GLOBAL debt watcher Fitch Ratings said Friday big banks in the Philippines will be able to comply with the liquidity coverage ratio, a new Basel 3 rule recently adopted by Bangko Sentral ng Pilipinas, because of their strong financial status.
“Major universal and commercial banks in the Philippines should be well-positioned to meet new Basel 3 liquidity rule… Ample domestic system liquidity, and banks’ balance sheets being mostly funded by deposits, are positive structural factors that will help banks comply with upcoming Liquidity Coverage Ratio requirements,” it said.
“Nonetheless, those with relatively large pools of corporate deposits will have a greater reason to pursue retail deposits more aggressively, and long-term debt issuance may rise,” it said.
Bangko Sentral announced on March 1 new rules requiring universal and commercial banks to meet an LCR of 90 percent by Jan. 1, 2018, rising to 100 percent by Jan. 1, 2019.
However, Fitch said aside from meeting the overall requirement, banks would likely need to monitor their LCRs for certain currencies where they have significant activity as well. It said the US dollar could be one such currency for many banks, other than the peso.
The new rule aims to strengthen the ability of individual banks to withstand short-term liquidity shocks. It seeks to ensure that banks hold sufficient cash and other high-quality liquid assets to meet their liquidity needs—including potential deposit withdrawals—under a 30-day stress scenario.
“System liquidity is healthy in the Philippines, as evident in the reported banking system loan-to-deposit ratio of 70.7 percent and liquid assets-to-deposits of 53.5 percent at end-2015. Banks’ surplus funds are often invested in peso or US dollar-denominated Philippine government bonds, which would typically qualify as high-quality liquid assets under the LCR framework—for US dollar bonds as long as they back US dollar liabilities,” Fitch said.
And although more detailed guidelines have yet to be published, Fitch’s internal estimates for its rated banks indicate broadly that most of the top 10 domestic banks should comfortably meet the LCR rules, based on the last available annual reports.
“That said, loan growth has exceeded deposit and M3 liquidity growth over the last five years, and system liquidity would tighten gradually if this dynamic were to continue. Against this backdrop, the LCR regime will enforce an added layer of balance-sheet discipline on the Philippine universal and commercial banks, in addition to existing conservative regulatory hurdles on capital,” it said.
It said the new rules would provide even more of an incentive for banks to raise retail deposits, particularly customers’ current and savings accounts. It said banks with strong retail deposit franchises will enjoy an advantage in meeting the LCR hurdle, as such balances are usually more stable in times of stress.
“Those that rely more on corporate deposits, however, could be subject to higher run-off assumptions under the LCR calculations, which would result in lower ratios on a like-for-like basis,” Fitch said.
