YEARENDER: Phl banks to grow more resilient vs external shocks

MANILA, Philippines - Local banks are seen further strengthening their positions against external shocks following a flurry of reforms handed down by the Bangko Sentral ng Pilipinas this year.

BSP Governor Amando M. Tetangco Jr. said in an e-mail that while some of these reforms may cut earnings in the near-term, their benefits in the long run translate to profitability and brisker business activity.

“From a policy perspective, the medium to long-term benefits of broad-based financial sector reforms are to keep the industry and the banks in strong position to handle future shocks,” Tetangco pointed out.

“At the same time, however, the same reforms should provide for the impetus to continue nurturing the creativity of banks in addressing the needs of stakeholders under an evolving environment,” he added.

Starting this year, universal and commercial banks were required to comply with higher capital ratios under the stricter Basel 3 reforms. Big banks now need to keep a minimum capital adequacy ratio of 10 percent, a minimum Tier 1 capital of 7.5 percent, a minimum common equity Tier 1 (CET1) ratio of six percent, and a capital conservation buffer of 2.5 percent.

Basel 3 is an updated set of measures meant to strengthen the regulation, supervision and risk management of banks.

The BSP in October also released guidelines for “too big to fail” banks or domestic systemically important banks (D-SIBs) in line with the Basel 3 reform agenda. These banks are those whose failure would significantly impact the financial system and the economy as well.

The D-SIBs will be asked to meet new capital ratios by January 2019, while CET1 levels will be mandated by 2017.

The central bank has also continuously adopted measures to ensure the exposure of banks to housing loans remains manageable and that there are no property bubbles in the economy.

In July, the central bank required banks to undergo a separate stress test in order to assess the impact of their exposure to the property sector once borrowers fail to pay back their loans.

Banks should be able to maintain a common equity tier 1 capital ratio of at least six percent and a minimum risk-based capital adequacy ratio of 10 percent even if 25 percent a lender’s exposure to the property sector has been written off.

There would be a quarterly report submitted to the BSP and those found non-compliant will be given the chance to explain and submit an action plan for their shortcomings.

“The pursuit of deep financial reforms will develop a safe, inclusive and competitive financial system. Supervised financial institutions (FIs) shall be allowed to grow, innovate and assume risks within the FI’s risk-bearing capacity,” Tetangco stressed.

Banks in October were also required to revisit their credit risk management frameworks to focus on borrowers’ cash-flow analysis and ability to pay instead of collateral and to develop internal risk rating systems and stress testing policies to better assess their credit risk exposures.

Moreover, the new rules encourage lending to the micro and small firms as borrowers will be exempted from some documentary requirements. Banks were also asked to limit credit exposures to certain segments and diversify their portfolio to mitigate risks.

“The macroprudential measures implemented will mitigate the build-up of systemic risks and their channels of transmission which may impair the smooth functioning of the financial system and economic growth,” Tetangco recounted.

The domestic banking landscape has also been opened up to more players following President Benigno Aquino’s signing into law of Republic Act No. 10641 in July.

This liberalized the entry of foreign banks in the country, earlier capped at only 10. The new law also allows foreign banks to buy as much as 100 percent of a local bank, amending a previous provision that only permits them to own up to 60 percent of any Philippine lender’s voting stock.

“The entry of more foreign banks is expected to be another vehicle for bringing in foreign direct investments,” Tetangco said.

“Across banks, new foreign entrants into the industry will enhance banking technology and offer a wider array of financial products and services. This will benefit end-users while also resulting in increased competition,” he continued.

The BSP in November released the implementing rules and regulations for the law and as early as last week, Tetangco said that there have already been applications coming from interest foreign banks.

“Banks which decide to introduce changes—for example through more capital, wider physical network, alternative delivery channels etc.—will indeed see an increase in cost,” Tetangco said.

“This can be seen as the price of reform in the sense of addressing evolving market conditions and changing stakeholder requirements,” he explained.

But the improvements are seen benefitting the banks in the long run as these are expected to help them offer a wider array of products and services and to give their customers “better client experience.”

“This broader base, improved customer relationship and heightened activity should lead to more business opportunities and thus ultimately to improved profitability,” Tetangco said.

The central bank remains ready to implement further changes in policy and strengthen the local banking system.

“We continue to build on our existing regulatory and supervisory framework to progressively align with international standards as may be appropriate for the situation of our market,” Tetangco said.

“As we align with specific pieces of the global reform agenda, we will also continue to refine governance standards by prescribing that the banking system adheres to appropriate and reform-consistent market, operational and liquidity risk management frameworks,” he continued.

These reforms, Tetangco stressed, will continue to be done in consultation with the stakeholders in accordance with the current practice.

“The reforms we will be adopting will help banks define the risk they are willing to take, and will make sure that they have the requisite capital, liquidity profile and funding structure and risk monitoring tools in place,” Tetangco said.

The BSP has been readying new prescriptions for banks’ liquidity and leverage ratios, still in line with the Basel 3 reform agenda.

The leverage ratio will supplement the capital requirements and will be computed as Tier 1 capital over the total exposure, Tetangco said.

“Meanwhile, Basel III’s liquidity standards include two major parts: Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR),” Tetangco said.

“The former will require banks to hold sufficient high-quality liquid assets to survive in a period of stress for at least 30 days. NSFR, on the other hand, intends to establish a minimum acceptable level of stable funding over a one-year time frame, based on the liquidity characteristics of a bank’s assets and activities, and to ensure that long-term assets are funded with at least a degree of stable liabilities,” he explained.

At the same time, the BSP is committed in developing surveillance tools for shadow banking and the real estate sectors so it can put in place the appropriate standards for said activities.

“It is important to develop surveillance tools that will help us detect potential vulnerabilities and the extent and nature of interconnectedness of shadow banking sector and the real estate sector to the financial system. These initiatives are being coordinated with counterpart regulators under the Financial Stability Coordination Council,” Tetangco said.