Proposed capital regime spooks smaller lenders

THE BANGKO Sentral ng Pilipinas (BSP) has confirmed it is introducing a higher capitalization requirement for banks within the year — a development thrift and rural bankers said could trigger a major shake-up in the industry.

Existing capital rules are “under review, and the intention is to raise it, because the existing capital requirement was set way back,” Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco, Jr. told reporters yesterday on the sidelines of an event held at the Social Security System’s complex in Quezon City.

Mr. Tetangco was responding to questions regarding the accuracy of a client note released by Malaysian financial services group Maybank ATR Kim Eng on Wednesday, which zeroed in on an unannounced central bank plan to sharply raise the minimum capital requirement for Philippine lenders.

Big banks would have to quadruple their capital to P20 billion under the proposed rules, from a minimum of P4.95 billion currently, according to Maybank ATR Kim Eng citing results of its talks with lenders.

While Mr. Tetangco acknowledged that the central bank is moving in that direction, he declined to disclose specifics, only saying: “We’re in consultation with the industry right now, and once we’ve made the decision on the new capital requirements, we’ll make an announcement.”

“It might not be the proper time to cite a specific number, but the idea is to increase it,” Mr. Tetangco said.

He added that the new capitalization requirement would be announced through a circular within “this year.”

Lamberto R. Villena, president and CEO of the Tiu family’s thrift lender Sterling Bank of Asia, told BusinessWorld in a mobile phone message reply that “the planned increase has been in the pipeline since last month.”

“On August 8, 2014, BSP sent a draft circular to the Chamber of Thrift Banks, requesting for comments on the proposed revisions to the minimum capital requirements for banks,” Mr. Villena said.

Citing the draft’s content, Mr. Villena said universal banks would have to shore up capital to P20 billion, while commercial banks, to P10 billion, corroborating the figures in the Maybank ATR Kim Eng note. As for thrift lenders, Mr. Villena said the minimum was set at P2 billion for Metro Manila-based players, P1 billion for those in Cebu and Davao, and P400 million for other areas.

The latest version of the Manual of Regulations for Banks (MORB) available on the BSP website put the required minimum capital for universal banks at P4.95 billion and P2.4 billion for commercial banks.

For thrift banks, the MORB requires a P1-billion capitalization for lenders based in Metro Manila; P500 million for those in the cities of Cebu and Davao; and P250 million for thrift banks in other areas.

For rural banks, meanwhile, present rules require P100 million in capitalization for Metro Manila-based rural banks; P50 million for rural banks in the cities of Cebu and Davao; P25 million for all other cities; P10 million for first to fourth class municipalities; and P5 million for fifth to sixth class municipalities. Additionally, P10 million in capitalization is required of cooperative banks.

Rural Bankers Association of the Philippines (RBAP) President Jose Misael B. Moraleda said the capital hike is “quite steep” for small lenders in far-flung areas.

Mr. Moraleda, in a text message, shared that the proposed increases set a P120 million minimum capitalization for Metro Manila-based rural banks; P65 million for those in the cities of Cebu and Davao; P35 million for all other cities; P25 million for first to fourth class municipalities; and P20 million for fifth to sixth class municipalities.

“We conducted a survey among our members. We have forwarded our comments to the BSP,” Mr. Moraleda said. “Basically, we are asking that the increase in capitalization be based or commensurate to deposit/client levels.”

“Some rural banks have low levels of deposit yet have sufficient capital,” Mr. Moraleda explained. “But if they so happen to be situated in first to second class municipalities, the increase [in required capitalization] is quite steep.”

Mr. Villena said that “there is no argument that a higher capital will improve the risk profile of the banking industry.”

“It means bigger capacity for risks and capacity to absorb loss.This is the main objective of the exercise,” he pointed out.

He also noted that the draft circular provides banks enough time to comply.

“There is also no argument that banks will need time to build up capital,” Mr. Villena said. “Hence, in the proposed draft, there is a five-year period to meet the new minimum capital requirements.”

But it remains to be seen whether players in the industry – big and small alike – are ready to adapt to the changes entailed by the higher capital requirements, Mr. Villena noted.

“The issue will be – will the existing shareholders be willing to put in more capital or place their money in other areas of investment?” said Mr. Villena. “Of course, if not, they know they have to take in new partners, sell, or merge.”

“Whether the industry will go through mergers or consolidations will depend on existing shareholders’ desire or capacity to support the capital buildup,” Mr. Villena said.

“We have seen this before, and based in previous experience, it will be reasonable to expect some mergers or consolidations,” he added, echoing points made by the Maybank ATR Kim Eng in its note.

Mr. Villena said it is “reasonable for the BSP to initiate or require conditions to strengthen the financial industry.”

In a reply to a follow-up question also yesterday, Mr. Tetangco explained that “the reform is really to adjust both the nominal amount of minimum capital and the quality of eligible capital.”

“Since we prescribed the current nominal capital requirements, the economy has grown considerably in size and the financial markets have grown in complexity also,” the BSP governor said in a mobile phone message. “Raising the minimum capital will mandate banks to hold capital commensurate to what kind and size of transactions we can reasonably expect from the market participants at this time.”

Maybank ATR Kim Eng had said in its note that the “last increase was made 15 years ago and the banking industry has grown more than five-fold since.”

BSP Deputy Governor Nestor A. Espenilla, Jr. said in a text message that the new capital requirements are “not really” being pursued in light of Basel 3, a set of reforms introduced by the Basel Committee on Banking Supervision in the wake of the 2008 global financial crisis.

The BSP started implementing the Basel 3 rules in January.

“Minimum capital levels basically prescribe minimum bank size (per category). Basel 3 pertains to risk based capital or amount of capital commensurate to bank risk profile,” Mr. Espenilla explained. “Both capital standards need to be met.”