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

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

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.