LBC Development Bank bites the dust, Are there other LBC's out there waiting to implode?

Editor's Note:  This blog was inspired by the spectacular failure of Banco Filipino Savings and Mortgage Bank for the second time in its 38 years of existence.  This blog post and other blog posts like it attempt to describe why the bank failed.  But it also attempts to assess what other Philippine Banks have the potential to fail in the not too distant future. To see blog posts on other banks, click on the Banco Filipino Graphic at the top of the blog or click on the blog archive on the right hand column, or simply go to bancofilipinofailure.blogspot.com.

Background

Last Friday, September 9, 2011, the Monetary Board ordered the Araneta -controlled LBC Development Bank (LBC Bank) to be closed and placed under receivership of the Philippine Deposit Insurance Corporation. According to the BSP, LBC Bank was insolvent, it had unsustainable operations that were detrimental to depositors and creditors, and it violated a cease and desist order on unsafe and unsound practices. Around 320,000 depositors were affected, some of whom were the relatives of OFWs who were in the process of receiving much-needed remittances from their loved ones abroad. This happened in less than six months after Banco Filipino's spectacular failure in March 2011.

The Philippine Deposit Insurance Corporation (PDIC) advised consumers to wisely choose the banks where they will deposit their money. The trouble is, most depositors don't and can't read financial statements before they open a bank account. The regulators, whose job is to safeguard the public's money, have a problem bank list that they do not divulge to the public, for fear of sparking another bank run. So who can the public turn to, to advise them where to put their money? No one, except the banks themselves who will always promote their self-interests. This analysis is an attempt to fill in that knowledge gap, by screening out the weaker banks that seem ready to implode at any given moment.

LBC Development Bank

LBC Bank bears many similarities to Banco Filipino. Initial media reports indicated that LBC Bank offered relatively high interest rates to depositors.

LBC's audited financial statements are unavailable. They are not on the BSP website and LBC Bank's own website http://www.lbcbank.com.ph has been taken down

A quick perusal of its December 2010 published statement of condition on the BSP website indicates that, like Banco Filipino, it had a very high proportion of illiquid assets (http://www.bsp.gov.ph/banking/psoc_tb/LBC%20DB.htm). Over 50 percent of its asset base consisted of assets that are not relevant to banking operations, namely, acquired real estate (PHP 167.39 million), and a whopping PHP 3.2 billion in other assets. The “other assets” bucket can be comprised of many things such as goodwill, deferred tax assets, or even unbooked losses. In other words, around PHP 3.3 billion of LBC's PHP 6.4 billion in assets was in non-earning assets.

You could argue that acquired real estate can be sold and, if acquired some time ago, can be sold at a profit. But selling real estate is not the bank's business, making money on loans is. The high proportion on non-earning assets on LBC Bank's books show that LBC Bank's ability to make money through loans was severely hampered. Another problem associated with holding such assets is liquidity. If the bank has liquidity problems, it will be often forced to sell assets and quickly. A quick sale of real estate often means a big discount, and if the real estate is sold below book value, the bank will incur a loss and the loss will eat into the bank's capital. Other assets such as goodwill, which often reflects the premium a company pays to buy the equity of another company, can be impaired if the acquired company's economic prospects are diminished. Deferred tax assets, which appear on a company's books due to losses in previous years, may have to be written down if it becomes clear that the company will not make enough future taxable profit to utilize the tax loss. Other assets, just as in Banco Filipino's case, can also consist of unbooked losses. If this is the case, then the value of those assets is plainly zero.

Moreover, LBC Bank's non-earning assets of PHP 3.3 billion is roughly six times the bank's equity of PHP 550 million. A 10 percent drop in the value of those non-earning assets will reduce the value of the bank's equity by 60%. A 20 percent drop in the value of its non-earning assets will more than wipe out the value of the bank's equity.

In 2009, LBC Bank was already in roughly the same financial condition. In 2009, LBC Bank already had a high proportion of its asset base in non-earning assets - PHP 2.5 billion in non-earning assets out of a total asset base of PHP 5.5 billion and these non-earning assets were already almost five times its equity base of PHP 539 million.

Given this scenario, LBC Bank had already been a zombie bank, neither living nor dead. Its large non-earning assets severely limited its ability to make loans and money. But through the use of relatively high interest rates, it was able to attract enough deposits (deposit growth of PHP 961 million in 2010) to keep alive for another year.

