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Monday, May 27, 2013

Nine Philippine Thrift Banks Do Not Meet BSP's Minimum Capital Adequacy Ratios as of December 31, 2012

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

The BSP issued new BASEL III Implementing Guidelines that will take effect on January 1, 2014. Under the new guidelines:

"Banks must now meet specific minimum thresholds for so-called Common Equity Tier 1 (CET1) capital and Tier 1 (T1) capital in addition to the Capital Adequacy Ratio (CAR). These regulatory thresholds effectively move banks worldwide to rely more on core capital instruments like CET1 and T1 issues. This is in lieu of hybrid instruments which did not fare well in the latest global crisis as far as absorbing losses. The ability to absorb losses is central to Basel III.
The BSP maintained the minimum Capital Adequacy Ratio (CAR) at 10.0 percent. In addition to CAR, the new framework sets a CET1 ratio of at least 6.0 percent and the Tier I capital ratio is at a minimum of 7.5 percent. 
The new guidelines also introduce a capital conservation buffer of 2.5 percent which shall be made up of CET1 capital. In addition, banks which issued capital instruments from 2011 will be allowed to count these instruments as Basel III-eligible until end-2015
Under these guidelines, several Philippine Thrift Banks currently do not meet these guidelines as of December 31, 2012.  The banks that fail to meet BSP's minimum capital requirements are as follows:

Total CAR

  1. Inter-Asia Development Bank (Total CAR of -11.76)
  2. The Real Bank Inc. (Total CAR of -1.55)
  3. Enterprise Bank (Total CAR of 0.00)
  4. The Palawan Bank, Inc. (Total CAR of 4.27)
Tier One CAR
  1. The Real Bank Inc. (Tier One CAR of -1.55)
  2. Business & Consumers Bank (Tier One CAR of 0.00)
  3. Enterprise Bank (Tier One CAR of 0.00)
  4. Equicom (Tier One CAR of 0.00)
  5. Inter-Asia Development Bank (Tier One CAR of 0.00)
  6. Maritime SLA (Tier One CAR of 0.00)
  7. Optimum Development Bank (Tier One CAR of 0.00)
  8. The Palawan Bank, Inc. (Tier One CAR of 4.27)
  9. Planters Development Bank (Tier One CAR of 6.74)
It should be noted that Bataan SLA, which had a Tier One CAR of 0.00 as September 30, 2012 (see "Nine Philippine Thrift Banks Do Not Meet BSP's Minimum Capital Adequacy Ratios as of September 30, 2012"), had no Published Statement of Condition as of December 31, 2012.

The Total CAR and Tier 1 CAR of Philippine Thrift Banks as of December 31, 2012 is as follows (Banks that do not meet BSP's minimum capital requirements are highlighted in red):




Philippine Thrift Banking System
Total CAR
December 31, 2012






Bank Total CAR
Inter-Asia Development Bank -11.76
The Real Bank (A Thrift Bank) Inc. -1.55
Enterprise Bank 0.00
The Palawan Bank, Inc. 4.27
Equicom SB 10.42
Silangan Savings and Loan Bank, Inc. 11.76
Citibank Savings Inc. 11.80
Planters Development Bank 12.61
University Savings Bank 13.93
Sterling Bank of Asia Inc. 14.16
BPI Family Savings Bank 14.58
RCBC Savings Bank 14.94
BPI Globe Banko Inc. Savings Bank 15.19
Opportunity Kauswagan Bank, Inc. 15.31
Philippine Resources Savings Banking Corporation 15.99
Wealth Bank - A Development Bank 16.09
Legazpi Savings Bank Inc. 16.18
World Partners Bank (A Thrift Bank) 16.34
Philippine Postal Savings Bank 16.40
City Savings Bank 16.45
Farmers Savings & Loan Bank 16.77
China Bank Savings 16.80
Philippine Savings Bank 17.14
BPI Direct Savings Bank 17.77
Village SLA, Inc. 18.08
Luzon Development Bank 18.25
Hiyas Savings & Loan Bank 19.75
Producers Savings Bank 20.15
Penbank, Inc. 20.79
HSBC Savings Bank (Phils) Inc. 21.57
Comsavings Bank 21.92
Philippine Business Bank 22.59
Dumaguete City Development Bank 22.79
Bataan Development Bank 24.21
Security Bank Savings Corporation 26.10
First Consolidated Bank 27.36
Malayan Bank Savings & Mortgage Bank 27.45
Allied Savings Bank 27.50
UCPB Savings Bank 28.37
Business & Consumers Bank 31.46
Life Savings Bank 31.48
Cordillera Savings Bank 32.19
Card SME Bank Inc. (A Thrift Bank) 33.32
Metro Cebu Public Savings Bank 35.52
Maritime SLA 36.10
Lemery Savings & Loan Bank, Inc. 38.90
Malasiqui Progressive SLB, Inc. 43.62
Northpoint Development Bank 43.80
Tong Yang Savings Bank Inc. 44.04
CityState Savings Bank 44.21
Pampanga Development Bank 48.54
Sampaguita SLA 48.99
The Queen City Development Bank 49.85
Optimum Development Bank 54.23
Microfinance Maximum SB (Maxbank) 54.63
Pridestar Development Bank 54.67
Pacific Ace Savings Bank 57.71
Dungganon Bank 59.00
Progress SLA 61.83
Tower Development Bank 65.08
Quezon Coconut Producers SLB Inc. 66.95
Sun Savings Bank 69.02
Bank One Savings and Trust Corp. 81.17
United Overseas Bank Philippines 83.67
Merchants Savings & Loan Association Inc. 98.57
Century Savings Bank 109.01
BDO Elite Savings Bank 239.61
Isla Bank (A Thrift Bank) Inc. 331.68
Iloilo City Development Bank 386.24
Bataan SLA NA


