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Tuesday, July 18, 2017

Overstated Capital of Philippine Banks as of March 31, 2017

On July 25, 2012, the Bangko Sentral ng Pilipinas (BSP) encouraged banks that continue to reflect unbooked losses or "deferred charges" on their balance sheets to charge those losses against retained earnings.  This implies that the BSP now considers that these banks have amassed so much in retained earnings that "they can now afford to absorb higher charges without impairing their capital and also without making their shareholders unhappy."

But can these banks do so? The answer is: yes but only for some banks.  As can be seen from the table below, seven banks have Deferred Charges as of March 31, 2017:


  1. Bataan Development Bank (Deferred Charges of 7.95% of SE)
  2. City Savings Bank (Deferred Charges of 6.46% of SE)
  3. China Bank Savings Inc (Deferred Charges of 4.55% of SE)
  4. United Coconut Planters Bank (Deferred Charges of 6.51% of SE)
  5. Bank of Commerce (Deferred Charges of 0.81% of SE)
  6. Card SME Bank, Inc. (Deferred Charges of 0.28% of SE)
  7. Wealth Development Bank Corporation (Deferred Charges of 0.06% of SE)


It must be noted that three of these banks were ranked as  distressed (highlighted in yellow) as of December 31, 2016:


  1. United Coconut Planters Bank (Distressed Ratio of 359.43%)
  2. China Bank Savings (Distressed Ratio of 120.92%)
  3. Bataan Development Bank (Distressed Ratio of 115.42%)


For more information on distressed banks, please see the previous blog post: "The Top Distressed Philippine Banks as of December 31, 2016.



Retained Earnings

Only five banks have sufficient Retained Earnings (RE) to absorb their unbooked losses as of March 31, 2017:


  1. Bataan Development Bank (37.18% of RE)
  2. City Savings Bank (7.84% of RE)
  3. United Coconut Planters Bank (6.94% of RE)
  4. Wealth Development Bank Corporation (6.29% of RE)
  5. CARD SME Bank (1.56% of RE)


Two of the banks with  Deferred Charges have negative Retained Earnings.  As such, they do not have the capacity to absorb additional losses.


  1. Bank of Commerce (Retained Earnings of - Php 3.97 billion vs. Deferred Charges of Php 103.61 million).
  2. China Bank Savings (Retained Earnings of - Php 1.36 billion vs. Deferred Charges of Php 416.85 million)

Philippine Banking System
Deferred Charges Not Yet Written Down
Impact on Stockholder's Equity
In Php
March 31, 2017
















Bank Type of Bank Deferred Charges Unbooked Losses Total Deferred Charges Stockholder's Equity Adjusted SE Impact on SE
BATAAN DEVELOPMENT BANK Thrift 6,169,529.00 0.00 6,169,529.00 77,568,284.11 71,398,755.11 7.95%
CITY SAVINGS BANK Thrift 727,696,423.88 0.00 727,696,423.88 11,258,212,430.01 10,530,516,006.13 6.46%
CHINA BANK SAVINGS INC Thrift 416,852,894.01 0.00 416,852,894.01 9,163,202,511.71 8,746,349,617.70 4.55%
UNITED COCONUT PLANTERS BANK U/KB 301,996,199.58 0.00 301,996,199.58 17,451,124,244.88 17,149,128,045.30 1.73%
BANK OF COMMERCE U/KB 103,610,227.34 0.00 103,610,227.34 15,153,876,740.35 15,050,266,513.01 0.68%
CARD SME BANK INC A THRIFT BANK Thrift 1,862,174.96 0.00 1,862,174.96 730,971,718.18 729,109,543.22 0.25%
WEALTH DEVELOPMENT BANK CORPORATION Thrift 810,202.50 0.00 810,202.50 1,428,158,118.24 1,427,347,915.74 0.06%
Grand Total
1,558,997,651.27 0.00 1,558,997,651.27 55,263,114,047.48 53,704,116,396.21 2.82%
























Philippine Banking System


Deferred Charges Not Yet Written Down


Impact on Retained Earnings


In Php


March 31, 2017


















Bank Total Deferred Charges RE Adjusted RE Impact on RE


BATAAN DEVELOPMENT BANK 6,169,529.00 16,594,818.75 10,425,289.75 37.18%


CITY SAVINGS BANK 727,696,423.88 9,277,098,942.00 8,549,402,518.12 7.84%


UNITED COCONUT PLANTERS BANK 301,996,199.58 4,354,224,523.92 4,052,228,324.34 6.94%


WEALTH DEVELOPMENT BANK CORPORATION 810,202.50 12,878,740.83 12,068,538.33 6.29%


CARD SME BANK INC A THRIFT BANK 1,862,174.96 119,380,894.60 117,518,719.64 1.56%


BANK OF COMMERCE 103,610,227.34 -3,863,444,370.18 -3,967,054,597.52 -2.68%


CHINA BANK SAVINGS INC 416,852,894.01 -1,363,213,531.71 -1,780,066,425.72 -30.58%


Grand Total 1,558,997,651.27 8,553,520,018.21 6,994,522,366.94 18.23%


Tuesday, July 11, 2017

The Financial Strength of Philippine Banks according to BSP: From Weakest to Strongest - As of March 31, 2017

