New accord seen to slash banks’ income

MANILA, Philippines - The implementation of the Basel III accord next year could slash banks’ net income as they invest more funds to comply with the new measures, an industry official said.

“Generally, Basel III will lower your expected net income... (the impact) varies from bank to bank,” Lorenzo Tan, president of the Bankers Association of the Philippines, told reporters on the sidelines of the Philippine International Banking Convention in Makati City.

Basel III is a set of reform measures for strengthening regulation, supervision and risk management of banks. Part of the reforms require banks to beef up their capital, resulting in lower return on equity.

But Tan was quick to add that while “Basel III will definitely lower your return on equity but it will cushion you against any financial storm.”

“We just have to find other ways to bring it back to the old level of shareholders’ return on equity,” Tan said, noting some banks heavily reliant on trading gains may take the biggest hit because of Basel III.

The Bangko Sentral ng Pilipinas (BSP) has mandated banks to put in place higher capital adequacy standards starting January next year.

Universal and commercial banks will be required to have a minimum Tier 1 capital of 7.5 percent, a minimum common equity Tier 1 ratio of six percent, and a capital conservation buffer of 2.5 percent. The capital adequacy ratio has been kept at 10 percent.

According to Tan, a reduction in their return on equity, will encourage banks to tap other revenue streams.

“This will force you to look at a diversified sources of revenue like credit card consumer loans [and] SMEs (small and medium enterprises),” Tan said.

“So it changes your business model more,” he continued.

The central bank in September said big banks are already prepared to adopt the new capital requirements under Basel III.

But aside from raising capital ratios to provide bigger equity cushions against financial crises, the BSP will also be requiring banks to comply with other components of the Basel III after it has reviewed them.

“Basel III has different components and there are those that we should adopt as soon as we can,” BSP Governor Amando M. Tetangco, Jr. told reporters on Friday.