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:
- Philippine Bank of Communications (Unbooked Losses equal to 73.39% of SE)
- United Coconut Planters Bank (Unbooked Losses equal to 63.97% of SE)
- 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:
- SPV Transactions;
- Acquisitions of failed/failing banks;
- 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.