A bank's Capital Adequacy Ratio is a measure of a bank's capital and financial strength. BSP requires Philippine banks to measure their capital adequacy in at least three defined ratios:


  1. Total Capital Adequacy Ratio
  2. Tier One Capital Adequacy Ratio
  3. Common Tier One Adequacy Ratio.

For a more detailed understanding of these ratios, you can consult BSP's own implementation guidelines, Investopedia.com, or numerous past posts about this subject.

The basic idea behind these ratios is that the higher the ratio, the more solid the bank is in financial strength, the greater it's ability to absorb losses.  BSP's own minimum for most of these ratios is 6.0 but it generally recommends a minimum of 10.0, especially for large and more systemically important banks (those that are Too Big To Fail or TBTF for short).


Every quarter, several Philippine Banks do not meet these guidelines. As of March 31, 2017, the banks that failed to meet BSP's recommended minimum capital requirements are as follows:

TOTAL CAR

  1. Microfinance Maximum SB Inc (Total CAR of -21.30)
  2. Bataan Savings and Loan Bank (Total CAR of 0.00)
  3. Philippine Postal Savings Bank (Total CAR of 5.48)
  4. Luzon Developement Bank (Total CAR of 6.74)
  5. United Coconut Planters Bank (Total CAR of 8.25)
  6. The Palawan Bank Inc (Total CAR of 9.41)

TIER ONE CAR

Eight banks reported Tier One CAR of 0.00 as of March 31, 2017.  Of those that did report Tier One CAR greater than 0.00, six have less than the BSP-recommended Tier One CARs of 10.00. These banks are:


  1. Card SME Bank (Tier One CAR of 3.66)
  2. Philippine Postal Savings Bank Inc (Tier One CAR of 5.13)
  3. Luzon Development Bank (Tier One CAR of 5.90)
  4. United Coconut Planters Bank (Tier One CAR of 8.25)
  5. Sterling Bank of Asia Inc (Tier One CAR of 8.37)
  6. The Palawan Bank (Tier One CAR of 9.27)

COMMON EQUITY TIER ONE CAR


The BSP's reporting guidelines on the Common Equity Tier One CAR (CET1) only took effect as of January 1, 2014.  Banks only started reporting this ratio in their Published Statements of Condition for June 30, 2014.  Forty-nine banks reported their CET1 Ratio as 0.00 for December 31, 2016.

However, of those banks that did report a CET1 Ratio other than 0.00, zero banks reported CET1 Ratios below BSP's recommended ratio.

The Total CAR, Tier 1 CAR, and Common Equity Tier 1 CAR of Philippine Banks as of December 31, 2016 is as follows:(Banks that do not meet BSP's minimum capital requirements are highlighted in yellow):