Source: www.bsp.gov.ph





Philippine Thrift Banking System
Tier 1 CAR
December 31, 2012






Bank Tier 1 CAR
The Real Bank (A Thrift Bank) Inc. -1.55
Business & Consumers Bank 0.00
Enterprise Bank 0.00
Equicom SB 0.00
Inter-Asia Development Bank 0.00
Maritime SLA 0.00
Optimum Development Bank 0.00
The Palawan Bank, Inc. 4.27
Planters Development Bank 6.74
Legazpi Savings Bank Inc. 8.09
Sterling Bank of Asia Inc. 10.03
Citibank Savings Inc. 11.03
Silangan Savings and Loan Bank, Inc. 11.76
China Bank Savings 12.93
Philippine Savings Bank 13.63
BPI Family Savings Bank 13.71
Philippine Resources Savings Banking Corporation 14.21
RCBC Savings Bank 14.35
BPI Globe Banko Inc. Savings Bank 14.37
Wealth Bank - A Development Bank 15.30
World Partners Bank (A Thrift Bank) 15.38
Philippine Postal Savings Bank 15.42
City Savings Bank 15.55
Farmers Savings & Loan Bank 15.97
BPI Direct Savings Bank 16.89
Luzon Development Bank 17.05
Producers Savings Bank 17.63
Village SLA, Inc. 18.08
Hiyas Savings & Loan Bank 19.45
Penbank, Inc. 20.01
HSBC Savings Bank (Phils) Inc. 20.87
Philippine Business Bank 21.80
Dumaguete City Development Bank 22.39
Comsavings Bank 22.56
Bataan Development Bank 23.49
Security Bank Savings Corporation 25.27
Allied Savings Bank 26.81
Malayan Bank Savings & Mortgage Bank 26.92
First Consolidated Bank 27.36
UCPB Savings Bank 27.58
Cordillera Savings Bank 31.73
Metro Cebu Public Savings Bank 35.11
Lemery Savings & Loan Bank, Inc. 38.52
Malasiqui Progressive SLB, Inc. 43.41
University Savings Bank 43.52
Northpoint Development Bank 43.80
Tong Yang Savings Bank Inc. 44.04
CityState Savings Bank 44.09
The Queen City Development Bank 49.28
Sampaguita SLA 50.40
Quezon Coconut Producers SLB Inc. 56.80
Pacific Ace Savings Bank 57.48
Dungganon Bank 58.18
Progress SLA 61.83
Microfinance Maximum SB (Maxbank) 61.84
Life Savings Bank 64.86
Pridestar Development Bank 66.66
Sun Savings Bank 68.04
Opportunity Kauswagan Bank, Inc. 70.57
Bank One Savings and Trust Corp. 80.50
United Overseas Bank Philippines 83.30
Merchants Savings & Loan Association Inc. 98.45
Iloilo City Development Bank 99.77
Century Savings Bank 107.14
Pampanga Development Bank 110.54
Tower Development Bank 111.00
Card SME Bank Inc. (A Thrift Bank) 203.07
BDO Elite Savings Bank 239.61
Isla Bank (A Thrift Bank) Inc. 331.36
Bataan SLA NA


