• Banks feel first impact of higher global rates


    Universal and commercial banks (U/KBs) in the Philippines are starting to feel the impact of increasing global rates, evidenced by the dip in their capital adequacy figures in the first quarter of the year, the central bank said.

    The capital adequacy ratio (CAR) of the country’s biggest banks stood at 15.45 percent at the end of March, the Bangko Sentral ng Pilipinas (BSP) said in a statement on Monday.

    Consolidated with the big banks’ subsidiaries and quasi-banks, the equivalent CAR figure was 16.35 percent.

    The central bank pointed out that the sector’s reported capital adequacy was based on the regulations of the Basel III regime, which took effect on January 1.

    The BSP data shows that the end-March 2014 CAR figures are lower than the December 2013 ratios of 16.50 percent (solo basis) and 17.65 percent (consolidated basis).

    However, the central bank clarified that the December 2013 ratios were calculated under the previous prudential regime of Basel II.

    “The new Basel 3 regime incorporates adjustments to the treatment of bank capital in ways that enhance the use of the CAR as a prudential measure,” it explained.

    The central bank said Basel III no longer counts toward “bank capital” the Basel II-compliant capital instruments that do not have the feature of loss absorbency.

    The BSP defines loss absorbency as the ability of bank-eligible capital instruments, other than common equity, to behave and act in the same way as common equity shares at the point where the bank takes losses and becomes non-viable.

    The central bank added that Basel III now deducts from capital the investments of banks in non-allied undertakings, defined benefit pension fund assets, goodwill and other intangible assets.

    “This new policy is because there is uncertainty in realizing value from these instruments, especially during periods of stress,” it added.

    Effects of US taper
    The central bank said the big banks’ CAR during the period was negatively affected by the increase in global rates as a result of the tapering of the unconventional monetary policy in the United States.

    “The rise in market rates creates revaluation losses for the holdings of ‘available for sale’ (AFS) financial assets by banks,” it said.

    A local bank analyst, however, believes that despite the fall in banks’ capital adequacy, Philippine banks still remain well capitalized and resilient to adverse occurrences.

    According to Nicholas Antoni Mapa, associate economist at the Bank of the Philippine Islands, the lower CAR in the first quarter of the year was to be expected, given the extra stringent requirements of Basel III and the expected loss of valuation in bonds due to the rise in global interest rates.

    “I will maintain, however, that the Philippine banking system is well in advance in working towards compliance for Basel III requirements, and has a couple of more years to comply with regulations,” he said.

    On the other hand, the BSP said universal and commercial banks reported for the first time their holdings of Common Equity Tier 1 (CET1) instruments, which represent the highest quality of bank capital.

    CET1, as a percentage to risk-weighted assets, was reported collectively by U/KBs at 13.44 percent on solo basis and 14.41 percent on consolidated basis.

    “The high level of CET1 instruments in the capital structure of U/KBs explains the correspondingly high Tier 1 capital ratio of 13.67 percent (versus risk-weighted assets) on solo basis and 14.59 percent on consolidated bases,” the BSP said.

    Finally, the central bank said it continues to monitor the capital position of banks vis-à-vis their risk-taking activities under the broader banking reform agenda.

    “The reform initiatives are aimed at bolstering the financial system from risks both at the transaction and the industry levels,” it said.


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