Universal and commercial banks (U/KBs) in the Philippines showed a dip in capital adequacy at the end of the fourth quarter of 2013 from a year earlier, but private analysts and the central bank said the sector remained well capitalized against risks.
In a statement on Wednesday, the Bangko Sentral ng Pilipinas (BSP) said the universal and commercial banking sector’s capital adequacy ratio (CAR) stood at 16.50 percent at the end of December 2013, down from 17.28 percent on a solo basis at end-2012. Consolidated with their subsidiary and quasi-banks, the ratio was down at 16.75 percent from 18.35 percent previously.
CAR indicates the percentage of a financial institution’s primary capital to its assets such as loans and investments, used as a measure of its financial strength and stability.
The central bank said that the industry’s CAR remained driven by Tier 1 capital, the highest quality among instruments eligible as bank capital, in the last quarter of 2013.
As a percentage of risk weighted assets (RWA)—a measure of the amount of a bank’s assets, adjusted for risk—the Tier 1 ratio stood at 15.37 percent. On a consolidated basis, the Tier 1 ratio was slightly higher at 15.82 percent.
The CAR values continued to decline till end-December 2013 from the end-September levels of 17.51 percent on a solo basis and 18.62 percent on a consolidated basis.
The central bank said that the quarter-on-quarter drop in CAR showed that the banks’ qualifying capital did not match the rate of increase in their RWAs or risk-weighted assets.
The industry’s RWA grew 5.69 percent solo and 5.62 percent on a consolidated basis, pushed up by the increase in lending to corporates.
Qualifying capital, on the other hand, dipped by 0.42 percent solo and rose slightly by 0.12 percent on a consolidated basis.
“This was mainly brought about by the redemption by some banks of unsecured subordinated debts classified as Lower Tier 2 capital,” the BSP said.
The central bank said the redemptions were expected because of the implementation of the new capital standards under the Basel III agreement in January, which derecognizes certain debt securities as qualifying capital.
Basel III is a framework designed to strengthen the banking sector’s capacity to absorb shocks, enhance the management of risk, and increase transparency.
The central bank has ordered universal and commercial banks in the Philippines to comply with Basel III’s 10 percent capital adequacy ratio standards with Tier 1 common equity and Tier 1 capital ratios of 6 percent and 7.5 percent, respectively.
“The decrease in capital was partially eased by the industry’s healthy net profits and issuance of Basel III-compliant Tier 2 capital,” the BSP said.
Nicholas Antonio Mapa, associate economist at the Bank of the Philippine Islands, acknowledges the decline in bank’s qualifying capital against the capital requirements under the Basel III regulations, yet views the local banking sector as resilient.
“The Philippine financial system remains one of the most resilient in the region given low non-performing loans and high capital adequacy ratios,” Mapa said.
The central bank explained that the CAR figures indicate the major bank’s continued efforts to maintain robust capitalization.
A strong capital position promotes financial stability by providing individual banks and the industry with an adequate buffer against unexpected losses that may arise during times of stress, it added.