Banks’ capital adequacy ratio seen going down

The capital adequacy ratio of the banking industry is expected to go down from the current range of 16 to 17 percent to 13 to 14 percent once the industry is fully compliant with International Accounting Standards (IAS) and the Basle II Convention.

The Bangko Sentral ng Pilipipinas (BSP) said the banking industry is in the middle of shifting gears to comply with regulations that align the country’s banking and financial markets with international best practices.

Once completed, BSP Governor Amando M. Tetangco said the industry would be in better shape but with lower capitalization than the present average.

Based on the latest available data ending September 2005, the BSP said the CAR of the Philippine banking system improved by 22 basis points on a solo basis to 16.7 percent and by 23 points on a consolidated basis to 17.59 percent.

In comparison, the average CAR during the previous quarter was 16.48 percent on a solo basis and 17.36 percent on a consolidated basis.

The capital adequacy ratio is a risk-sensitive measure of a bank’s solvency, relating capital to risk assets weighted according to their relative riskiness.

Under the BSP rules and regulations, banks are required to maintain a CAR of at least 10 percent both on solo basis, meaning head office plus branches and consolidated basis, meaning parent bank plus subsidiary financial undertakings except insurance companies.

Despite the anticipated decline in CAR due to the IAS and Basle, however, Tetangco was quick to point out that the resulting average would still be well above the BSP minimum of 10 percent and even more significantly higher than the international minimum standard of eight percent.

Tetangco said anticipating the impact of the IAS and the Basle II convention also dampened the industry’s appetite for lending, aggravating an already risk-averse stance of most banks.

The BSP said the increase in the CAR was traced to the moderate decline in qualifying capital relative to the reduction in the risk-weighted assets of the banking system.

The CAR covers capital charges for combined credit and market risks provided under BSP circulars.

On a consolidated basis, the BSP said the industry’s risk-weighted assets fell by 2.73 percent from P2.715 trillion in the previous quarter to P2.641 trillion at the end of the third quarter of 2005. On a solo basis, risk-weighted assets also declined by 2.57 percent from P2.541 trillion compared to P2.476 trillion over the same period.

On the other hand, the industry’s qualifying capital declined from P410.7 billion to P413.5 billion on a solo basis and on consolidated basis, the decline was bigger from P471.5 billion to P464.6 billion.

The BSP said the picture was not much different in the thrift banking industry where the CAR stood at 17.67 percent as of end-September 2005 on both solo and consolidated basis.

According to the BSP, the higher CAR of the thrift banking industry was due to the combined effect of 3.12 percent increase in total qualifying capital accompanied by a 2 percent reduction in risk-weighted assets from P209.6 billion to P205.5 billion.