CHAPTER I-III

I. How commercial banks have been affected by the pandemic?

- The financial system of the Philippines has been affected by the pandemic,
along with other sectors and industries. The banking sector specifically the operations of
commercial banks should aim to prevent short-term liquidity pressures by maintaining
the right balance of liquidity. Furthermore, as stated at BSP Unbound, the COVID-19
issue had an impact on their business model, asset quality, lending capacity, liquidity
position, business operations, and overall risk profile, as well as how they are managing
risks on their exposure and the board and management's engagement in these
activities.
Commercial banks are often judged on their liquidity, or their ability to meet cash
requirements (Ross, 2021).

2. Types and Number of banks involved in the study

We still used the commercial banks as the subject of the study because there is
no readily-available information for rural banks. In the BSP Directory as of Dec.1, 2021,
there are 25 listed commercial banks in the Philippines. However, only seven
commercial banks were involved in the study. Since we highlighted also in the title that
we will only deal with selected banks. Those banks were BDO Private Bank Inc., Bank
of Commerce, CTBC Bank, Philippine Bank of Communications, Bank of China
Hongkong Limited Manila Branch, Robinsons Bank Corporation and Veterans Bank. We
believe that these 7 banks represented the total population of commercial banks in the
Philippines and can be a reliable basis for decision making.

3. How did you gather data?

First, we searched the official list of commercial banks and found it out in the
BSP Directory. Next, we located the audited financial statements or annual reports of
commercial banks. After searching, we come up with seven banks with complete and
accurate data that can be found directly in their official websites. We downloaded the
files and check on the ratios needed in the conduct of study which are LCR, ROA, ROE
and NIM. After the data has been gathered, we perform quality assurance to check if
the data is inputted correctly in Microsoft Excel. Right after that, we sent the file to our
statistician, Dr. Realiza Mame. The statistical treatment of data has been applied. The
results or the tables were given by the statistician, right then and then, we started with
the writing of Chapter 4 and 5.

4. The hypothesis of the study

 In our study, there is only one hypothesis tested which is the significant effect of
liquidity on profitability of commercial banks. Meanwhile, the means of profitability and
liquidity ratios were compared when grouped according to profile which are years of
operation and asset size.

5. Statistical Treatment of Data

The statistical treatment employed in the study were financial ration analysis
since we are dealing with financial ratios such as LCR, ROA, ROE and NIM. Next, we
used the mean to get the average ratios for each year as basis for comparison and
interpret the trend of three consecutive years. The standard deviation was also part of
the descriptive statistics. The Pearson’s r correlation was used to test if the liquidity has
significant effect on profitability of selected commercial banks.

GENERAL QUESTIONS:
1. Who will benefit from the study?
The study is beneficial to the managers of commercial banks, bank’s
shareholders and depositors, investors and other stakeholders. This study will assist
bank managers in better understanding the relationship between the two variables and,
as a result, revision and implementation of related strategies aligned with the guidelines
set by Bangko Sentral ng Pilipinas.
This study will be a great benefit to investors and other stakeholders by gaining
knowledge about liquidity and profitability which will enable them to manage their
investments, as well as serve as a benchmark for banks supervision and policies aimed
at safeguarding and balancing the money cycle.
This study will be beneficial to Accountancy and Business students and other
researchers. This study will give them better understanding on the field, especially in the
areas of liquidity and profitability and also the relationship of two the variables through
the presentation of literature and the result of the study.
In addition to this, it would also be beneficial to the depositor, the researchers ourselves
and to the future researchers. This study will help the depositors in properly determining
the status of their deposits. It would also be a guide to them in depositing and
withdrawing their money in a specific commercial bank during this said pandemic.
As for the researchers ourselves, this study also helps us in enriching our knowledge,
ability, values and virtues like teamwork, time management, patience, and moral
responsibility while conducting the study. And lastly, for the future researchers, this
study will serve as a guide for future studies.

2. What is the major contribution of the study?

The findings and output generated from this study can be used for the effective
management of banks regarding on how to maintain their current liquidity and
profitability position and mindful of the requirements or guidelines set by BSP amidst the
pandemic.
The IEC material which is an infographic about the liquidity and profitability of
commercial banks were also set out by the researchers. It can be used as a basis for
management decision-making. The profitability strategies were laid of such as the
Usage of Market Power theory, Efficiency Theory, Agency Cost Theory and Signaling
Theory. Further discussion of this strategies can be seen in the Appendix C.
The liquidity strategies for banks were also laid down such as Usage of Commercial
Lending and Liquidity Theory, Convertibility Theory, Financial Intermediation Theory,
shorten asset maturities, Improve the average liquidity of assets, lengthen liability
maturities, issue more equity, reduce contingent commitments, and obtain liquidity
protection. Further discussion of this strategies can be seen in the Appendix C.

