The Capital Adequacy Ratios of Philippine Commercial Banks

Editor's Note:  This blog was inspired by the spectacular failure of Banco Filipino Savings and Mortgage Bank for the second time in its 38 years of existence.  This blog post and other blog posts like it attempt to describe why the bank failed.  But it also attempts to assess what other Philippine Banks have the potential to fail in the not too distant future. To see blog posts on other banks, click on the Banco Filipino Graphic at the top of the blog or click on the blog archive on the right hand column, or simply go to bancofilipinofailure.blogspot.com.


A bank's Capital Adequacy Ratio is a measure of a bank's capital and financial strength.  It is expressed as a percentage of a bank's risk weighted credit exposures.  It is also known as the "Capital to Risk Weighted Assets Ratio (CRAR).

The general formula is as follows:

CAR = (Tier 1 Capital + Tier 2 Capital)/Risk Weighted Assets)

Tier 1 Capital

Tier 1 CAR is the ratio of a bank's core or equity capital to its total risk-weighted assets.  It measures financial strength from a regulator's point of view. Tier 1 Capital measures the bank's ability to absorb losses without a bank being required to cease trading.

The formula for Tier 1 Capital is as follows:

Tier 1 Capital = (Paid-up Capital + Statutory Reserves + Disclosed Free Reserves) - (Equity Investments in Subsidiary + Intangible Assets + Current & B/F losses)

Tier 1 CAR = Tier 1 Capital/Risk Weighted Assets

Tier 2 Capital

Tier 2 Capital is supplementary capital.  It measures the ability of a bank to absorb losses in the event of a winding up and so it provides a lesser degree of protection to depositors.

The formula for Tier 2 Capital is as follows:

 Tier 2 Capital = Undisclosed Reserves + General Loss Reserves + Hybrid Debt Capital Instruments and Subordinated Debts.

Risk Weighted Assets

Risk Weighted Assets are a bank's on balance sheet assets and off-balance sheet exposures, weighted according to risk.  Different classes of assets have different risk weightings.  For instance, cash on hand or a government bond has zero risk weighting and are subtracted from the total risk assets.  A loan would have a 100% risk weighthing - it would be counted towards the total risk assets of the bank.

More information about this can be found here.

Minimum Capital Requirements

International Guidelines

Basel III is the global requlatory standard on bank capital adequacy, stress testing, and market liquidity risk agreed upon by the members of the Basel Committee on Banking Supervision.

Under Basel III, the minimum Common Equity Tier 1 Capital Ratio is 4.5%, Tier 1 Capital Ratio is 6.0%, conservation buffer is 2.5%, and the minimum Total CAR is 8.0%.

For more information on Basel III, read this.

BSP Guidelines

BSP Guidelines are somewhat stricter than Basel III.  Under the new BSP Guidelines conforming to Basel III, the minimum Common Equity Tier 1 Capital Ratio is  6.0%, Tier 1 Capital Ratio is 7.5%, conservation buffer is still 2.5%, and the minimum Total CAR is 10.0%.  See "BSP Issues Basel 3 Memorandum on Banks' Capital Base Standards" for more information.

Under these guidelines, all of the Philippine Commercial Banks currently meet these guidelines as of December 31, 2011.

Philippine Commercial Banking System
Total CAR
December 31, 2011
Bank	Total CAR
United Coconut Planters Bank	10.25
The Bank of Tokyo - Mitsubishi UFJ Ltd	12.13
Bank of the Philippine Islands	13.54
Banco De Oro Unibank	13.68
Maybank Philippines Inc.	13.68
Allied Banking Corporation	14.42
Metropolitan Bank & Trust Company	14.79
Standard Chartered Bank	14.84
East West Banking Corporation	15.12
Asia United Bank Corporation	15.31
China Banking Corporation	16.00
Philippine Veterans Bank	16.15
Land Bank of the Philippines	16.47
Rizal Commercial Banking Corporation	17.12
HongKong & Shanghai Banking Corporation	17.31
Union Bank of the Philippines	18.21
Development Bank of the Philippines	18.97
Citibank N.A.	19.20
Security Bank Corporation	19.58
Philippine National Bank	19.83
ANZ Banking Group Ltd	21.54
Philippine Trust Company	22.03
Bank of Commerce	23.33
Deutsche Bank AG	25.50
Philippine Bank of Communications	25.98
Bank of China Limited - Manila Branch	28.55
Chinatrust (Philippines) Commercial Banking Corporation	29.11
Robinsons Bank Corporation	29.13
BDO Private Bank, Inc.	31.51
Mizuho Corporate Bank Ltd. - Manila Branch	31.53
Korea Exchange Bank	35.90
Mega International Commercial Bank Company Limited	43.88
Internationale Nederlanden Groep BK	50.59
Bangkok Bank Public Co. Ltd	54.03
Bank of America N.A.	57.72
JP Morgan Chase National Bank Association	63.46
Al-Amanah Islamic Bank of the Philippines	213.66