Philippine Banking System
TOTAL CAR
March 31, 2017









Bank Type of Bank Total CAR
MICROFINANCE MAXIMUM SB INC Thrift Bank -21.30
BATAAN SAVINGS AND LOAN BANK Thrift Bank 0.00
PHIL POSTAL SAVINGS BANK INC Thrift Bank 5.48
LUZON DEVELOPMENT BANK Thrift Bank 6.74
UNITED COCONUT PLANTERS BANK U/KB 8.25
THE PALAWAN BANK (PALAWAN DB) INC Thrift Bank 9.41
ENTERPRISE BANK INC (A THRIFT BANK) Thrift Bank 11.29
LAND BANK OF THE  PHILIPPINES U/KB 11.54
PHIL NATIONAL BANK U/KB 12.03
STERLING BANK OF ASIA INC (A SAVINGS BANK) Thrift Bank 12.09
BANK OF THE PHIL ISLANDS U/KB 12.17
CHINA BANK SAVINGS INC Thrift Bank 12.18
THE BNK OF TOKYO-MITSUBISHI UFJ LTD U/KB 12.46
EQUICOM SAVINGS BANK INC Thrift Bank 12.47
PHILIPPINE VETERANS BANK U/KB 13.04
EAST WEST BANKING CORP U/KB 13.09
CHINA BANKING CORP U/KB 13.12
BANK OF CHINA LIMITED U/KB 13.18
RCBC SAVINGS BANK INC Thrift Bank 13.25
PHIL SAVINGS BANK Thrift Bank 14.00
MAYBANK PHILIPPINES INC U/KB 14.06
METROPOLITAN BANK & TRUST CO U/KB 14.23
VILLAGE BANK INC (A THRIFT BANK) Thrift Bank 14.29
PHIL BANK OF COMMUNICATIONS U/KB 14.62
BDO UNIBANK INC U/KB 14.73
CITY SAVINGS BANK INC Thrift Bank 14.85
MIZUHO BANK LTD - MANILA BRANCH U/KB 15.02
UNION BANK OF THE PHILS U/KB 15.06
RIZAL COMM'L BANKING CORP U/KB 15.59
DEVELOPMENT BANK OF THE PHIL U/KB 15.81
BPI FAMILY SAVINGS BANK INC Thrift Bank 15.89
BANGKO KABAYAN INC Thrift Bank 16.34
UCPB SAVINGS BANK Thrift Bank 16.35
MALAYAN BANK SAVINGS AND MORT BANK INC Thrift Bank 16.46
PRODUCERS SAVINGS BANK CORPORATION Thrift Bank 16.87
BDO PRIVATE BANK, INC. U/KB 16.94
PHILIPPINE BUSINESS BANK INC A SAVINGS BANK Thrift Bank 17.00
STANDARD CHARTERED BANK U/KB 17.37
PHILIPPINE RESOURCES SAVINGS BANKING CORPORATION (PR SAVINGS Thrift Bank 17.39
BATAAN DEVELOPMENT BANK Thrift Bank 17.47
ASIA UNITED BANK CORPORATION U/KB 17.58
HONGKONG & SHANGHAI BANKING CORP U/KB 18.39
BANK OF COMMERCE U/KB 18.91
SECURITY BANK CORP U/KB 19.29
CARD SME BANK INC A THRIFT BANK Thrift Bank 19.38
MEGA INT'L COMM'L BANK CO LTD U/KB 19.55
CITIBANK, N.A. U/KB 19.58
FARMERS SAVINGS & LOAN BANK INC Thrift Bank 19.64
1ST VALLEY BANK INC A DEVELOPMENT BANK Thrift Bank 19.68
ANZ BANKING GROUP LTD U/KB 20.00
KEB HANA BANK - MANILA BRANCH U/KB 20.20
PENBANK INC (A PDB) (FORMERLY: PENINSULA RB INC) Thrift Bank 20.55
CITYSTATE SAVINGS BANK INC Thrift Bank 20.65
BANK OF MAKATI (A SAVINGS BANK) INC Thrift Bank 20.66
CTBC BANK (PHILIPPINES) CORP U/KB 21.64
HIYAS BANKING CORPORATION Thrift Bank 21.76
INTER-ASIA DEVELOPMENT BANK Thrift Bank 22.34
DEUTSCHE BANK AG U/KB 22.49
ROBINSONS BANK CORPORATION U/KB 23.36
MARITIME SAVINGS BANK CORPORATION Thrift Bank 23.54
JP MORGAN CHASE BANK NATIONAL ASSN. U/KB 24.42
DUMAGUETE CITY DEV BANK INC Thrift Bank 25.16
METRO CEBU PUBLIC SAVINGS BANK Thrift Bank 25.20
LIFE SAVINGS BANK INC Thrift Bank 25.28
BUSINESS AND CONSUMERS BANK (A DB) Thrift Bank 25.82
WEALTH DEVELOPMENT BANK CORPORATION Thrift Bank 26.16
FIRST CONSOLIDATED BANK INC (A PDB) Thrift Bank 26.61
SUN SAVINGS BANK INC Thrift Bank 28.12
LEGAZPI SAVINGS BANK INC Thrift Bank 29.72
BPI DIRECT BANKO INC Thrift Bank 30.44
UNIVERSITY SAVINGS BANK INC Thrift Bank 30.50
PAMPANGA DEVELOPMENT BANK Thrift Bank 32.00
PNB SAVINGS BANK Thrift Bank 33.42
BANGKOK BANK PUBLIC CO LTD U/KB 35.99
LEMERY SAVINGS & LOAN BANK, INC. Thrift Bank 36.27
QUEEN CITY DEVELOPMENT BANK INC OR QUEENBANK A THRIFT BANK Thrift Bank 36.92
BANK OF AMERICA N.A. U/KB 38.25
CORDILLERA SAVINGS BANK INC Thrift Bank 38.81
PHIL TRUST COMPANY U/KB 39.27
MALASIQUI PROGRESSIVE SLB, INC Thrift Bank 41.33
NORTHPOINT DEV'T BANK INC Thrift Bank 43.39
OPTIMUM DEVELOPMENT BANK INC Thrift Bank 48.72
PHIL STAR DEVELOPMENT BANK INC Thrift Bank 52.06
ING BANK N.V. U/KB 53.36
MERCHANTS SAVINGS & LOAN ASSN INC Thrift Bank 54.80
QUEZON COCONUT BANK INC (A THRIFT BANK) Thrift Bank 57.82
YUANTA SAVINGS BANK PHILIPPINES INC Thrift Bank 63.12
BANK ONE SAVINGS AND TRUST CORP. Thrift Bank 65.31
CATHAY UNITED BANK CO LTD - MANILA BRANCH U/KB 68.68
CENTURY SAVINGS BANK CORPORATION Thrift Bank 79.61
FIRST COMMERCIAL BANK U/KB 96.27
AL-AMANAH ISLAMIC INVESTMENT BANK OF THE PHILS U/KB 105.92
SHINHAN BANK - MANILA BRANCH U/KB 110.84
INDUSTRIAL BANK OF KOREA MANILA BRANCH U/KB 126.78
SUMITOMO MITSUI BANKING CORPORATION - MANILA BRANCH U/KB 135.84
ISLA BANK(A THRIFT BANK) INC Thrift Bank 155.71
UNITED OVERSEAS BANK LIMITED MANILA BRANCH U/KB 211.98
DUNGGANON BANK (A MICROFINANCE THRIFT BANK) INC Thrift Bank NA
HSBC SAVINGS BANK PHILIPPINES Thrift Bank NA
OPPORTUNITY KAUSWAGAN BANK INC (A MICROFINANCE THRIFT BANK) Thrift Bank NA
PACIFIC ACE SAVINGS BANK INC Thrift Bank NA
SAMPAGUITA SAVINGS BANK INC Thrift Bank NA
TONGYANG SAVINGS BANK INC Thrift Bank NA
TOWER DEVELOPMENT BANK Thrift Bank NA
WORLD PARTNERS BANK (A THRIFT BANK) Thrift Bank NA




