Search This Blog

Friday, September 21, 2012

The Capital Adequacy Ratios of Philippine Commercial Banks as of March 31, 2012

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 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:

  1. United Coconut Planters Bank (Deferred Charges equal to 61.20% of SE)
  2. Philippine Bank of Communications (Deferred Charges equal to 57.48% of SE)
  3. 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:
  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 Further Improvement in the 1st Qtr. of 2012" for a more indicative measure of their financial strength.

No comments:

Post a Comment