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 March 31, 2012.
Philippine Commercial Banking System | |
Total CAR | |
March 31, 2012 | |
Bank | Total CAR |
United Coconut Planters Bank | 10.25 |
The Bank of Tokyo - Mitsubishi UFJ Ltd | 11.95 |
HongKong & Shanghai Banking Corporation | 12.85 |
Maybank Philippines Inc. | 13.33 |
Banco De Oro Unibank | 13.56 |
Standard Chartered Bank | 13.82 |
Allied Banking Corporation | 14.31 |
Bank of the Philippine Islands | 14.75 |
Metropolitan Bank & Trust Company | 15.34 |
Rizal Commercial Banking Corporation | 16.26 |
China Banking Corporation | 16.35 |
Security Bank Corporation | 16.45 |
Philippine Veterans Bank | 16.85 |
Asia United Bank Corporation | 17.39 |
East West Banking Corporation | 18.08 |
ANZ Banking Group Ltd | 18.58 |
Citibank N.A. | 19.34 |
Union Bank of the Philippines | 19.73 |
Philippine National Bank | 20.00 |
Development Bank of the Philippines | 20.11 |
Philippine Trust Company | 20.28 |
Land Bank of the Philippines | 20.46 |
Bank of Commerce | 20.54 |
Deutsche Bank AG | 20.54 |
Robinsons Bank Corporation | 27.36 |
Philippine Bank of Communications | 27.43 |
BDO Private Bank, Inc. | 29.29 |
Mizuho Corporate Bank Ltd. - Manila Branch | 30.25 |
Chinatrust (Philippines) Commercial Banking Corporation | 30.34 |
Korea Exchange Bank | 34.34 |
Internationale Nederlanden Groep BK | 43.04 |
JP Morgan Chase National Bank Association | 43.42 |
Mega International Commercial Bank Company Limited | 43.43 |
Bank of America N.A. | 48.63 |
Bank of China Limited - Manila Branch | 53.17 |
Bangkok Bank Public Co. Ltd | 75.86 |
Al-Amanah Islamic Bank of the Philippines | 213.66 |
Source: www.bsp.gov.ph
Philippine Commercial Banking System | |
Tier 1 CAR | |
March 31, 2012 | |
Bank | Tier 1 CAR |
Banco De Oro Unibank | 9.14 |
United Coconut Planters Bank | 10.25 |
The Bank of Tokyo - Mitsubishi UFJ Ltd | 11.19 |
Allied Banking Corporation | 12.07 |
Maybank Philippines Inc. | 12.19 |
Development Bank of the Philippines | 12.64 |
HongKong & Shanghai Banking Corporation | 13.22 |
Standard Chartered Bank | 13.25 |
Land Bank of the Philippines | 13.28 |
East West Banking Corporation | 13.61 |
Rizal Commercial Banking Corporation | 13.78 |
Philippine National Bank | 14.31 |
Bank of the Philippine Islands | 14.75 |
Metropolitan Bank & Trust Company | 15.01 |
Security Bank Corporation | 15.36 |
Philippine Bank of Communications | 15.54 |
China Banking Corporation | 15.91 |
Philippine Veterans Bank | 16.70 |
Union Bank of the Philippines | 16.86 |
Asia United Bank Corporation | 17.37 |
ANZ Banking Group Ltd | 18.18 |
Citibank N.A. | 18.59 |
Philippine Trust Company | 20.06 |
Deutsche Bank AG | 20.33 |
Bank of Commerce | 20.46 |
Robinsons Bank Corporation | 28.20 |
BDO Private Bank, Inc. | 29.10 |
Mizuho Corporate Bank Ltd. - Manila Branch | 29.32 |
Chinatrust (Philippines) Commercial Banking Corporation | 29.66 |
Korea Exchange Bank | 34.34 |
Mega International Commercial Bank Company Limited | 42.52 |
Internationale Nederlanden Groep BK | 42.87 |
JP Morgan Chase National Bank Association | 43.33 |
Bank of America N.A. | 48.73 |
Bank of China Limited - Manila Branch | 52.53 |
Bangkok Bank Public Co. Ltd | 74.93 |
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, eight 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 (SE). These banks have been tagged as distressed (highlighted in yellow) in a previous blog post:"Philippine Commercial Banks Show Further Improvement in the 1st Qtr. of 2012". These banks are as follows:
- United Coconut Planters Bank (Deferred Charges equal to 61.20% of SE)
- Philippine Bank of Communications (Deferred Charges equal to 57.48% of SE)
- Philippine National Bank (Deferred Charges equal to 25.11% of SE)
See "Can Philippine Commercial Banks Charge their Unbooked Losses Against Retained Earnings?"
The overstatement is due to BSP policy of granting "regulatory relief" and allowing the deferment and amortization of un booked losses arising from:
- SPV Transactions;
- Acquisitions of failed/failing banks;
- Large credit losses
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 Further Improvement in the 1st Qtr. of 2012" for a more indicative measure of their financial strength.
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