The banking industry’s capital adequacy ratio (CAR) improved to 16.6 percent and 17.1 percent on solo and consolidated bases in 2020 despite the COVID-19 pandemic’s hits on its earnings, capital and operations.
The CAR, which is a bank’s measure of capital health in relation to its risks and liabilities, was an improvement from the previous year’s 15.4 percent and 16 percent.
“Banks’ risk-taking activities were supported by adequate capital which was mainly composed of common equity and retained earnings,” the Bangko Sentral ng Pilipinas (BSP) said in its latest “Report on the Philippine Financial System” released over the weekend.
The banking system was able to keep its adequate capital level amid the pandemic-induced economic and financial uncertainties. Banks’ capital reached P2.430 trillion as of end-December 2020, up 4.8 percent year-on-year. This was lower compared to the previous four years’ growth rates, said the BSP. “The higher capital for the current period was mainly fuelled by the 8.2 percent or P92.3 billion increase year-on-year in retained earnings and undivided profits which held a combined share of 49.9 percent of the total capital accounts of banks,” it added.
Capital growth is also due to banks’ fresh capital infusion of P8.3 billion and raising the capital stock to P1 trillion in 2020. The capital stock accounted for 41.4 percent of the banking system’s capital. Other capital components consisting of deposits for stock subscription, other equity instruments, assigned capital of foreign banks and accumulated earnings also posted growth which all contributed to higher capital of banks during the period, reported the BSP.
The 47 universal and commercial banks accounted for lion’s share of the banking systems’ capital with 91.1 percent. Rural and cooperative banks have 2.2 percent while thrift banks have 6.7 percent share.
Banks remained well-capitalized as the CARs on solo and consolidated bases are well-above the minimum thresholds set by the BSP at 10 percent and the Bank for International Settlements at eight percent.
“It is also resilient to credit and market risk shocks, based on the BSP’s stress test exercise,” noted the BSP.
The report said the stress test results showed that banks -- post-shock CAR -- will remain comfortably above the 10 percent threshold under an assumed separate 20 percent write-off of loans to top 20 conglomerate groups and micro, small and medium enterprises loans. There is an additional five percent allowance for credit losses or ACL on total loans and some “simultaneous impact of increase in NPLs (non performing loans) and ACL with corresponding disposal of a portion of NPLs,” said the BSP.
“This is expected as both groups (big banks and thrift banks) recorded high pre-shock CARs,” added the BSP.
Driven by loans extended to the corporate sector, the BSP said credit risk-weighted assets continued to dominate the universal and commercial banks’ total risk-weighted assets (RWA) at 88.2 percent as of end-2020. “Notably, the annual growth of the banking system’s RWAs has been falling since end-December 2015 until end-December 2019 on account of the increased in credit RWAs. The declining trend in RWA growth is also attributable to banks' shift in preference from risky assets to more liquid 'safe' investments,” said the BSP.