Fitch awaits further Basel III Tier 2 Issues from Philippine Banks

Over USD1.15bn instruments issued to date.

It has been observed that Philippine banks are likely to issue more Basel III-compliant Tier 2 instruments, which will be mostly targeted at the domestic market.

According to a release from Fitch Ratings, the issuance will be largely driven by the need to refinance legacy instruments and support growth.

There has been over PHP50bn (USD1.15bn) of Basel III Tier 2 instruments issued to date in the Philippine banking system.

This followed the Bangko Sentral ng Pilipinas's (BSP) unveiling of new Basel III capital rules in January 2013.

Government-owned Development Bank of the Philippines (DBP, BB+/Stable) was the first to issue Basel III-compliant securities in November 2013, with its PHP10bn Tier 2 instrument.

Here's more from Fitch Ratings:

Activity picked up following Basel III implementation in January 2014, with issuance to date limited to the local market amid more favourable pricing for the banks and healthy domestic demand from institutional investors and trust accounts.

The issuance of these new types of instruments compares with the over PHP120bn in legacy Basel II-Tier 2 capital outstanding, which must be replaced eventually.

Issuance of Basel III Tier 2 securities is also being driven by rapid balance sheet growth in a buoyant economy, where loan growth has averaged 15% recently.

The banking system is considered well capitalised with healthy capital buffers above the BSP's Basel III requirements of 8.5% common equity Tier 1 capital adequacy ratio (CAR) and 10.0% total CAR, but these buffers may erode in a rapidly growing system. Fitch's approach to rating Basel III capital instruments is to notch down from an issuer's anchor rating based on incremental non-performance and loss severity risks.

In the Philippines, the anchor rating is expected to be the Viability Rating or the equivalent point on the National Rating scale. As Basel III-Tier 2 instruments specify that losses are triggered only at the point of non-viability (PONV), the non-performance risk of these securities is judged to be broadly similar to that of senior debt, and therefore Fitch does not apply any incremental notching for non-performance risk for these instruments.