As of end-December 2006, the risk-based capital adequacy ratios (CARs) of the banking system maintained comfortable margin over the 10 percent minimum ratio prescribed under Circular No. 280 dated 29 March 2001 and Circular No. 360 dated 03 December 2002, both as amended.
Philippine Banking System. The average CARs of the Philippine banking system stood at 16.85 percent on solo basis and 18.13 percent on consolidated basis as of end-December 2006. These were lower by 50 basis points and 51 basis points than the average CARs as of end-September 2006 of 17.35 percent and 18.64 percent on solo and consolidated bases, respectively. These were, however, higher by 47 basis points (solo basis) and 49 basis points (consolidated basis) than the average CARs as of end-2005 of 16.38 percent on solo basis and 17.64 percent on consolidated basis.
The slight decline in CARs of the banking system resulted from the faster growth in risk-weighted assets relative to the increase in the system’s total qualifying capital. Risk-weighted assets grew from P2,417.3 billion to P2,575.1 billion on solo basis (6.53 percent), and from P2,618.6 billion to P2,785.0 billion on consolidated basis (6.36 percent). Similarly, qualifying capital went up from P419.3 billion to P433.8 billion or by P14.5 billion (3.45 percent), on solo basis, and increased from P488.2 billion to P505.0 billion or by P16.8 billion (3.43 percent) on consolidated basis.
On a solo basis, the banking system’s total qualifying capital of P433.8 billion is made up of 87.42 percent Tier 1 (T1) and 12.58 percent Tier 2 (T2) as of end-December 2006. Almost the same capital mix comprised the P505.0 billion total qualifying capital on a consolidated basis.
Universal and Commercial Banking Industry. The total qualifying capital of universal and commercial banks (U/KBs) adequately covers the combined credit and market risks as provided under Circular No. 360. The U/KBs posted an overall CAR of 17.04 percent on solo basis and 18.50 on consolidated basis as of 31 December 2006. These were lower by 41 basis points and 44 basis points, respectively, compared to their end- September 2006 CARs of 17.45 percent (on solo basis) and 18.94 percent (on consolidated basis).
On solo basis, the industry’s risk-weighted assets moved up to P2,212.6 billion as of end-December 2006, which is 6.98 percent higher than the P2,068.3 billion level as of end-September 2006. On consolidated basis, risk weighted assets registered a growth of 6.74 percent from P2,269.6 billion as of end-September 2006 to P2,422.5 billion as of end-December 2006. The qualifying capital of the U/KBs also increased from P360.9 billion as of end-September 2006 to P377.1 billion as of end-December 2006 (4.48 percent) and from P429.8 billion to P448.3 billion (4.30 percent) on solo and consolidated bases, respectively.
The industry’s total qualifying capital as of end-December 2006 had a mix of 87.72 percent or P330.8 billion T1 capital and 12.28 percent or P46.3 billion T2 capital. On consolidated basis, total qualifying capital is composed of P362.5 billion T1 capital (80.87 percent) and P85.7 billion T2 capital (19.13 percent).
Thrift Banking Industry. As of end-December 2006, the CARs of the thrift banking industry dropped to 16.03 percent on both solo and consolidated bases covering solely credit risk as provided under Circular No. 280, or a decline of 119 basis points from the 17.22 percent industry CAR as of end-September 2006. The decline in CARs was due to the combined effect of the 3.15 percent decrease in total qualifying capital from P40.6 billion to P39.3 billion and the 4.0 percent increase in risk-weighted assets from P235.6 billion to P245.0 billion.
Rural Banking Industry. The average CAR of the rural/ cooperative banking industry as of end-December 2006 was lower by 93 basis points at 14.80 percent from the 15.73 percent as of end-September 2006. The lower CAR of the rural/cooperative banks was due to the 2.46 percent decrease in total qualifying capital from P17.8 billion to P17.4 billion coupled with the 3.63 percent increase in risk weighted assets from P113.4 billion to P117.5 billion.
The capital adequacy ratio is a risk-sensitive measure of a bank’s solvency. It relates capital to assets weighted according to their relative riskiness. BSP Circular Nos. 280 and 360, both as amended, require all banks to maintain CAR of at least 10 percent both on solo basis (i.e., head office and branches) and consolidated basis (i.e., parent bank and subsidiary financial undertakings but excluding insurance companies) covering credit risk, and combined credit and market risks for U/KBs. The BSP issuances are based on the 1988 Basel Capital Accord (also known as Basel 1) and its 1996 Amendment prepared by the Basel Committee on Banking Supervision based in Basel, Switzerland, with modifications to suit the local conditions.
The BSP will be shifting to the Basel 2 Capital Adequacy Framework on 1 July 2007. As of press time, a parallel run of the Basel 2 reportorial framework with the existing report for Basel 1 is ongoing covering the quarters ending 31 December 2006 until 30 June 2007.