Philippines' new leverage framework to boost banks' resilience

Banks will be required to hold more capital and curb excessive credit growth.

With the Bangko Sentral ng Pilipinas implementing a minimum Basel III leverage ratio of 5% on July 1, 2018, Philippine banks will be required to hold more capital and restrain excessive credit growth, making the system more resilient to losses, Moody's Credit Outlook reports.

Under this framework, credit commitments, letters of credit, credit guarantees, and other off-balance sheet exposures will be calculated by multiplying notional amounts by a predefined credit conservation factor of 10%-100%.

Here's more from Moody's:

The Philippines’ minimum leverage ratio is higher than the 3% recommended by the Basel Committee on Banking Supervision, which many countries in Asia have adopted. The requirement will reinforce the local Basel III capital rules adopted in 2014, which are also stricter than international standards. As a simple measure of solvency, the leverage ratio is more transparent and less model-driven than traditional regulatory capital ratios that compare capital levels to risk-weighted exposures.

The stricter capital rules will limit excessive credit and asset growth in the system, which in turn will bolster banks’ capital buffers against risks. Philippine banks’ loan assets are growing nearly 20% annually, amongst the fastest growth rates in Southeast Asia. The system’s rapid credit growth has been supported by robust economic conditions.

However, Philippine banks’ ability to generate internal capital generally is not strong enough to support their rapid credit growth. Consequently, their capitalization tends to weaken over time, forcing them to raise capital externally every four to five years. On Wednesday, Bank of the Philippines Islands and Metropolitan Bank & Trust Company announced plans to raise fresh equity capital through rights offerings to support their future business growth.

For now, we expect that most of our 10 rated Philippine banks will be able to meet the minimum leverage requirement, based on September 2017 data. However, banks with the lowest ratios in the peer group, such as Land Bank of the Philippines and United Coconut Planters Bank will need to manage the pace of their asset growth to comply with the new requirement.