DEBT watcher Fitch Ratings said Philippine banks are likely to issue more Basel III-compliant Tier 2 instruments, which will be mostly targeted at the domestic market.
The ratings agency based its forecast on assumptions that the issuance will be largely driven by the need to refinance legacy instruments and support growth.
“There has been over P50 billion ($1.15 billion) of Basel III Tier 2 instruments issued to date in the Philippine banking system. This followed the Bangko Sentral ng Pilipinas’s (BSP) unveiling of new Basel III capital rules in January 2013,” Fitch said in a statement released on Monday.
It noted that the government-owned Development Bank of the Philippines was the first to issue Basel III-compliant securities in November 2013, with its P10 billion Tier 2 instrument.
Fitch said activity picked up following Basel III implementation in January 2014, with issues to date limited to the local market amid more favorable pricing for the banks and healthy domestic demand from institutional investors and trust accounts.
“The issuance of these new types of instruments compares with the over P120 billion in legacy Basel II-Tier 2 capital outstanding, which must be replaced eventually,” it said.
The ratings agency said the issuance of Basel III Tier 2 securities is also being driven by rapid balance sheet growth in a buoyant economy, where year-to-date loan growth has averaged 15 percent.
It also said that the banking system is considered well capitalized with healthy capital buffers above the central bank’s Basel III requirements of 8.5 percent common equity Tier 1 capital adequacy ratio (CAR) and 10.0 percent total CAR, but these buffers may erode in a rapidly growing system.