Banks' capital adequacy ratio dips

Compliance with international rules has lowered the capital adequacy ratio of Philippine banks but central bank officials assured the industry still has enough capital to support their operations.

The Bangko Sentral ng Pilipinas (BSP) reported that at the end of the first quarter of the year, the CAR within the Philippine banking system collectively stood at 14.49 percent on solo basis and 15.49 percent on consolidated basis.

At the end of December last year, the CAR of the banking system was recorded at 14.71 percent on solo basis and 15.7 percent on consolidated basis.

Last year, the first quarter CAR of the industry was recorded at 17.54 percent on solo basis and 18.83 percent on consolidated basis, reflecting a significant annual drop.

The BSP said the latest values were lower both year-on-year and quarter-on-quarter but were still significantly well above both the 10 percent prudential norm required by the BSP and the eight percent international standard under the Basel Accord.

The BSP said the decline was attributable, among others, to the assignment of higher risk weights to certain assets and the incorporation of operational risk charge in the capital adequacy framework. 

Numerically, the BSP said these changes contributed to the increase in risk-weighted assets (RWA) of P157.2 billion (quarter-on-quarter) on solo basis while matched by a P15.5 billion increase in qualifying capital over the same period.

The BSP said the increases in RWAs, which were much larger than their corresponding increases in qualifying capital were consistently found across bank categories. 

However, the BSP said the combined effect of these factors led to a decline in the CAR for universal and commercial banks while resulting in the increase in the CAR for thrift, rural and cooperative banks. 

“The same trend is found for both solo and consolidated bases,” the BSP reported.

Stringent requirement under the Basel II Convention have begun to take their toll on Philippine banks, causing a decline in the industry’s capital adequacy ratio in 2007.

As the Basel II standards came into effect, the BSP said banks have had to assign higher capital charges on their riskier investments, including government securities.

The BSP explained that the CARs were calculated based on the revised CAR framework (patterned after Basel II) for universal and commercial banks (U/KBs) and their subsidiary banks and quasi-banks.

On the other hand, the old CAR framework patterned after Basel I was used to calculate the CAR of stand-alone thrift banks (TBs) and rural and cooperative banks (RB/coop banks). 

Consistent with Basel 2 framework, the risk weight of foreign currency-denominated exposures to NG was raised from zero percent to 100 percent, albeit applied on a staggered basis.       — Des Ferriols