Philippine Banking System
Tier One CAR
March 31, 2017









Bank Type of Bank Tier One CAR
MICROFINANCE MAXIMUM SB INC Thrift Bank -24.40
1ST VALLEY BANK INC A DEVELOPMENT BANK Thrift Bank 0.00
BATAAN SAVINGS AND LOAN BANK Thrift Bank 0.00
BUSINESS AND CONSUMERS BANK (A DB) Thrift Bank 0.00
ENTERPRISE BANK INC (A THRIFT BANK) Thrift Bank 0.00
EQUICOM SAVINGS BANK INC Thrift Bank 0.00
INTER-ASIA DEVELOPMENT BANK Thrift Bank 0.00
MARITIME SAVINGS BANK CORPORATION Thrift Bank 0.00
OPTIMUM DEVELOPMENT BANK INC Thrift Bank 0.00
CARD SME BANK INC A THRIFT BANK Thrift Bank 3.66
PHIL POSTAL SAVINGS BANK INC Thrift Bank 5.13
LUZON DEVELOPMENT BANK Thrift Bank 5.90
UNITED COCONUT PLANTERS BANK U/KB 8.25
STERLING BANK OF ASIA INC (A SAVINGS BANK) Thrift Bank 8.37
THE PALAWAN BANK (PALAWAN DB) INC Thrift Bank 9.27
EAST WEST BANKING CORP U/KB 10.14
LAND BANK OF THE  PHILIPPINES U/KB 10.71
PHIL SAVINGS BANK Thrift Bank 11.07
CHINA BANK SAVINGS INC Thrift Bank 11.17
PHIL NATIONAL BANK U/KB 11.21
METROPOLITAN BANK & TRUST CO U/KB 11.23
BANK OF THE PHIL ISLANDS U/KB 11.27
PHIL BANK OF COMMUNICATIONS U/KB 11.48
DEVELOPMENT BANK OF THE PHIL U/KB 11.63
THE BNK OF TOKYO-MITSUBISHI UFJ LTD U/KB 11.72
RIZAL COMM'L BANKING CORP U/KB 11.84
UNION BANK OF THE PHILS U/KB 11.95
CHINA BANKING CORP U/KB 12.30
BANK OF CHINA LIMITED U/KB 12.44
PHILIPPINE RESOURCES SAVINGS BANKING CORPORATION (PR SAVINGS Thrift Bank 12.48
RCBC SAVINGS BANK INC Thrift Bank 12.53
PHILIPPINE VETERANS BANK U/KB 12.58
MAYBANK PHILIPPINES INC U/KB 13.08
ASIA UNITED BANK CORPORATION U/KB 13.23
BDO UNIBANK INC U/KB 13.28
VILLAGE BANK INC (A THRIFT BANK) Thrift Bank 13.90
MIZUHO BANK LTD - MANILA BRANCH U/KB 14.07
CITY SAVINGS BANK INC Thrift Bank 14.09
BPI FAMILY SAVINGS BANK INC Thrift Bank 15.03
UNIVERSITY SAVINGS BANK INC Thrift Bank 15.25
UCPB SAVINGS BANK Thrift Bank 15.59
BANGKO KABAYAN INC Thrift Bank 15.85
MALAYAN BANK SAVINGS AND MORT BANK INC Thrift Bank 15.95
PHILIPPINE BUSINESS BANK INC A SAVINGS BANK Thrift Bank 16.12
PRODUCERS SAVINGS BANK CORPORATION Thrift Bank 16.33
BDO PRIVATE BANK, INC. U/KB 16.72
SECURITY BANK CORP U/KB 16.86
STANDARD CHARTERED BANK U/KB 16.97
HONGKONG & SHANGHAI BANKING CORP U/KB 17.69
BANK OF COMMERCE U/KB 18.24
MEGA INT'L COMM'L BANK CO LTD U/KB 18.60
FARMERS SAVINGS & LOAN BANK INC Thrift Bank 18.66
CITIBANK, N.A. U/KB 18.85
BATAAN DEVELOPMENT BANK Thrift Bank 19.27
ANZ BANKING GROUP LTD U/KB 19.38
PENBANK INC (A PDB) (FORMERLY: PENINSULA RB INC) Thrift Bank 19.80
KEB HANA BANK - MANILA BRANCH U/KB 19.86
CITYSTATE SAVINGS BANK INC Thrift Bank 20.08
BANK OF MAKATI (A SAVINGS BANK) INC Thrift Bank 20.15
CTBC BANK (PHILIPPINES) CORP U/KB 20.78
HIYAS BANKING CORPORATION Thrift Bank 21.38
DEUTSCHE BANK AG U/KB 21.86
ROBINSONS BANK CORPORATION U/KB 22.66
METRO CEBU PUBLIC SAVINGS BANK Thrift Bank 24.15
JP MORGAN CHASE BANK NATIONAL ASSN. U/KB 24.25
DUMAGUETE CITY DEV BANK INC Thrift Bank 24.71
LIFE SAVINGS BANK INC Thrift Bank 25.13
WEALTH DEVELOPMENT BANK CORPORATION Thrift Bank 25.34
FIRST CONSOLIDATED BANK INC (A PDB) Thrift Bank 25.75
BPI DIRECT BANKO INC Thrift Bank 26.69
SUN SAVINGS BANK INC Thrift Bank 27.28
LEGAZPI SAVINGS BANK INC Thrift Bank 28.94
BANGKOK BANK PUBLIC CO LTD U/KB 35.01
PNB SAVINGS BANK Thrift Bank 35.52
LEMERY SAVINGS & LOAN BANK, INC. Thrift Bank 35.83
QUEEN CITY DEVELOPMENT BANK INC OR QUEENBANK A THRIFT BANK Thrift Bank 36.54
BANK OF AMERICA N.A. U/KB 37.78
CORDILLERA SAVINGS BANK INC Thrift Bank 38.28
PHIL TRUST COMPANY U/KB 38.94
MALASIQUI PROGRESSIVE SLB, INC Thrift Bank 41.33
NORTHPOINT DEV'T BANK INC Thrift Bank 42.99
ING BANK N.V. U/KB 52.87
MERCHANTS SAVINGS & LOAN ASSN INC Thrift Bank 54.14
PHIL STAR DEVELOPMENT BANK INC Thrift Bank 55.25
QUEZON COCONUT BANK INC (A THRIFT BANK) Thrift Bank 59.01
YUANTA SAVINGS BANK PHILIPPINES INC Thrift Bank 63.12
BANK ONE SAVINGS AND TRUST CORP. Thrift Bank 64.63
CATHAY UNITED BANK CO LTD - MANILA BRANCH U/KB 68.32
CENTURY SAVINGS BANK CORPORATION Thrift Bank 78.86
FIRST COMMERCIAL BANK U/KB 96.27
AL-AMANAH ISLAMIC INVESTMENT BANK OF THE PHILS U/KB 105.44
SHINHAN BANK - MANILA BRANCH U/KB 110.32
INDUSTRIAL BANK OF KOREA MANILA BRANCH U/KB 126.78
PAMPANGA DEVELOPMENT BANK Thrift Bank 132.96
SUMITOMO MITSUI BANKING CORPORATION - MANILA BRANCH U/KB 134.89
ISLA BANK(A THRIFT BANK) INC Thrift Bank 155.44
UNITED OVERSEAS BANK LIMITED MANILA BRANCH U/KB 211.98
DUNGGANON BANK (A MICROFINANCE THRIFT BANK) INC Thrift Bank NA
HSBC SAVINGS BANK PHILIPPINES Thrift Bank NA
OPPORTUNITY KAUSWAGAN BANK INC (A MICROFINANCE THRIFT BANK) Thrift Bank NA
PACIFIC ACE SAVINGS BANK INC Thrift Bank NA
SAMPAGUITA SAVINGS BANK INC Thrift Bank NA
TONGYANG SAVINGS BANK INC Thrift Bank NA
TOWER DEVELOPMENT BANK Thrift Bank NA
WORLD PARTNERS BANK (A THRIFT BANK) Thrift Bank NA