This study contributes to our understanding of some related constructions that have not
been explored in-depth in previous literature relating to the liquidity and profitability of
commercial banks specifically in the Philippines. Hence, helping in developing a better
understanding of the impact of liquidity using LCR on profitability through ROA, ROE,
and NIM is the key contribution of this study. In this regard, the findings of the study
demonstrate that liquidity has no significant impact on the profitability of the banks
(Adegboyega, 2017) (Durand, 2019). On the contrary, liquidity has a strong positive
impact on the profitability of commercial banks (Adebayo et al., 2011) (Ayodele and
Oke, 2013).

3. Why is there a need to conduct this study?

As aspiring accountants, we must know how the financial system in the
Philippines works specifically commercial banks which are undeniably stable yet have
been affected by the pandemic. Numerous studies, mostly foreign studies conducted a
similar study yet found different results regarding the impact of liquidity on the
profitability of commercial banks in their respective countries. While doing the research,
there is no local study about this matter. This topic is timely and relevant to the field of
Accountancy as we are engaged into financial management and/or analysis. With our
research, we used liquidity ratio and profitability ratios to ascertain the impact and
relationship of the two variables.
In addition, changes brought by the pandemic is uncontrollable. This study specifically
sought to know the status of the commercial banks in the midst of the pandemic and
their capacity and ability to respond to this changes whether it be good or bad. There is
also a need to study this because not all accountancy students are aware of the impact
of liquidity on profitability. They may be able to know the definitions of those terms but
the deeper knowledge about the relationship of the two is not present. So this study is
relevant, timely, and needful.
4. Where the problem lies?
The problem lies on the profitability of banks during the pandemic since the
liquidity of the banks were greatly affected by the protocols imposed by the government.
People tend to withdraw their savings to satisfy their needs which affects the ability of
the banks to raise profit since banks earn from the deposits and loans of the clientele.
We also considered the liquidity coverage ratio as the measure of liquidity which
imposes a minimum standard to protect banks against liquidity risks which may happen
even if a bank is still solvent. Under normal conditions, the liquidity ratio should not be
less than 100% on a regular basis, in accordance with the guidelines set by BSP. With
that, we wanted to know how profitability will get affected if the banks still maintain or
sustain the regulatory requirement.
Additionally, the problem also lies on the comparison of liquidity and profitability when
both grouped according to profile. This talks about how the liquidity indicator and
profitability indicators of commercial banks when grouped by years in operation and
asset size be compared. This also proves if years in operation and asset size of the
commercial banks have effect on liquidity and profitability. Liquidity which illustrates the
financial health of the organization and profitability that shows how well the business
performs its operation must be properly assessed. Those factors that might affect them
must be known so that it would be handled properly. With that, we want to know how
this profiles affect the two factors.

SUPPORT – CHAPTER IV

What are your findings?

