Tighter rules led to lower solvency rate of banks — BSP

Despite the significant reduction in their bad loans, the Bangko Sentral ng Pilipinas (BSP) admitted that regulatory tightening has reduced the solvency rate of the banking industry and fewer banks were able to meet the minimum capital requirements in 2005.

In its financial system report for the second semester of 2005, the BSP reported that overall, the Philippine financial system remained sound and stable amid a tough operating environment last year.

Overall performance was modest compared to 2004 but the BSP said these gains were achieved despite the fact that the economy faced external and internal disturbances.

According to the BSP, banks posted moderate expansions in assets, deposits and capital accounts although credit expansion was anemic due to weak corporate demand.

For the whole of 2005, the BSP said the banking system managed to post a slight 1.9-percent increase in lending although this was drastically lower than the four- percent growth posted in 2004.

Outside traditional loan recipients, the BSP said consumer lending remained the strongest growth area due to the related upswing in residential real estate, automotive and credit card financing.

"This indicates that the domestic economy remained consumption-led, fueled mainly by heavy inflows from overseas Filipino workers, " the BSP said.

The BSP said the banking industry also reported higher profitability with net income after tax posting double-digit growth of 27.1 percent.

However, the BSP admitted that underneath the numbers, there were still remaining weak banks burdened with bad assets and limited capital flow to grow their businesses.

Morever, the BSP said banks reported lower solvency ratios in 2005 as the system felt the brunt of regulatory tightening from the assignment of additional 25- percent to 125-percent risk weights on non-performing loans (NPLs) in February 2005.

Although the industry’s capital adequacy ratio (CAR) remained well above regulatory and international standards, the BSP said compliance with the minimum capital requirements fell to 77.8 percent from 79.1 percent in 2004.

"The increasing number of banks failing to meet the minimum capital requirement is also indicative of the dearth of capital," the BSP said.

However, the BSP said it expected these ratios to improve this year as it allowed banks to explore alternative and innovative ways to strengthen their capital base.

According to the BSP, banks were now allowed to use hybrid financial instruments in the banks’ capital if their loss absorption characteristics mimic that of a common stock or perpetual non-cumulative preferred stock.