Source: www.bsp.gov.ph

Philippine Commercial Banking System
Tier 1 CAR
December 31, 2011
Bank	Tier 1 CAR
Banco De Oro Unibank	9.00
United Coconut Planters Bank	10.25
East West Banking Corporation	10.53
The Bank of Tokyo - Mitsubishi UFJ Ltd	11.34
Allied Banking Corporation	12.11
Maybank Philippines Inc.	12.53
Land Bank of the Philippines	12.60
Bank of the Philippine Islands	13.54
Philippine National Bank	13.96
Rizal Commercial Banking Corporation	14.23
Metropolitan Bank & Trust Company	14.26
Standard Chartered Bank	14.29
Development Bank of the Philippines	14.56
Asia United Bank Corporation	15.31
Union Bank of the Philippines	15.32
China Banking Corporation	15.48
Philippine Bank of Communications	15.72
Philippine Veterans Bank	16.05
HongKong & Shanghai Banking Corporation	17.21
Security Bank Corporation	18.00
Citibank N.A.	18.43
ANZ Banking Group Ltd	20.95
Philippine Trust Company	21.78
Bank of Commerce	23.33
Deutsche Bank AG	25.25
Bank of China Limited - Manila Branch	27.79
Robinsons Bank Corporation	28.28
Chinatrust (Philippines) Commercial Banking Corporation	28.34
Mizuho Corporate Bank Ltd. - Manila Branch	30.61
BDO Private Bank, Inc.	31.34
Korea Exchange Bank	35.90
Mega International Commercial Bank Company Limited	42.98
Internationale Nederlanden Groep BK	50.42
Bangkok Bank Public Co. Ltd	53.11
Bank of America N.A.	57.83
JP Morgan Chase National Bank Association	63.15
Al-Amanah Islamic Bank of the Philippines	490.48

Source: www.bsp.gov.ph


Caveat:


Although all Philippine Commercial Banks currently pass BSP Guidelines for Capital Adequacy, seven of these banks have overstated capital due to the fact that they carry significant unbooked losses on their balance sheets.  Three Philippine Commercial Banks carry unbooked losses equivalent to 25% or more of their Shareholders Equity.  These banks are as follows:

1. Philippine Bank of Communications (Unbooked Losses equal to 73.39% of SE)
2. United Coconut Planters Bank (Unbooked Losses equal to 63.97% of SE)
3. Philippine National Bank (Unbooked Losses equal to 26.49% of SE)

See "Philippine Commercial Banks with Overstated Capital as of December 31, 2011

The overstatement is due to BSP policy of granting "regulatory relief" and allowing the deferment and amortization of un booked losses arising from:

1. SPV Transactions;
2. Acquisitions of failed/failing banks;
3. Large credit losses

The premise behind this policy is regulatory forbearance that would allow the banks to earn back and write off those losses over time, reducing their need to raise additional capital and avoid  significant dilution of existing shareholders.

For more information regarding this, please refer to a previous post, "BSP's Ampaw Accounting System"

As a result of this policy, the Capital Adequacy Ratios reflected in the Published Statement of Conditions of certain banks are not indicative of their true financial condition.  Their actual Capital Adequacy Ratios may be a lot lower and may not even meet BSP or Basel III minimum capital requirements.  However, without more information, it is difficult to calculate what their true Capital Adequacy Ratios are.  Readers are advised to go to a previous blog post "Philippine Commercial Banks Show Improvement at Year End 2011"for a more indicative measure of their financial strength.