Banks’ capital adequacy ratio down to 15.45%

Published by rudy Date posted on April 27, 2009

MANILA, Philippines – Although still well-capitalized, the Philippine banking industry continued to experience a steady decline in its capital adequacy, with levels going down across all banking groups particularly in the rural and cooperative banking industry.

The latest available data from the Bangko Sentral ng Pilipinas (BSP) showed that at the end of September 2008, the consolidated capital adequacy ratio of the entire banking system fell to 15.45 percent from 15.7 percent in 2007.

Despite the decline, however, the Philippine banking system remained well above the international benchmark ratio of eight percent and the BSP’s own 10-percent minimum requirement.

The CAR is a ratio of a bank’s capital to its risk and bank regulators track 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.

With bank lending expected to slow down dramatically this year, regulators have been projecting some difficulties for the banking sector including the possible decline in its overall capital adequacy and asset quality.

The BSP reported that universal and commercial banks (U/KB) suffered a slight drop in its capital adequacy ratio from 15.85 percent at end-September 2007 to 15.7 percent.

However, the industry actually managed to improve its ratio when compared with the end-June 2008 ratio which had fallen to 15.47 percent, on a consolidated basis.

On the other hand, the BSP said thrift banks reflected the same trend, with the consolidated CAR dropping to 14.59 percent from 14.6 percent the previous year.

Likewise, the consolidated CAR of rural and cooperative banks fell even more to 13.76 percent from 15.58 percent at end-September 2007 although this was already an improvement compared with 13.52 percent the previous quarter.

The BSP said the consolidated Tier 1 (T1) capital ratio of the banking system stood at 12.39 percent as of Sept. 30, 2008, with the banking system’s total qualifying capital of P584.79 billion broken down into 80.17 percent T1 capital and 19.83 percent Tier 2 (T2) capital.

The U/KB industry was reported to have a consolidated total qualifying capital amounting to P438.50 billion of which 79.85 percent was T1 capital and P110.67 billion 20.15 percent was T2 capital.

Central bank officials, however, have been expecting a slight decline in the asset quality of Philippine banks which would also deteriorate the industry’s capital adequacy ratio as banks faced more difficulties growing capital internally.

The BSP said the most optimistic scenario for 2009 was for the capital adequacy ratio (CAR) of the banking industry to stay “relatively neutral”.

BSP Deputy Governor Nestor Espenilla, however, said earlier that the CAR was more likely to decline because of what he called the “modest deterioration” of asset quality.

But Espenilla said the decline in asset quality is to be expected under the circumstances when the economy is slowing, credit was tightening and there was a deterioration of corporate and household incomes.

“That is counter-balanced by the efforts of many banks to actually recapitalize,” Espenilla said. “But of course declining profitability will also diminish the banks’ ability to grow capital internally.”

As a result, Espenilla said the CAR of the banking industry could decline slightly this year although he said the decline would not reach alarming levels since the industry had taken extraordinary care to recapitalize during the economic surge in 2007 and earlier.

Even before the 2008 financial meltdown, however, the effects of tighter international rules have already chipped away at the capital adequacy of Philippine banks, with the industry’s capital adequacy ratio dropping from 18.85 percent at the end of June 2007 to 15.25 percent in June 2008. –Des Ferriols, Philippine Star

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