BPI eyes early adoption of Basel 3 requirements on capital adequacy ratio

MANILA, Philippines—The Ayala-led Bank of the Philippine Islands is taking steps towards the early adoption of the stringent capital adequacy ratio (CAR) requirements under the Basel 3 global framework but sees no need to raise fresh capital even if it were to grow its loan book by 12 percent in the next three years.

“Even with our strong capital base, we have taken the first steps to consider the early adoption of Basel 3 rules as announced by the Bangko Sentral ng Pilipinas, another step to strengthen our overall capital adequacy under the new global standards,” BPI chair Jaime Augusto Zobel de Ayala said in a report to stockholders on Thursday.

Universal and commercial banks are required by the BSP to adopt by Jan. 1, 2014, the capital adequacy standards under Basel 3, which introduces a complex package of reforms designed to improve the ability of banks to absorb losses, extend the coverage of financial risks and have stronger firewalls against periods of stress.

“We submitted our final Internal Capital Adequacy Assessment (ICAAP) document for 2011 to the BSP and an internal minimum capital adequacy ratio of 10.25 percent was defined to include risks other than credit, market and operational risks,” Zobel de Ayala said.

“A management action trigger (MAT) of 11 percent, 100 basis points over the required minimum, was set to prompt the bank to take the proper action to always ensure an adequate level of capital,” he said.

To date, BPI has a CAR of almost 15 percent.  Counting only the tier 1 or core capital, the ratio is at 13.1 percent.

Based on its ICAAP, BPI president Aurelio Montinola III said the bank has been projecting a 12 percent increase in lending in the next three years, which meant that no fresh capital would be needed until 2015.

“The other way to put it is by making good profits. Even if we dividend out (stocks), that’s the cheapest way of raising capital without going to the markets,” Montinola said. “Of course, we have a proviso that if something of interest comes up, we’ll be ready to go into the markets,” he added.

Montinola added that as a strategy under the bank’s ICAAP, its CAR must be maintained above the BSP’s minimum requirement.

Based on the BSP’s proposal under Basel 3, the minimum CAR must be raised from 10 to 12.5 percent.  “We leave it to the industry to see whether or not that’s an acceptable number,” he said.

“Since we’re a relatively small country and a relatively small banking system worldwide, we need a bit of cushion and therefore we need higher CAR numbers. On the other hand, if you make it too high, you are at a competitive disadvantage when it comes to the other banks around the world and more specifically when it comes to ROE (return on equity) number, which the shareholders would like to have,” Montinola said.

“The good news is the banks in the Philippines have the capital now so they’re poised to lend and are willing to lend and if the Philippine economy does well, that’s good for everyone,” he said.

Another comment prevalent across Asia with regards to Basel 3, Montinola said, has been that the risk weights on trade finance were quite punitive, and this was ironic, considering that trade finance has been a big factor behind Asia’s growth. “So I anticipate there will be discussions on that to try to lessen the weights in that area,” he said.

For BPI, Montinola said the target would be to sustain its ROE at 15 percent.  “We’re looking forward to increasing it this year,” he said.

BPI, the country’s most valuable and profitable bank (in peso terms), chalked up a record high net profit of P12.8 billion in 2011, equivalent to 15.2 percent in ROE.  It has a five-million customer base, which it plans to expand by another million this year.