1. The study revealed that the profile of selected commercial banks in the
Philippines in terms of years of operation, among the seven commercial banks, 3 of
them were operating for 40 and above years, the other 3 for 20-39 years, and one of
them for less than 20 years. Overall, the mean number of years in operation was
41.8571 years, and the standard deviation was 24.07231 years. Meanwhile, in terms of
asset size, the study found that among the seven commercial banks, 3 of them have an
asset size of greater than ₱100 billion, the 2 have an asset size of greater than ₱50
billion but less than ₱100 billion, and the other 2 have less than ₱50 billion. Overall, the
mean asset size was ₱87,580,011,657 and the standard deviation was
₱54,324,486,989.72.
2. In the area concerned with the profitability of commercial banks, the result
revealed that in terms of return on assets, in 2018, the mean was 0.0025, then it
increased to 0.0108 in 2019, but in 2020 it decreased to 0.0069. Overall, the ROA's
mean was 0.0067 and the standard deviation was 0.0089. In terms of the return on
equity, in 2018, the mean was 0.0114, then it increased to 0.0818 in 2019, but in 2020 it
decreased to 0.0335. Overall, the ROE's mean was 0.0422 and the standard deviation
was 0.0838. In terms of the net interest margin, in 2018, the mean was 0.0336, then it
increased to 0.0384 in 2019, and 0.0407 in 2020. Overall, the NIM's mean was 0.0375
and the standard deviation was 0.0103.
3. In the area concerned with the liquidity of the commercial banks, the result
revealed that in terms of the liquidity coverage ratio, in 2018, the mean was 1.3031,
then it increased to 1.5517 in 2019, and 2.2805 in 2020. Overall, the LCR's mean was
1.7118 and the standard deviation was 0.8368.
4. When comparing the means of profitability of the commercial banks in the
Philippines when grouped according to years in operation, the result revealed that the
return on assets of commercial banks that have operated for less than 20 years has the
highest mean of 0.0120, followed by 20-39 years, which has a mean of 0.0091, and 40
and above years, which has a mean of 0.0026. In terms of return on equity, commercial
banks that have operated for 20-39 years has the highest mean of 0.0664, followed by
less than 20 years, which has a mean of 0.0433, and 40 and above years, which has a
mean of 0.0177. In terms of net interest margin, commercial banks that have operated
for 40 and above years has the highest mean of 0.0418, followed by 20-39 years, which
has a mean of 0.0357, and less than 20 years, which has a mean of 0.0303. On the
other hand, the result revealed that when comparing the means of profitability of the
commercial banks in the Philippines when grouped according to asset size, the return
on assets of commercial banks with less than ₱50 billion asset size has the highest
mean of 0.0147, followed by ₱100 billion and above, which has a mean of 0.0060, and
₱50 billion but less than ₱100 billion, which has a mean of -0.0001. In terms of return on
equity, commercial banks with less than ₱50 billion asset size has the highest mean of
0.0850, followed by ₱100 billion and above, which has a mean of 0.0535, and ₱50
billion but less than ₱100 billion, which has a mean of -0.0176. In terms of net interest
margin, commercial banks with ₱50 billion but less than ₱100 billion asset size has the
highest mean of 0.0484, followed by ₱100 billion and above, which has a mean of
0.0381, and less than ₱50 billion, which has a mean of 0.0258.
5. When comparing the means of liquidity of the commercial banks in the Philippines
when grouped according to years in operation the results revealed that the Liquidity
coverage ratio of commercial banks who operate for less than 20 years has the highest
mean of 2.4523, followed by 40 and above years has a mean of 1.8383 and 20-39
years have a mean of 1.3384. On the other hand, the result revealed that when
comparing the means of liquidity of the commercial banks in the Philippines when
grouped according to Asset size, the Liquidity Coverage Ratio, commercial banks with
₱50 billion but less than ₱100 billion asset size has the highest mean of 1.8923,
followed by less than ₱50 billion asset size has a mean of 1.8607, and ₱100 billion and
above asset size have a mean of 1.4922.
6. Regarding the significant impact of the liquidity on the profitability of commercial
banks the results revealed that the computed r coefficient for net interest margin is
0.247 verbally interpreted as having a weak positive effect on liquidity coverage ratio.
While both return on assets and return on equity with computed r coefficients of -0.231
and -0.496, revealed a weak and moderate negative effect on liquidity coverage ratio,
respectively. Additionally, the probability indicators namely return on assets (ROA),
return on equity (ROE), and net interest margin (NIM) have no significant effect on the
liquidity coverage ratio at the level of 5% significance.
7. Based on the result of the study, the researcher proposed Instructional, Educational,
and Communication materials specifically targeting those interested in the impact of
liquidity on the profitability of selected commercial banks in the Philippines. The
proposed IEC was developed to help commercial banks in the Philippines to understand
the relationship between liquidity and profitability, and give strategies to enhance both
liquidity and profitability.

