Philippine banks are expected to continue raising money this year to strengthen their books and sustain the high levels of lending growth the economy needs to stay on its present course.
Debt watcher Fitch Ratings in a report said recent regulations introduced in the industry also forced lenders to bolster their capital positions.
“Many Philippine banks are unable to generate sufficient capital through profits alone to support loan growth in the high teens,” Fitch said in a statement.
“A number of the large banks have raised capital through the financial markets over the past few years, to back robust asset growth as well as to prepare for more demanding capital rules,” the rating agency said.
Last year, Basel III rules on capital were imposed by the Bangko Sentral ng Pilipinas (BSP), the financial industry’s chief regulator. Under these standards, banks have to comply with higher capitalization requirements as regulators sought to curb excessive risk-taking.
Another rule that took effect last year concerned domestic systemically important banks (DSIBs), which forces banks deemed by regulators as “too big to fail” to set aside even more capital as buffer for potential losses.
The new framework requires the largest banks to hold core equity Tier 1 capital of at least 11 percent of risk-weighted assets by January 2019, up from the current minimum of 8.5 percent. Large Philippine banks already have Tier 1 capital adequacy ratios (CAR) above this level, but they may be eroded by high loan growth over time.
Bank of the Philippine Islands (BPI) and Philippine National Bank both raised equity in early 2014, and Metropolitan Bank & Trust Co. is set to issue stocks in the coming months.
A bank’s capital serves as its buffer from potential losses. It also restricts a bank’s ability to lend relative to the amount of capital it has.
Loan growth in the Philippines has been in the mid- to high-teens for the last four years, and private sector credit relative to the size of the economy has risen to 38.3 percent as of the end of 2014 from 29.6 percent at the end of 2010, according to Fitch.
“This is not unreasonable for the country’s present stage of economic growth as absolute credit penetration still remains low,” Fitch said.