Most of the big banks in the Philippines look able to comply with the capital requirements under the framework of what is classified by the central bank as domestic systemically important banks (D-SIBs), credit watcher Fitch Ratings said.
On a global level, there is an official list of systemically important banks (G-SIBs), categorized as such because of the impact of their failure or distress on the global economy. On a national level, such banks are identified or referred to by local regulators as domestic systemically important banks (D-SIBs)—also known in Europe as national SIFIs—because of their structural role and impact on the domestic economy.
“Philippine banks should be able to meet new capital requirements for domestic systemically important banks deemed ‘too big to fail,” debt watcher Fitch Ratings said in a statement released Wednesday.
The Bangko Sentral ng Pilipinas (BSP) earlier announced that it had determined the local banks that qualify as D-SIBs under the framework initially outlined in October 2014.
Higher capital requirements
The BSP said banks designated as D-SIBs will be required to hold additional loss-absorbency of 1.5 percent or 2.5 percent of risk-weighted assets depending on a number of factors, including size, market reliance and complexity.
The higher capital requirements will be phased in over two years beginning in January 2017, which should be fully in place by January 2019, with minimum common equity tier 1 (CET1) ratios of 10 percent to 11 percent for D-SIBs.
“Most large and mid-sized banks in the Philippines have core equity Tier 1 (CET1) ratios comfortably above Basel III minimums, with the largest banks’ CET1 ratios falling between 12 percent and 14 percent as of end-2014,” Fitch said.
The BSP, unlike the monetary authorities in Hong Kong and Singapore, would not publicly disclose which banks are classified as D-SIBs or their respective additional loss-absorption buckets, it added.
As part of its framework, the BSP will update the list of D-SIBs annually and notify the relevant banks individually.
BDO, BPI, Metrobank
Fitch said it believes that a handful of the largest banks, including BDO Unibank, Bank of the Philippine Islands and Metrobank are likely to face a 2.5 percent additional loss-absorption requirement while other large lenders should fall into the 1.5 percent bucket.
In addition, the debt ratings firm said the banks need to meet the capital requirements at a consolidated level, as well as at an individual entity (solo) level.
“Capital ratios tend to be lower for parent banks at the individual entity level, and Fitch believes not every parent bank would have met the D-SIB requirement had it been fully implemented at end-December 2014,” it said.
Act before phase-in
Meanwhile, Fitch expects any bank with a shortfall to take action to comply with the requirements ahead of the phase-in period.
Increasing the solo level capital ratio could be achieved through internal capital generation, but this would require a slowdown in credit growth or an increase in earnings retention, it said.
“Alternatively, a parent bank may have to raise more common equity or streamline its subsidiary holdings,” Fitch stressed.
The debt watcher also said the central bank has also established a higher 3.5 percent capital charge bucket to “disincentivize” banks from becoming even more systemically important.
At present, no bank falls into this category, Fitch said, pointing out that lenders control their asset growth so as to avoid falling into the 3.5 percent bucket.
“The 3.5 percent bucket should also become a consideration for large banks when contemplating substantial acquisitions in the future,” it suggested.
Capitalization by Philippine banks is relatively robust, with several lenders having boosted their CET1 ratios, it added.