MANILA, Philippines—The Central bank’s decision to fully implement the stricter Basel III capitalization rules last January would enable the country’s banks to leap ahead of their regional counterparts in terms of strength.
Moody’s Investor Service on Thursday said that Philippine banks’ above-average level of capital should allow them to grow their loan portfolios by at least 15 percent a year in the near future.
While regulators of most other countries adopted a gradual approach in complying with capitalization requirements, Moody’s said, the Bangko Sentral ng Pilipinas (BSP) decided to implement the new rules right away.
“The implementation of the Basel III capital framework in the Philippines, and the corresponding measures taken by domestic banks to increase the quantity and improve the quality of their capital buffers, are credit positive for the sector and bank creditors,” Moody’s said.
Also, the BSP now requires banks to maintain capital well above the Basel III requirements. Philippine banks must maintain minimum common equity Tier 1 ratios of 6 percent and total capital adequacy ratios (CAR) of 10 percent, compared to the 4.5 percent and 8 percent, respectively, recommended by the Basel committee.
A bank’s CAR is a measure of the amount of capital it has set aside relative to its risk-weighted assets.
In response to the new Basel III measures, Philippine banks have improved their capital structure—a trend Moody’s expects to continue in the near future. Some of the steps taken include the issuance of new common equity and new Basel III-compliant securities and the disposal of non-core assets, among others.
“We also expect Philippine banks to continue to grow by a rate of up to 15 percent annually over the coming years, as their ongoing capital raising initiatives will allow them to do so without compromising their credit profiles and loss-absorbing buffers,” Moody’s analyst Alka Anbarasu said.
The country’s economic growth is one the fastest among global emerging markets, while banking penetration remains low compared with other countries in the region.
Moody’s said Philippine banks are expected to maintain CARs above 10 percent through end-2015, even after assuming 15-percent loan growth in 2014 and 2015.