Credit upgrade may spawn P147B new loans

Bangko Sentral ng Pilipinas yesterday said that banks may be able to release more money that may be used for lending and other expenses as a result of lower risk weight covers brought by the credit rating upgrade into investment grade by two international rating agencies.

Amando Tetangco, BSP Governor, said that the lower risk weights assets have the effect of making available more funds that may be potentially used for lending and other banking activities.

BSP simulations indicate that about P147.13 billion may effectively be released for loans and other expenses as a result of the upgrade to investment grade.

The same BSP simulations show that the calibrated risk weights will raise the capital adequacy ratio (CAR) of universal and commercial banks (U/KBs) from 17.28 percent to 17.83 percent using end-2012 banking figures.

Tetangco pointed out that “these are the direct gains that accrue with the investment-grade rating”.

He highlighted, however, that “the impact is not only about the feel-good effects of a lower risk weight but that there are balance sheet implications to consider as well”.

The BSP last month announced a reduction in the risk weights of Philippine sovereign issues denominated in foreign currencies, a direct result of the credit rating upgrade of the Philippines into investment grade by two international rating agencies.

As part of its overall risk management framework, the BSP conservatively raised in July 2007 the risk weights of sovereign issues denominated in foreign currencies.

Under the same guidelines, the recent investment grade ratings from Fitch and Standard and Poor’s respectively recognize the stronger risk standing of the Republic of the Philippines.

This then allows for the reduction in risk weights.

The reduced risk weights cover two risk categories—credit risk weights for foreign currency denominated sovereign issues are reduced from 100 percent to 50 percent and the capital charge for interest rate risks on bank holdings of foreign currency bonds issued by the Philippine government and the BSP is reduced from eight percent to a range of 0.25 to 1.60 percent of these assets, depending on the residual maturity of the debt securities or derivative contract.

The BSP pointed out that the simulated effects are not insignificant.

However, the BSP also reminds banks that credit underwriting standards need to be sustained if we are to sustain the benefit of such ratings upgrade.

The Philippines last May received its second investment grade rating as Standard & Poor’s Ratings Services raised its sovereign credit ratings on the Republic of the Philippines to BBB- from BB+.

The upgrade came a month after another credit rating agency, Fitch Ratings, also gave the country an investment grade rating.  Moody’s Investors Service is also expected to upgrade the country’s rating within the year.

source:  Malaya