BSP imposes new tougher rules for key local banks

Fitch Ratings is confident that local banks would be able to meet new capital requirements following the Bangko Sentral ng Pilipinas’ (BSP) announcement that it has identified domestic systemically important banks (D-SIB).

“Most large and mid-sized banks in the Philippines have Core Equity Tier 1 (CET1) ratios comfortably above Basel III minimums, with the largest banks’ CET1 ratios falling between 12 percent and 14 percent as of end-2014,” the debt watcher noted.

On July 6 the BSP said it has identified D-SIBs, but declined to name the banks.

These financial institutions were identified based on their importance in terms of size, interconnectedness, substitutability and market reliance as a financial market infrastructure and complexity.

They are described as “banks whose distress or disorderly failure would cause significant disruptions to the wider financial system and economy.”

Because of their systemic importance, these banks are now required to maintain additional CET1 of between 150 and 250 basis points of their respective risk-weighted assets starting 2017 and should be fully complied with the new capital requirement by 2019. These financial institutions will also have higher supervisory expectations.

BSP Governor Amando Tetangco Jr. said the move toward putting in more stringent capital requirements for D-SIBs “serves to strengthen the system by lowering thee probability of systemic bank failures.”

Fitch said the additional 1.5-percent to 2.5-percent capital buffer required of D-SIBs is “broadly in line with other Asian jurisdictions” with similar frameworks such as in Singapore and Hong Kong.

With this development, the credit rating agency considers that “a handful” of top banks in the Philippines, such as the Sy-led Banco de Oro Unibank Inc. (BDO), the Ayala-led Bank of the Philippine Island (BPI) and Ty-led Metropolitan Bank and Trust Co. (Metrobank) “are likely to incur a 2.5-percent additional loss-absorption requirement, while other large lenders should fall into the 1.5-percent bucket.”

It expects banks that will have a problem with the new requirements to take action ahead of the phase-in period and also considers profitability “to come under pressure as core capital increases.”

“This will add to profitability pressures caused by intensified competition from new foreign entrants,” it added.