Philippine Banking System
Common Tier 1 Ratio
March 31, 2017









Bank Type of Bank Common Tier 1 Ratio
1ST VALLEY BANK INC A DEVELOPMENT BANK Thrift Bank 0.00
BANGKO KABAYAN INC Thrift Bank 0.00
BANK OF AMERICA N.A. U/KB 0.00
BANK OF CHINA LIMITED U/KB 0.00
BANK OF MAKATI (A SAVINGS BANK) INC Thrift Bank 0.00
BANK ONE SAVINGS AND TRUST CORP. Thrift Bank 0.00
BATAAN DEVELOPMENT BANK Thrift Bank 0.00
BATAAN SAVINGS AND LOAN BANK Thrift Bank 0.00
BUSINESS AND CONSUMERS BANK (A DB) Thrift Bank 0.00
CARD SME BANK INC A THRIFT BANK Thrift Bank 0.00
CENTURY SAVINGS BANK CORPORATION Thrift Bank 0.00
CITYSTATE SAVINGS BANK INC Thrift Bank 0.00
CORDILLERA SAVINGS BANK INC Thrift Bank 0.00
DUMAGUETE CITY DEV BANK INC Thrift Bank 0.00
ENTERPRISE BANK INC (A THRIFT BANK) Thrift Bank 0.00
EQUICOM SAVINGS BANK INC Thrift Bank 0.00
FARMERS SAVINGS & LOAN BANK INC Thrift Bank 0.00
FIRST CONSOLIDATED BANK INC (A PDB) Thrift Bank 0.00
HIYAS BANKING CORPORATION Thrift Bank 0.00
INTER-ASIA DEVELOPMENT BANK Thrift Bank 0.00
ISLA BANK(A THRIFT BANK) INC Thrift Bank 0.00
LEMERY SAVINGS & LOAN BANK, INC. Thrift Bank 0.00
LIFE SAVINGS BANK INC Thrift Bank 0.00
LUZON DEVELOPMENT BANK Thrift Bank 0.00
MALASIQUI PROGRESSIVE SLB, INC Thrift Bank 0.00
MALAYAN BANK SAVINGS AND MORT BANK INC Thrift Bank 0.00
MARITIME SAVINGS BANK CORPORATION Thrift Bank 0.00
METRO CEBU PUBLIC SAVINGS BANK Thrift Bank 0.00
MICROFINANCE MAXIMUM SB INC Thrift Bank 0.00
NORTHPOINT DEV'T BANK INC Thrift Bank 0.00
OPTIMUM DEVELOPMENT BANK INC Thrift Bank 0.00
PAMPANGA DEVELOPMENT BANK Thrift Bank 0.00
PENBANK INC (A PDB) (FORMERLY: PENINSULA RB INC) Thrift Bank 0.00
PHIL POSTAL SAVINGS BANK INC Thrift Bank 0.00
PHIL STAR DEVELOPMENT BANK INC Thrift Bank 0.00
PHILIPPINE BUSINESS BANK INC A SAVINGS BANK Thrift Bank 0.00
PHILIPPINE RESOURCES SAVINGS BANKING CORPORATION (PR SAVINGS Thrift Bank 0.00
PRODUCERS SAVINGS BANK CORPORATION Thrift Bank 0.00
QUEEN CITY DEVELOPMENT BANK INC OR QUEENBANK A THRIFT BANK Thrift Bank 0.00
QUEZON COCONUT BANK INC (A THRIFT BANK) Thrift Bank 0.00
STERLING BANK OF ASIA INC (A SAVINGS BANK) Thrift Bank 0.00
SUN SAVINGS BANK INC Thrift Bank 0.00
THE PALAWAN BANK (PALAWAN DB) INC Thrift Bank 0.00
UNITED COCONUT PLANTERS BANK U/KB 0.00
UNITED OVERSEAS BANK LIMITED MANILA BRANCH U/KB 0.00
UNIVERSITY SAVINGS BANK INC Thrift Bank 0.00
VILLAGE BANK INC (A THRIFT BANK) Thrift Bank 0.00
