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Capital Adequacy Ratios (CARs) of Banks as of end-September 2005

04.11.2006

As of end-September 2005, the risk-based capital adequacy ratios (CARs) of the banking system remained above the 10 percent minimum ratio prescribed under Circular Nos. 280 and 360, dated 29 March 2001 and 03 December 2002, respectively. 

Philippine Banking System.  As of end-September 2005, the average CARs of the Philippine banking system were 16.70 percent on solo basis and 17.59 percent on consolidated basis.   These CARs were higher than the average CARs as of end-June 2005 by 22 basis points (16.48 percent, solo) and 23 basis points (17.36 percent, consolidated), respectively. 

The increase in CARs can be attributed to the moderate decline of qualifying capital relative to the reduction of the risk-weighted assets of the banking system.   On solo basis, qualifying capital went down from P418.7 billion to P413.5 billion or by 1.24 percent. On consolidated basis, qualifying capital decreased by 1.46 percent from P471.5 billion to P464.6 billion.  This contraction in qualifying capital, however, was outpaced by the decrease in risk-weighted assets.   Risk-weighted assets fell by 2.57 percent from P2,541.4 billion to P2,476.2 billion on solo basis, and by 2.73 percent from P2,715.9 billion to P2,641.7 billion on consolidated basis.   

As of end-September 2005, on solo basis, 85.05 percent of the total qualifying capital or P351.7 billion represented Tier 1 capital while Tier 2 capital of P61.8 billion made up the remaining balance.   Almost the same capital mix comprised the total qualifying capital on consolidated basis, i.e., 84.61 percent or P393.1 billion represented Tier 1 capital and the remaining balance of P71.5 billion represented Tier 2 capital.
 
Universal and Commercial Banking Industry.  The CARs of universal and commercial banks cover capital charges for combined credit and market risks as provided under Circular No. 360.  The industry’s CAR on solo basis went up to 16.64 percent at end-September 2005 from 16.46 percent at end-June 2005.  Likewise, CAR on consolidated basis moved up to 17.65 percent from 17.46 percent. The rise in CARs was due to the slower decline in the industry’s qualifying capital compared to its risk-weighted assets. On solo basis, risk-weighted assets stood at P2,169.7 billion as of end-September 2005,  2.82 percent lower than the P2,232.6 billion registered as of end-June 2005. On consolidated basis, risk weighted assets decreased by 2.99 percent to P2,335.2 billion.   The slower decline in qualifying capital contributed positively to the industry’s CARs as qualifying capital went down by only 1.80 percent from P367.6 billion as of end-June 2005 to P361.0 billion as of end-September 2005 on solo basis, and by 2.00 percent from P420.4 billion to P412.0 billion, respectively, on consolidated basis.

The industry’s total qualifying capital as of end-September 2005 on a solo basis was comprised of 84.46 percent or P304.9 billion Tier 1 capital and P56.1 billion Tier 2 capital or 15.54 percent.   On consolidated basis, total qualifying capital was made up of P346.2 billion Tier 1 capital and P65.8 billion Tier 2 capital.

Thrift Banking Industry.  The CAR of the thrift banking industry of 17.67 percent as of end-September 2005 on both solo and consolidated basis covering credit risk as provided in Circular No.280 was higher by 86 basis points than the 16.81 percent CAR recorded as of end-June 2005.  The higher CAR of the thrift banks was due to the combined effect of 3.12 percent increase in total qualifying capital from P35.2 billion to P36.3 billion and 2.00 percent reduction in risk-weighted assets from P209.6 billion to P205.5 billion.

Rural Banking Industry.   The average CAR of the rural/cooperative banking industry, on the other hand, was maintained at 16.02 percent level as its qualifying capital and risk-weighted assets as of end-June 2005 increased by almost same pace, i.e., 1.89 percent and 1.92 percent, respectively,

The capital adequacy ratio or CAR is a risk-sensitive measure of a bank’s solvency.  It relates capital to risk assets weighted according to their relative riskiness.  BSP Circular No. 280 dated 29 March 2001 and BSP Circular No. 360 dated 3 December 2002, both as amended, require all banks to maintain CAR of at least 10 percent both on solo basis (i.e., head office plus branches) and consolidated basis (i.e., parent bank plus subsidiary financial undertakings but excluding insurance companies) covering credit risk, and for universal and commercial banks, combined credit and market risks.  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.

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