'Phl banks strong enough to survive US crisis'

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) is confident that banks operating in the Philippines are well capitalized to survive the debt crisis being faced by the US in light of a possible downgrade of its triple A credit rating despite an agreement reached by Democrat and Republican leaders to reduce its deficit and avoid default.

BSP Governor Amando M. Tetangco Jr. said in an interview with reporters that a stress test conducted by the BSP showed that the capital adequacy ratio (CAR) of Philippine banks would stay above the central bank’s minimum requirement of 10 percent and Basel Accord’s eight percent despite the latest crisis that hit the US.

“Now we have conducted certain assessment or stress test on how this will going to affect Philippine banks and the results show that the banks here are fairly resilient and will not be adversely affected by an increase in spreads for instance. There, of course, will be some effects but it is unlikely that this is going to be very significant,” the BSP chief added.

Even if debt spreads by 500 basis points, Tetangco said the CAR of banks would still stay above the BSP’s minimum requirement of 10 percent and eight percent under the Basel Accord.

“And even if spreads would go up to about 500 basis points then the capital adequacy ratio of Philippines banks will still be in excess of the minimum 10 percent. In short, the capital adequacy ratio will remain above of the minimum requirement of the BSP,” he added.

Latest data showed that the CAR of the banking system remained healthy at 16.02 percent on solo basis and 16.97 percent on a consolidated basis as of end-December 2010. Similarly, the Tier 1 capital ratios of the banking system remained high at 13.64 percent on a solo basis and 13.69 percent on a consolidated basis.

The banking system’s CARs hardly moved from the last quarter’s 16.04 percent on a solo basis and 16.97 percent on a consolidated basis.

The CAR is a ratio of a bank’s capital to its risk and the central bank tracks this indicator to ensure that banks have the capability to absorb a reasonable amount of loss and that they are complying with their statutory capital requirements.

US President Obama announced an agreement reached early this week to cut about $1 trillion over 10 years so as not to drag the fragile US economy.

Earlier, Fitch Ratings said Philippine banks have enough “firepower” to survive the negative impact of the fragile economic growth in the US and the debt crisis in Europe.

Ambreesh Srivastava, senior director and head of financial institutions in South Asia of Fitch Ratings, earlier said the impact of what is happening in the US and Europe on Asian economies including the Philippines would put some pressure on the performance of the banking industry.

“This will likely result to a moderation in the performance of the banks,” Srivastava stressed.

He pointed out that banks generated historically high profitabilities in 2009 and 2010 after their Return on Average Assets were driven by their treasury profits on the back of record low interest rates.

“But clearly interest rates will not likely stay at the levels that we have. Some have started tigthening their monetary policy,” he added.

In the case of the Philippines, the BSP has raised key policy rates by 25 basis points last March 24 and by another 25 basis points last May 5 as a preemptive move to keep inflation expectations well anchored amid escalating oil prices in the world market. This brought the overnight borrowing rate to 4.50 percent and the overnight lending rate to 6.50 percent.

The twin action was followed by an increase in the reserve requirement for banks to 21 percent from 19 percent to siphon off close to P70 billion from the financial system to curb additional inflationary pressures arising from excess liquidity.

However, he explained that the economic uncertainties in advanced economies led by the US and the debt crisis in Europe would not have direct impact on Asian banks unless the slowdown in growth rates would be considerable.