Other Potential Problem Banks

The question is are there other banks like LBC Bank and Banco Filipino out there? Are there other banks that exhibit the same characteristics of a high proportion of non-earning assets as a percentage of assets and equity? A quick flip through the published statements of condition on the BSP website answers the question: a most definite yes.

List of Local Philippine Banks with a High % of Non-Earning Assets to Total Assets As of December 2010
Bank	Total Assets (In PHP Millions)	Non-Earning Assets (In PHP Millions)*	Total Stockholders' Equity (In PHP Millions)	Non-Earning Assets/ Total Assets (In %)**
Bank of Calape	12	9	6	75%
LBC Development Bank	6,391	3,323	548	52%
Export and Industry Bank***	31,003	15,225	1,410	49%
Inter-Asia Development Bank	88	32	3	36%
The Palawan Bank	287	93	10	32%
Pridestar Development Bank	123	34	66	27%
GSIS Family Bank	3,575	833	690	23%
Sampaguita SLA, Inc.	118	27	60	23%
Philippine Bank of Communications****	43,802	10,080	4,777	23%
Opportunity Microfinance Bank	484	98	119	20%

* Non-Earning Assets include Real and Other Properties Acquired (ROPA), Non-Current Assets Held for Sale, and Other Assets
**Arbitrary % Cut Off was set at 20% of Total Assets

*** The board of Export and Industry Bank approved the sale of all its bank assets to Banco De Oro Unibank, Inc. last July 30, 2010

**** The group of Roberto Ongpin acquired a 97.28% stake in Philippine Bank of Communcations last July 27, 2011

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List of Local Philippine Banks with a High % of Non-Earning Assets to Total Stockholders Equity As of December 2010
Bank	Total Assets (In PHP Millions)	Non-Earning Assets (In PHP Millions)*	Total Stockholders' Equity (In PHP Millions)	Non-Earning Assets/ Total Stockholders' Equity (In %)**
Legaspi Savings Bank	1,912	335	26	1291%
Export and Industry Bank***	31,003	15,225	1,410	1080%
Inter-Asia Development Bank	88	32	3	1066%
The Palawan Bank	287	93	10	914%
LBC Development Bank	6,391	3,323	548	606%
Philippine Bank of Communications****	43,802	10,080	4,777	211%
United Coconut Planters Bank	179,470	28,684	14,244	201%
Planters Development Bank	50,755	6,702	3,706	181%
Bank of Calape	12	9	6	160%
Hiyas Savings and Loan Bank	1,237	204	141	144%
Equicom SB	3,998	486	399	122%
GSIS Family Bank	3,575	833	690	121%
Philippine National Bank	299,787	32,290	30,773	105%

* Non-Earning Assets include Real and Other Properties Acquired (ROPA), Non-Current Assets Held for Sale, and Other Assets
**Arbitrary % Cut off was set at 100% of Total Stockholders' Equity

*** The board of Export and Industry Bank approved the sale of all its bank assets to Banco De Oro Unibank, Inc. last July 30, 2010

**** The group of Roberto Ongpin acquired a 97.28% stake in Philippine Bank of Communcations last July 27, 2011

List of Local Philippine Banks with both High Non-Earning Assets as a % of Total Assets and Total Stockholders Equity As of December 2010
Bank	Total Assets (In PHP Millions)	Non-Earning Assets (In PHP Millions)*	Total Stockholders' Equity (In PHP Millions)
Philippine Bank of Communications**	43,802	10,080	4,777
Export and Industry Bank***	31,003	15,225	1,410
Bank of Calape	12	9	6
LBC Development Bank	6,391	3,323	548
GSIS Family Bank	3,575	833	690
The Palawan Bank	287	93	10
Inter-Asia Development Bank	88	32	3

* Non-Earning Assets include Real and Other Properties Acquired (ROPA), Non-Current Assets Held for Sale, and Other Assets

** The group of Roberto Ongpin acquired a 97.28% stake in Philippine Bank of Communcations last July 27, 2011

*** The board of Export and Industry Bank approved the sale of all its bank assets to Banco De Oro Unibank, Inc. last July 30, 2010

Disclaimer:

This list only serves as a screening guide.  It is not a definitive guide and must be taken in the context of other factors.  The figures are based on the individual banks' statement of condition as of December 31, 2010 as published in the BSP website (www.bsp.gov.ph). For this analysis, no attempt was made to go through the audited financial statements of each bank. Readers are suggested to make their own investigations and verify the figures presented. Both BSP and PDIC have their own problem bank screening systems that are much more sophisticated in scope and design, given that they have more access to information over the banks they regulate.