How would you relate your findings to existing theories on the study?
1. The finding in SOP 1 was similar to the study of Aziz & Samad (2016), wherein the
years in operation were defined and measured as the significant period since its
foundation, and according to Esteve-Pérez et al. (2017) it was a major factor of
business survival. Sritharan (2015), wherein asset size refers to the ability, the variety,
and the number of production capacities or the amount and multiplicity of services or
transactions banks can offer concurrently to their clients and according to Mester (2010)
increasing banks’ asset size can reduce risk by diversifying operations across product
lines, sectors, and regions.
2. The finding in SOP 2 was similar to the study of Al-Qudah (2016), where he defined
that Return on assets (ROA) is used to measure a bank's capacity to benefit from its
asset management activities while Return on equity (ROE) is used measure of how well
management uses equity but financing to finance operations and expand the company,
on the other hand, Silaban (2017) defined that net interest margin is regarded as an
indicator of a bank’s ability to earn interest income by taking into account its ability to
disburse loans, given that the operating income of a bank is mainly dependent on the
difference between interest and credit disbursed. Furthermore, McClure (2020) argues
that the rising return on asset (ROA) over time indicates that the bank is doing a good
job of maximizing earnings for each peso invested. On the other hand, a decrease in
ROA indicates that the bank is in trouble because of too much investment in its assets
that failed to yield revenue growth while Lalonde (2021) argues that a growing ROE
indicates that a corporation is generating more profits while using less capital, on the
other hand, Buchory (2014), argues that a higher net interest margin may indicate that
the bank has potential advantages from the difference between interest revenue and
earnings.
3. The finding in SOP 3 was similar to the study of Morales (2021), wherein he stated
that the Liquidity Coverage Ratio is measured as the proportion of high-quality liquid
assets to total net cash outflow. Furthermore, the EBA 2013 and Cucinelli (2013), argue
that organizations with a high LCR will not be required or incentivized to make
unnecessary changes to their business model.
4. The finding for SOP 4 when the profitability of commercial banks was grouped
according to years in operation the result in terms of ROA was similar to Dietricha and
Wanzenriedb (2009), they argue that the years in operation do not have a significant
impact on banking profitability and older banks are not more lucrative than banks
established in a recent year, while in terms of ROE the study of Sulub (2014) reveals
that there was a weak negative relationship between the bank's years in operation and
return on equity, on the other hand, Coad et al. (2013) indicates that older firms
outperform younger firms in terms of net interest margin because they have more
experience and benefit from "learning by doing". When the profitability of commercial
banks was grouped according to asset size the result in terms of ROA was similar to
EduPristine (2018), wherein though a high ROA indicates that the firm is performing
well in terms of finance and operations there are instances that a bank will obtain low
ROA, while in terms of ROE, Fernando (2021), argues that a slightly above-average
ROE is preferred over one that is twice, thrice, or even more than the group's average,
on the other hand, Tarusa, et.al. (2012), argues that the greater efficiency of a
competitive the banking system is manifested in low to average net interest margin.
5. The findings for SOP 5 when the liquidity of commercial banks was grouped
according to years in operation and asset size the result in terms of LCR found no
indication of a relationship between years in operation and liquidity, and also asset size
and liquidity, this was according to Vu et al. (2020) and Quinones (2015).
6. The findings for SOP 6 revealed that liquidity does not have a significant effect on the
profitability of commercial banks similar to the study by Durand (2019), wherein he
found that regulatory ratios do not impose any binding constraints on a bank's
performance as evidenced by LCR having little impact on profitability. Moreover, the
return on assets has no statistically significant relationship to liquidity, as proved by
Idowu and Adegboyega (2017) in their evaluation of the relationship between liquidity
and bank performance in Nigeria. The result of the study is in contrast to the study of
Adebayo et al. (2011) which indicates that there is a positive relationship between
liquidity and profitability. The result is also contrary to the study of Ayodele and Oke
(2013) which found out that there is a strong correlation between bank liquidity and
profitability.

What are the contributions (to knowledge) of your thesis?

This study contributes to our understanding of some related constructions that have not
been explored in-depth in previous literature relating to the liquidity and profitability of
commercial banks specifically in the Philippines. Hence, helping in developing a better
understanding of the impact of liquidity using LCR on profitability through ROA, ROE,
and NIM is the key contribution of this study. In this regard, the findings of the study
demonstrate that liquidity has no significant impact on the profitability of the banks
(Adegboyega, 2017) (Durand, 2019). On the contrary, liquidity has a strong positive
impact on the profitability of commercial banks (Adebayo et al., 2011) (Ayodele and
Oke, 2013).
What is the implication of your work in your area? What does it change?
Our study implies that the liquidity of the commercial banks in the Philippines does not
have a significant impact on their profitability. Further, the ROA and ROE have a weak
and moderate negative relationship with LCR, respectively. While NIM has a weak
negative relationship with LCR. The commercial banks in the Philippines should still
consider improving their LCR if they aim to increase their NIM but if they aim to increase
their ROA and ROE, they reduce their LCR and maintain it to its minimum requirement
which is 1.00.

Based on your findings what are your recommendations?

1. Apply the proposed theories and strategies to enhance the profitability and liquidity of
commercial banks.
2. Explicated the impact of liquidity on commercial bank profitability's information and
educational components. Develop instructional materials that include the impact of
liquidity on commercial bank profitability as well as strategies to enhance commercial
bank liquidity and profitability.
3. The study's findings must be shared with the respective commercial banks. It is
expected that doable recommendations would be followed. Other banks may use as
well as create techniques to improve commercial banks' liquidity and probability.
4. Focus on improving indicators of probability and liquidity of commercial banks to help
users of information like shareholders and depositors decide whether to deposit or
withdraw their investments.
5. Future researchers are encouraged to conduct further studies that would expand the
knowledge on the impact of liquidity on the profitability of commercial banks in the
Philippines. More commercial banks as respondents and covering a longer time frame
were proposed to deeply analyze and understand the impact of liquidity on the
profitability of commercial banks in the Philippines.