Source: www.bsp.gov.ph

Sunday, May 26, 2013

The Capital Adequacy Ratios of Philippine Universal and Commercial Banks - December 31, 2012

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

The BSP issued new BASEL III Implementing Guidelines that will take effect on January 1, 2014. Under the new guidelines:


"Banks must now meet specific minimum thresholds for so-called Common Equity Tier 1 (CET1) capital and Tier 1 (T1) capital in addition to the Capital Adequacy Ratio (CAR). These regulatory thresholds effectively move banks worldwide to rely more on core capital instruments like CET1 and T1 issues. This is in lieu of hybrid instruments which did not fare well in the latest global crisis as far as absorbing losses. The ability to absorb losses is central to Basel III.
The BSP maintained the minimum Capital Adequacy Ratio (CAR) at 10.0 percent. In addition to CAR, the new framework sets a CET1 ratio of at least 6.0 percent and the Tier I capital ratio is at a minimum of 7.5 percent. 
The new guidelines also introduce a capital conservation buffer of 2.5 percent which shall be made up of CET1 capital. In addition, banks which issued capital instruments from 2011 will be allowed to count these instruments as Basel III-eligible until end-2015

The Total CAR and Tier 1 CAR of Philippine Universal and Commercial Banks as of December 31, 2012 is as follows:


Philippine Commercial Banking System
Total CAR
December 31, 2012






Bank Total CAR
United Coconut Planters Bank 10.71
Maybank Philippines Inc. 12.54
Bank of the Philippine Islands 12.58
Metropolitan Bank & Trust Company 12.99
HongKong & Shanghai Banking Corporation 13.05
Standard Chartered Bank 14.00
Asia United Bank Corporation 14.80
Security Bank Corporation 14.99
Allied Banking Corporation 15.75
China Banking Corporation 15.85
Rizal Commercial Banking Corporation 15.99
Philippine National Bank 16.62
ANZ Banking Group Ltd 16.75
Banco De Oro Unibank 17.10
East West Banking Corporation 18.12
Land Bank of the Philippines 20.24
Philippine Veterans Bank 20.41
Philippine Bank of Communications 20.45
Union Bank of the Philippines 20.68
Philippine Trust Company 21.41
Citibank N.A. 21.79
Deutsche Bank AG 21.80
Bank of Commerce 22.32
Development Bank of the Philippines 24.05
Robinsons Bank Corporation 25.73
Korea Exchange Bank 27.58
Mizuho Corporate Bank Ltd. - Manila Branch 28.94
Chinatrust (Philippines) Commercial Banking Corporation 30.72
Bank of China Limited - Manila Branch 31.45
The Bank of Tokyo - Mitsubishi UFJ Ltd 32.12
BDO Private Bank, Inc. 32.82
Internationale Nederlanden Groep BK 35.79
JP Morgan Chase National Bank Association 44.01
Mega International Commercial Bank Company Limited 44.25
Bank of America N.A. 55.36
Bangkok Bank Public Co. Ltd 146.38
Al-Amanah Islamic Bank of the Philippines 203.89


Source: www.bsp.gov.ph

Philippine Commercial Banking System
Tier 1 CAR
December 31, 2012






Bank Tier 1 CAR
United Coconut Planters Bank 10.71
Philippine National Bank 11.39
Maybank Philippines Inc. 11.45
Bank of the Philippine Islands 12.58
Metropolitan Bank & Trust Company 12.99
HongKong & Shanghai Banking Corporation 13.05
Land Bank of the Philippines 13.40
Standard Chartered Bank 13.46
Allied Banking Corporation 13.56
Rizal Commercial Banking Corporation 13.62
Banco De Oro Unibank 14.10
Security Bank Corporation 14.15
Philippine Bank of Communications 14.48
East West Banking Corporation 14.77
Asia United Bank Corporation 14.80
China Banking Corporation 15.32
ANZ Banking Group Ltd 16.28
Development Bank of the Philippines 17.41
Union Bank of the Philippines 18.01
Philippine Veterans Bank 20.22
Citibank N.A. 21.07
Philippine Trust Company 21.19
Deutsche Bank AG 21.42
Bank of Commerce 22.14
Robinsons Bank Corporation 26.31
Korea Exchange Bank 27.58
Mizuho Corporate Bank Ltd. - Manila Branch 28.91
Chinatrust (Philippines) Commercial Banking Corporation 29.98
Bank of China Limited - Manila Branch 30.84
The Bank of Tokyo - Mitsubishi UFJ Ltd 31.17
BDO Private Bank, Inc. 32.66
Internationale Nederlanden Groep BK 35.53
Mega International Commercial Bank Company Limited 43.31
JP Morgan Chase National Bank Association 43.89
Bank of America N.A. 55.19
Bangkok Bank Public Co. Ltd 145.46
Al-Amanah Islamic Bank of the Philippines 460.31

