Banks raised capitalization cover in Q1, BSP reports

The banking sector improved its capitalization cover in the first quarter, indicating that banks are healthy despite the financial crisis in some advanced economies and can support the growth of the local economy.

The banks’ capital adequacy ratio (CAR) averaged at 16.48 percent in the first quarter, from 14.9 percent in the same period last year, data from the Bangko Sentral ng Pilipinas showed.

The latest CAR was also an improvement from the 15.99 percent recorded in the fourth quarter of 2010.

“The Philippine banking system’s capitalization remained robust despite geopolitical tensions in the Middle East and North Africa (MENA) region and concerns over sovereign risk in Europe,” the BSP said in a statement.

CAR, one of the key indicators of the stability of banks, is the proportion of capital to risk-exposed assets.

By having enough capital, banks are in a better position to absorb loan defaults.

The BSP requires banks to maintain a CAR of at least 10 percent, while international standards require 8 percent.

Regulators said the fact that the CAR of local banks exceeds requirements shows that the sector remains one of the healthier sectors of the domestic economy.

It said the favorable state of the banking sector puts it in a position to support the economy through higher loans.

The higher-than-required capitalization of banks is credited partly to the rising income of Filipinos that in turn leads to higher demand for bank services, such as loans.

The BSP also reported the CAR of each banking sub-sector and said that the average CAR of all sub-sectors stayed above the regulatory requirement.

The CAR of universal and commercial banks stood at 16.42 percent; thrift banks at 16.11 percent; and rural banks at 18.6 percent.

The BSP said rising demand for banking services, mainly loans, indicates the general confidence of the public in their income and capacity to pay.

Moreover, the central bank said deposits to banks are also rising, indicating the public’s confidence in the banking sector, the BSP said.