RP banks exceed international capitalization norm

MANILA, Philippines - Hard times struck in 2008 but the Bangko Sentral ng Pilipinas (BSP) said banks managed to keep their capital levels significantly above international standards, driven by conscious efforts to beef up capital.

The BSP reported over the weekend that the banking system recorded a capital adequacy ratio (CAR) level of 14.74 percent on a solo basis and 15.49 percent on a consolidated basis at the end of 2008.

Specifically, the BSP said the net Tier 1 capital ratios of the banking system also remained above international norms, standing at 12.31 percent on a solo basis and 12.38 percent on consolidated basis as of end 2008.

According to the BSP, the improvement in the CAR level of the industry was driven by an increase in the qualifying capital for the system as a whole, particularly resulting from capital-raising exercises by some banks.

The BSP said several banks issued supplementary capital instruments in the form of unsecured subordinated debt which raised qualifying capital by P23.8 billion (solo) in the fourth quarter alone.

The BSP reported that the system’s total qualifying capital reached P557.4 billion on a solo basis, composed of 83.5 percent T1 capital (P465.5 billion) and 16.5 percent Tier 2 capital.

On a consolidated basis, the comparative capital mix was 79.9-percent T1 capital amounting to P483.2-billion and 20.1-percent T2 capital.

The BSP said the industry’s qualifying capital increased parallel with the increase in its risk-weighted assets which amounted to P117.7 billion in the fourth quarter of 2008.

According to the BSP, this was significant because the increase in qualifying capital in relation to the increase in the risk-weighted assets translated to a ratio of 20.2-percent (solo).

“This would ensure that the banking system’s CAR remained robust in the face of the global financial crisis,” the BSP said.

The CAR level of universal and commercial banks went up to 14.81 percent at the end of 2008 largely because of the P26.3-billion hike in qualifying capital resulting from the issuance of unsubordinated debt and payment of loans extended to DOSRI, subsidiaries and affiliates.

However, the CAR of the thrift banking industry fell from 14.59 percent at the end of September 2008 to only 12.8 percent at the end of December. This was traced to the 13.2 percent decline in qualifying capital which overtook the 1.1 percent decline in risk-weighted assets.

The profile of Philippine banks would soon change, however as the central bank now allows banks to determine their own ideal capital adequacy ratio. Regulators also said banks engaged in risky behavior should be singled out and required to meet a higher hurdle.

BSP Deputy Governor Nestor Espenilla said this would enable the adjustment of the CAR as might be appropriate for bans exposed to higher risks.

Espenilla explained that while banks could be capitalized at the same level, their adequacy ratio would not be uniform since banks operate with different risk appetites.

“A bank that is engaged in more risky investments and operations, for instance, would require more cover than a bank capitalized at the same level but engaged in largely benign banking activities,” Espenilla said.