WEALTH DEVELOPMENT BANK CORPORATION Thrift Bank 0.00
YUANTA SAVINGS BANK PHILIPPINES INC Thrift Bank 0.00
EAST WEST BANKING CORP U/KB 10.14
LAND BANK OF THE  PHILIPPINES U/KB 10.71
PHILIPPINE VETERANS BANK U/KB 11.05
PHIL SAVINGS BANK Thrift Bank 11.07
CHINA BANK SAVINGS INC Thrift Bank 11.16
PHIL NATIONAL BANK U/KB 11.21
METROPOLITAN BANK & TRUST CO U/KB 11.23
BANK OF THE PHIL ISLANDS U/KB 11.27
PHIL BANK OF COMMUNICATIONS U/KB 11.48
DEVELOPMENT BANK OF THE PHIL U/KB 11.63
THE BNK OF TOKYO-MITSUBISHI UFJ LTD U/KB 11.72
RIZAL COMM'L BANKING CORP U/KB 11.84
UNION BANK OF THE PHILS U/KB 11.95
CHINA BANKING CORP U/KB 12.30
RCBC SAVINGS BANK INC Thrift Bank 12.53
BDO PRIVATE BANK, INC. U/KB 12.89
BDO UNIBANK INC U/KB 12.97
MAYBANK PHILIPPINES INC U/KB 13.08
ASIA UNITED BANK CORPORATION U/KB 13.23
MIZUHO BANK LTD - MANILA BRANCH U/KB 14.07
CITY SAVINGS BANK INC Thrift Bank 14.09
BPI FAMILY SAVINGS BANK INC Thrift Bank 15.03
UCPB SAVINGS BANK Thrift Bank 15.59
SECURITY BANK CORP U/KB 16.86
STANDARD CHARTERED BANK U/KB 16.97
HONGKONG & SHANGHAI BANKING CORP U/KB 17.69
BANK OF COMMERCE U/KB 18.24
MEGA INT'L COMM'L BANK CO LTD U/KB 18.60
CITIBANK, N.A. U/KB 18.85
ANZ BANKING GROUP LTD U/KB 19.38
KEB HANA BANK - MANILA BRANCH U/KB 19.86
CTBC BANK (PHILIPPINES) CORP U/KB 20.78
DEUTSCHE BANK AG U/KB 21.86
ROBINSONS BANK CORPORATION U/KB 22.66
JP MORGAN CHASE BANK NATIONAL ASSN. U/KB 24.25
BPI DIRECT BANKO INC Thrift Bank 26.69
LEGAZPI SAVINGS BANK INC Thrift Bank 28.94
PNB SAVINGS BANK Thrift Bank 32.51
BANGKOK BANK PUBLIC CO LTD U/KB 35.01
PHIL TRUST COMPANY U/KB 38.94
ING BANK N.V. U/KB 52.87
MERCHANTS SAVINGS & LOAN ASSN INC Thrift Bank 54.14
CATHAY UNITED BANK CO LTD - MANILA BRANCH U/KB 68.32
FIRST COMMERCIAL BANK U/KB 96.27
AL-AMANAH ISLAMIC INVESTMENT BANK OF THE PHILS U/KB 105.44
SHINHAN BANK - MANILA BRANCH U/KB 110.32
INDUSTRIAL BANK OF KOREA MANILA BRANCH U/KB 126.78
SUMITOMO MITSUI BANKING CORPORATION - MANILA BRANCH U/KB 134.89
DUNGGANON BANK (A MICROFINANCE THRIFT BANK) INC Thrift Bank NA
HSBC SAVINGS BANK PHILIPPINES Thrift Bank NA
OPPORTUNITY KAUSWAGAN BANK INC (A MICROFINANCE THRIFT BANK) Thrift Bank NA
PACIFIC ACE SAVINGS BANK INC Thrift Bank NA
SAMPAGUITA SAVINGS BANK INC Thrift Bank NA
TONGYANG SAVINGS BANK INC Thrift Bank NA
TOWER DEVELOPMENT BANK Thrift Bank NA
WORLD PARTNERS BANK (A THRIFT BANK) Thrift Bank NA