Source: www.bsp.gov.ph

Friday, May 10, 2013

If There is a Real Estate Bubble in the Philippines, How Quickly Can It Burst?

Editor's Note: This is an update of four previous blog posts:"Is There a Real Estate Bubble in the Philippines? - June 2012"
 "Is There a Real Estate Bubble in the Philippines - Part II""The Philippine Banking System's True Exposure to Real Estate", and "Is There a Real Estate Bubble in the Philippines?"

If there is a Real Estate Bubble in the Philippines, how quickly can it burst?  The answer is: very quickly.  Right now, NPLs (non-performing loans) are at a record low of just 2.00% of total loans, levels not seen since 1996, a year prior to the the Asian Financial Crisis.  When the Asian Financial Crisis hit in the Philippines in 1997, NPLs jumped by more than two thirds, to 4.68% of total loans.  The year after that, in 1998, NPLs doubled again to 10.37%.  In the succeeding years, NPLs kept on climbing until it peaked at 17.35% of total loans in 2001.  From then on, it took ten years for NPLs, until 2011, for NPLs to reach the pre-crisis low of 2.80% that was posted in 1996.

NPLs




Loan Growth

One factor that may have lead to the bursting of the bubble was that the growth of loans prior to the Asian Financial Crisis far outpaced the growth in the underlying economy. From 1987 to 1992, loans as a percentage of GDP climbed slowly, from a moribund 18.4% of GDP in 1987 to 24.5% of GDP in 1992.  From 1992 onwards, loans as a percentage of GDP grew relentlessly each year.  Just five years later, this ratio stood at 58.5% of GDP, more than double the 24.5% ratio posted five years earlier in 1992.

The sharp climb in loan growth from 1992 to 1997 indicates a significant loosening of loan underwriting standards.  Loans grew at a pace faster than the economy could handle.  Bankers lent and borrowers borrowed more money than they ever knew what to do with.

The question is, are we in that same situation again?  The data indicates otherwise.  For the past five years, loans as percentage of GDP have been stuck in the low 30s.  It currently stands at 32.7% as of October 2012.




House Prices  

During the last US housing bubble, loan defaults remained low because borrowers who couldn't repay their mortgages simply sold the house, the underlying collateral, into an ever rising real estate market.  When housing prices plateaued or declined, NPLs began to climb very sharply.



The same was true for housing busts in other countries such as Spain...





and Greece...




and Ireland.



Now, is the same true for the Philippines?  Have house prices peaked?

Based on the latest available data, not yet.



Investment Overhang

In all these markets, the busts were due to an over investment in residential assets that was way, way above the historical average.

In the US, Residential Fixed Investment as a % of GDP strayed way above the historical average of 4.20% of GDP, peaking at 6.20% of GDP in 2005.


As this graph suggests, the cumulative overhang still needs to be worked off the system, as it did during the Great Depression.





The same goes true for Spain



and Ireland.




Might this be true of the Philippines as well?

Based on the available data, which covers Construction Investment and not Residential Fixed Investment, Construction as a % of GDP averaged 9.35% of GDP from 1990 to 2012.  There was a brief overhang in the years running up to the Asian Financial Crisis and an intermittent overhang from 2009 onwards.





On a cumulative basis, the current construction boom is making up for the under investment that occurred from 2000 to 2009, so the cumulative underhang stills stands at -2.40% of GDP.  At the current rate of growth, equilibrium with historical averages should occur by 2014.  As to whether the Construction Investment will continue to outpace the economy beyond that remains to be seen.





So is the bubble set to burst?  The answer is: not yet, at least on a national scale.  But on a regional scale, such as in Metro Manila, it may just be so.  But that is another story altogether.