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Monday, September 12, 2011

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
.

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.

11 comments:

  1. Hello, nice to visit your blog. Good thing there is someone I can talk to regarding bank condition analysis. Just want to know your opinion about the Rural Bank of Makati? Can you provide your interpretation about its statistics? I am very eager to know how this bank stands today as to safety. Thank you very much.

    ReplyDelete
  2. Based on the data available at the Rural Bank of Makati's website:

    http://www.bankofmakati.com.ph/images/stories/pdfs/financials.pdf

    The Rural Bank of Makati's non-earning assets are around 32% of Stockholders Equity and around 8% of Total Assets. Using the analysis I used above, it is significant but not exactly troubling. It wouldn't be on any of the lists I posted above.

    But I caution you to do your own investigation. This analysis is based on a cursory examination of their financial statements and has to be taken into consideration with other factors.

    ReplyDelete
  3. Thank you David. The site already updated their financial data.
    http://www.bankofmakati.com.ph/images/stories/pdfs/financials2011.pdf

    Would you mind interpret this once again? Sorry for I cannot analyze these kinds of data, I am not into the banking and finance field.

    ReplyDelete
  4. There was some slight deterioration.

    The Rural Bank of Makati's non-earning assets as of 6/30/2011 are around 33% (from 32% as of 12/31/2011) of Stockholders Equity and around 8.5% of Total Assets (from 8% as of 12/31/2011).

    This analysis is a screening tool. I caution you to do your own investigation. This analysis is based on a cursory examination of their financial statements and has to be taken into consideration with other factors.

    ReplyDelete
  5. I have two updates. One on Thrift Banks as of March 31, 2011:

    http://bancofilipinofailure.blogspot.com/2011/10/are-there-other-banks-ready-to-implode.html

    And one on Large Commercial Banks as of June 30, 2011

    http://bancofilipinofailure.blogspot.com/2011/10/lbc-development-bank-bites-dust-are.html

    ReplyDelete
  6. Hi I'm Daryll, Mr. Grime^^ Can you teach me the exact account to add to get 3.323 Billion?? thank you^^ and what are the capital cushions thank you^^

    ReplyDelete
  7. Simple. Go to the December 2010 Published Statement of Condition of LBC Development Bank at www.bsp.gov.ph. Add the Real and Other Properties Acquired - Net PHP 167.4 Million plus Other Assets - Net (this is where LBC Bank booked the advances made to its affiliate LBC Express) PHP 3,155.5 million. This gives you total Non-Earning Assets. Capital Cushion normally consists of Stockholders Equity less Goodwill, less Preferred Stock and Hybrid Capital plus Allowance for Credit and Impairment Losses. I hope this helps.

    ReplyDelete
  8. It really help Mr. Grime thank you^^ We are actually doing a business research about who's going to be the next to be bankrupt exactly what you are blogging. so I'm thinking can we Interview you sometime?? as an addition for our list of professionals?? we are from Far Eastern University....^^

    ReplyDelete
  9. I'm Daryll mago
    e:mail: daryll_mago13@yahoo.com
    cel# 09273647988
    We are actually third year financial management student hope you can help us^^

    ReplyDelete
  10. thank you po for this info..^^ big help for our research..:) God bless you..^^

    ReplyDelete