Friday, June 30, 2017

After the BPI Computer Glitch, the New BSP Cyber-Security Guidelines May Be Ignoring the Ticking Time Bomb in the Heart of Philippine Banks

On June 28, 2017, the Bangko Sentral ng Pilipinas (BSP) said that it would roll out tighter rules on the information technology (IT) systems of banks by next month.  These rules would update BSP 2013 Circular # 808, BSP's main framework for IT risk management and security. Circular #808 directs banks "to ensure that banks implement security controls to adequately protect their information assets from unauthorized access, and deliberate misuse or fraudulent modification, insertion, deletion, or substitution." The new framework would continue to focus on cyber-security but be updated to include new technologies such as cloud computing and higher encryption standards.

While it's true that cyber-security is an ever-increasing risk in the banking industry, the new BSP framework might be ignoring an equally growing risk - that of legacy IT systems. After all, the last two computer glitches, the one at the Bank of Philippine Islands (BPI) at the start of June 2017 as well as the one at Security Bank last June 21, 2017 were not caused by hacking per se but by errors in their internal systems, human or otherwise. It was only BDO Unibank that admitted to have lost money due to ATM skimming.

In the House and Senate Hearings on these computer malfunction incidents, both BPI and BSP officials cited similar snafus taking place in other countries such as in the United Kingdom as well as Singapore.   The computer outages that took place in the Royal Bank of Scotland (RBS) in 2012 and 2013 (leading to a record fine of GBP 56 million pound sterling) as well as a similar outage in the Development Bank of Singapore (DBS) in 2010 were not products of hacking or external breaches in their computer systems but were internal to their respective firms.

Royal Bank of Scotland

The RBS cases are particularly instructive. Their numerous mishaps were attributed to human error as well as a failed batch processing upgrade. The U.K.'s Financial Conduct Authority (FCA) pinned RBS computer failure to deficiencies in the bank's IT risk management and control. There was an: 

  • Inadequate focus on IT resilience;
  • Insufficient identification, understanding or mitigation of the risk of a batch scheduler failure;
  • Measures to reduce the risks and subsequent effects of computer outages such as separating batch processing systems were not in place;
  • IT risk management policies were focused on recovering from a low probability but high impact events such as the total loss of a data center rather than smaller but more probable disruptions like software failure.

