Small banks proving as strong as bigger banks

Thrift and rural banks may be small, but these institutions, which have unrivaled reach in the Philippine countryside, are just as strong as their bigger counterparts.

Data released by regulators this week showed small banks have maintained high levels of capital over the year, which showed they were more than capable of absorbing unexpected losses.

“A strong capital position promotes financial stability by providing individual banks and the industry with an adequate buffer,” the Bangko Sentral ng Pilipinas (BSP) said Monday.

In its maiden report on the capital adequacy ratios (CAR) of small banks, the BSP said thrift and rural lenders’ buffer against potential losses was more than twice the minimum level set by regulators as of the end of last year.

The stand-alone thrift banks’ capital position over the two-year period remained stable with CARs (solo basis) range from 17.69 percent to 22.02 percent. Similarly, the net tier 1 ratios remained solid at 15.12 percent to 19.20 percent.

On a year-on-year basis, the overall CAR of stand-alone thrift banks improved to 18.07 percent in end-2013 from 17.69 percent in end-2012.

The stand-alone rural industry over the two-year period similarly showed stability based on their reported CARs (solo basis) ranged from 17.98 percent to 20.67 percent.

On a year-on year basis, the overall CAR of stand-alone rural banks slightly slid to 19.15 percent in end-December 2013 from 20.67 percent in end-December 2012.

Banks’ CAR measures the amount of capital relative to risk-weighted assets such as loans and investments.

This is made up of two components: more durable tier 1 capital that refers to common equity put in by shareholders, and tier 2 instruments are more like debt than stock.

Small banks’ CAR are measured using rules under Basel 1.5, which is a simplified version of rules that apply to larger banks.

This is done in view of the simple operations of stand-alone banks.

Basel 1.5 framework involves only a few key changes to the then existing Basel I framework.

This includes, among others, the increase in risk weight on foreign currency-denominated exposures to government securities and foreclosed real estate assets.

The combined assets of these stand-alone thrift and rural banks accounted for 5.30 percent and 4.30 percent of the total resources of the Philippine banking system as of end-2012 and end-2013, respectively. However, in terms of operating network, the total number of offices of these banks consistently make up the bulk of the total banking industry’s structure which is 92.82 percent in 2012 and 92.57 percent in 2013.