continuity and contingency plans in early 2020 to enable the bank to continue serving its customers, while ensuring the safety and well-being of its employees.

Compared with the other economic crises, such as the Asian Financial Crisis or the Global Financial Crisis, Marita Socorro Gayares, BPI’s chief risk officer, notes this is the first time that all of the bank’s risk pillars have seen significant stress as a result of Covid-19, particularly in terms of operational and cybersecurity risk.

“This time around, operational risk plays an equally important role aside from market and credit risk. In terms of operational risk, we have provided an uninterrupted service to our customers and have invested a lot in business continuity in the past year, even prior to the pandemic,” she says.

Building on its digital strategy

BPI first began its digital transformation strategy in 2016 and has continued to build on it over the past 12 months. The bank has implemented a mostly-automated operational risk-management system to help give a complete view of the bank’s risks. Other recent initiatives include the digitisation of the bank’s expected credit-loss models, under the Philippine Financial Reporting Standards (PFRS), and automation of prudential risk reporting to the Philippine central bank.

At the core of the bank’s digitalisation initiative is its risk management dashboard, a one-page comprehensive report which provides an overall view of the bank’s risk exposures in credit, market, operational and informational technology, as well as its capital management. This is regularly reviewed to further improve the bank’s decision-making process.

Continual investment in its digital platform has stood the bank in good stead for weathering the Covid-19 storm. For example, during the quarantine lockdown period in the Philippines that started in March 2020, the bank saw an uptick in online transactions, while industry wide there was also a spike in phishing attacks. But BPI was prepared.

“We have seen a surge in electronic transactions in our digital channels where at least 80% of transactions now take place on our digital platform since the lockdown. We were also the first leading Philippine bank to establish a cyber security operations centre back in 2017 and this has helped us to safeguard against fraudulent transactions,” says Gayares.

Stress-testing for Covid-19

As a result of the Covid-19 pandemic, BPI has further enhanced its stress-testing framework, combining capital stress-testing with scenario analysis, which takes into account the impact of virus, in addition to macroeconomic drivers. The bank also regularly stress tests high-risk industry accounts and has set aside non-performing loans (NPLs) provisioning of 15 billion pesos ($310 million) for the first half of 2020, 4.3 times more than it set aside a year ago, to cover for bad debts resulting from Covid-19.

Marita Socorro Gayares

Bank of The Philippine Islands

“Stress-testing is done regularly to make sure our provisions are enough to reflect not only the requirements under the PFRS model but also based on the riskiness of the industry and the potential counterparty risk exposure of our borrowers,” says Gayares.

According to Gayares, the bulk of BPI’s book is in credit risk, hence the bank has been setting aside adequate provisions and is bracing for a spike in NPLs in the succeeding quarters.

Sustainable financing

In 2019, BPI established its Green Finance Framework, driven in part by the increased awareness on environmental, social and corporate governance (ESG) investing. Under this framework, BPI was the first Philippine bank to issue a green bond denominated in Swiss francs, and the first to issue a negative-yielding green bond out of the Philippines in international capital markets. BPI raised Sfr100 million ($109 million) for the two-year bonds, with a coupon of 0% and a re-offer yield of -0.02%.

In 2019, the bank became the first Philippine bank to issue USD-denominated Asean green bonds, raising $300 million for the five-year bonds with a coupon of 2.5%. Not only were these the first dollar-denominated Asean green bonds issued by a Philippine bank, but they also had the lowest coupon and yield paid for a USD-denominated bond from the Philippines, as well as the lowest credit spread paid by a Philippine bank.

The bank also received an investment grade credit rating from S&P of BBB+ in 2019, the first rating issued by S&P to the bank, due to what the rating agency said was its “dominant market position as the third-largest bank in the Philippines and its strong capitalisation”.