But the RBS computer outage could also have been due to the dismal state of its core legacy IT systems. The basic bank process software, "the back-end", may have been left untouched due to years of under-investment. Instead, management may have treated the legacy core system as a "black box" that is wrapped in snazzy new shell or front-end (customer-interface) applications such as real-time banking services such as mobile banking and/or internet banking (which show customers their up to the minute bank balances) even though their actual bank balances are batch-processed overnight. Hence, there is a divergence between what a customer thinks his balance is and what the bank thinks their customer's bank balance is until the two balances are reconciled with the overnight batch processing. This momentary divergence makes the bank's data vulnerable to data corruption.  Over time, because of competitive pressures, the shell of applications sitting on top of the core legacy system may become more larger and more complex and increase the risk of incompatibility and connectivity of the newer shell applications with the older core technology.

Compounding this basic problem is the complex integration of one bank's legacy IT system with another bank's legacy IT system. The modern RBS itself is a result of the merger of the old RBS with Natwest in 2000. Post merger, "a decision was taken to ditch Natwest more advanced computer systems and migrate all of the enlarged group's IT onto RBS's smaller IBM-based platform" because RBS's mainframe system was considered more cost-efficient solution at that time.

Although European banks spend a sizable amount on IT, most of the money is spent on patching and maintaining increasingly creaky and fragmented legacy systems.  As mentioned by Frances Coppola, a banking systems analyst, "core system replacement is very expensive... Very expensive IT infrastructure projects simply aren't acceptable to management or staff when the system may break down and their jobs are on the line." Bank management may like to move to new systems but system migration of this magnitude has been likened to "trying to change the engines on an aeroplane while it is in flight." There is the very real risk that everything can go horribly (and expensively) wrong. More often than not, bank management prefers to make incremental changes, resulting in a system that is ever more complex, diverse, and unstable.  Hence, the operational risk of a major IT failure remains a very distinct possibility at many banks.


Bank of the Philippine Islands (BPI)

Like RBS, BPI is an old bank. In fact, it is the oldest bank in the Philippines. Like RBS, the modern BPI is a product of a series of mergers since the late 1990s:
  1. City Trust Banking Corporation, the retail banking arm of Citibank Philippines, in 1996;
  2. Far East Bank & Trust Company (FEBTC) in 2000 (the larger banking merger at that time); 
  3. Three major life, non-life and reinsurance companies in 2000; as well as
  4. Prudential Bank in 2005.
BPI has been known to be a leader in the field of banking technology. For instance, it was the first to introduce Automated Teller Machines into the country in the 1980s. As such, it may have a number of core legacy systems remaining.

Like RBS, and as indicated by its Executive Vice President Ramon Locsin Jocson (BPI's Head of Enterprise Services) during the Senate and Congressional Hearings, the bank was prepared for a low probability event such as total loss of data instead of a higher probability event such as the software malfunction it suffered last June 7, 2017.

Like RBS (as well as Security Bank), it suffered a batch processing failure. The failure occurred internally and was not due to an external computer breach or hack. The error was pinned on a programmer who inputted the wrong date range on a batch reconciliation report and who deviated from procedure to rush the report, resulting in errors in as many as 1.5 million accounts and resulted in a system wide shutdown of its ATM, Cash Acceptance, and Point of Sale systems for almost two days.

Although the bank spends a significant amount on IT - around Php 5.3 billion (roughly US$100 million) on IT investments, it is not clear as to how much investment goes to new systems as to patching and maintaining its core legacy system. It is also not clear as to how much of this yearly investment goes into front-end or shell applications versus the more mission-critical core or back-end systems.

The bank, however, did indicate that it is, by far, the leading Philippine bank in terms of the absolute size of its IT infrastructure investments (roughly 8% of 2016 bank revenues) and it has been spending at least Php 400 million a year in terms of research and development. It also indicated that it spends at least Php 300 million a year in terms of cyber-security. Why so much investment in IT? Because it aims to "catch up" with the technological capabilities of its rivals within the ASEAN region.

So what then?

If BPI is one of the leaders in Philippine banking technology and this "glitch" happened to them, then what does this say about the state of the core legacy systems of the rest of the Philippine banking system? By the very fact that BPI is playing catch up to its regional rivals, perhaps the bank has realized that it has reached a "tipping point where the costs of and risk of doing nothing outweigh the cost and risk of taking action."

To paraphrase banking analyst Frances Coppola, it is high time then that the BSP focus on the increasing fragility of the legacy IT systems of Philippine banks. Unless this is addressed, we run the risk of a major systems failure in one or more banks at some point. The BPI/BDO/Security Bank failures are warnings. Banking regulators need to address this problem before there is a real disaster.