Local banks in the Philippines have to go “back to the basics” in terms of their business models to deal with the impact of the Basel III requirement on their profits, Bankers Association of the Philippines (BAP) President Lorenzo Tan said.
On the sidelines of the BAP annual meeting on Monday, Tan said the Basel III capital requirement will force banks to change their business models to meet the standards for higher capital, less leverage and several consumer protection rules.
Tan said the average return on equity (ROE) of Asian banks has always been around 15 percent to 16 percent and 10 percent to 12 percent for US and European banks, but a number of studies show that Basel III will reduce banks’ ROE.
The BAP president said studies show that Basel III will reduce ROE on European and US banks by 3 percent to 4 percent, while some Asian banks are likely to experience 10 percent to 11 percent reduction in profit.
“There are banks that have been making 25 percent ROE because of trading income, so those banks will see a significant reduction in ROE. So you [banks]start looking at your business model, you have to start cutting costs, you have to reduce your cost-to-income ratio,” he said.
“It should affect us [Philippine local banks]. Banks will be safer – that’s the good news, but it is hard for us to see the old levels of ROE because of the limits on leverage, liquidity . . .” he added.
Basel III is a framework designed to strengthen the banking sector’s capacity to absorb shocks, enhance the management of risk, and to increase transparency. The Bangko Sentral ng Pilipinas 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.
Tan also cited a study by Accenture which showed that banks’ ROE will be reduced by as much as 11 percent ROE from 25 percent because of the new rules.
The BAP president said the business model of the future will be as simple as Wells Fargo’s— the fourth largest bank in the US.
“[In Wells Fargo] the loans are just the hook, but after you get the corporate loans from me, I’ll sell you insurance, investment products, I’ll sell you risk management products. So I think the business model of the future will be something like that. You focus on actuarial risk,” he explained.
“So I think the business model of the future will be something like that. You focus on actuarial risk. So instead of doing a P1 billion loan, you probably do a 50 P20-million loan or 20 P50-million loans that when that loan becomes bad you don’t have a P1 billion NPL [non performing loans]. It’s like insurance, it’s an actuarial risk,” he added.