The Texas Ratio of Select Philippine Banks

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.

The Texas Ratio is a measure of a bank's credit problems. The higher the Texas ratio, the more severe the bank's credit troubles. The Texas Ratio was developed by Gerald Cassidy and other analysts at RBC Capital Markets as an early warning system to identify potential problem banks. According to Investopedia.com, it was originally applied to banks in Texas in the 1980s. Mr. Cassidy noticed that when problem assets grew to more than 100% of capital, most of the Texas banks in that precarious position ended up going under. A similar pattern occurred in the New England banking sector during the recession of the early 1990s.

The Texas Ratio is calculated by dividing the bank's distressed assets (Non-performing Loans + Acquired Real Estate, plus Deferred Charges such as unbooked losses) by the sum of its tangible common equity capital and allowances for impairment and credit losses.

Tangible common equity is the subset of shareholders' equity that strips out preferred shares or other forms of hybrid equity capital as well as goodwill or other intangible assets. It measures a company's financial strength because it indicates how much equity the common stockholders would have left in the event of a company's liquidation. A bank's tangible common equity plus its allowances for impairment and credit losses indicates the size of the bank's capital cushion, or its ability to absorb losses. Banks tended to fail when their Texas Ratio reached 1:1; or 100% of the bank's capital cushion.

The following table indicates the Texas Ratio for selected Philippine banks using the figures indicated in their audited financial statements as of December 31, 2010. The exceptions to this are Asiatrust Development Bank, whose last published audited financial statement was as of June 30, 2009, and Bank of Commerce, Land Bank of the Philippines, and Philippine Veterans Bank, whose last published audited financial statements were as of December 31, 2009.

Bank	Texas Ratio
Philippine Bank of Communications	14.99
Export and Industry Bank	8.84
United Coconut Planters Bank	5.53
Planters Development Bank	2.98
Asiatrust Development Bank	2.51
Bank of Commerce	1.13
Rizal Commercial Banking Corporation	1.09
Philippine Veterans Bank	1.01
Philippine National Bank	0.70
Union Bank of the Philippines	0.70
Security Bank Corporation	0.69
Allied Banking Corporation	0.65
Asia United Bank	0.63
Rural Bank of Makati	0.58
Metropolitan Bank and Trust Company	0.54
BDO Unibank, Inc.	0.44
Development Bank of the Philippines	0.39
Bank of the Philippine Islands	0.36
Land Bank of the Philippines	0.34
Philippine Trust Company	0.34
Philippine Savings Bank	0.23
China Banking Corporation	0.20
Citystate Savings Bank	0.09

As indicated in the table above, eight banks have a Texas Ratio greater than 1:1. Of these, five banks have Texas Ratios greater than 2:1. The top three banks on the above list have Texas Ratios greater than 5:1, which indicates extremely severe credit problems at these banks.

Recent Developments

Bank of Commerce:

In May 2009, San Miguel Corporation's property arm and retirement fund have acquired a 51% stake in Bank of Commerce with an additional equity infusion of PHP 2 billion. As of December 31, 2010, Bank of Commerce's Capital Funds was increased to PHP 12.5 billion from PHP 6.7 billion in year-end 2009.

Export and Industry Bank (EIB):

On July 30, 2010, the board of Export and Industry Bank (EIB)approved the sale of all EIB's bank assets to Banco De Oro Unibank, Inc. As of April 13, 2011, PDIC gave its approval for the transaction.

Philippine Bank of Communications:

On July 27, 2011, the group of Roberto Ongpin acquired a 97.28% stake in Philippine Bank of Communications from the Chung, Luy, and Nubla families for PHP 4.68 billion.

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. 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.