Asiatrust Development Bank (Asiatrust),
which has long been operating under life support granted by the
Philippine Deposit Insurance Corporation (PDIC), has agreed to sell
its banking assets, but not its stock to Asia United Bank Corporation
(AUB), a banking unit of Filipino Chinese businessman Jack Ng, owner
of the Rebisco Biscuit Group (
http://www.bworldonline.com/content.php?section=Finance&title=AUB-buys-Asiatrust%E2%80%99s-banking-business&id=46828). Under the deal, which excludes Asiatrust's trust business, Asiatrust's 28
branches will be absorbed by AUB, increasing AUB's total branch
network to 100 branches.
Luckily for Asiatrust depositors, the
sale of Asiatrust's banking assets is accompanied by an assumption of
its banking liabilities by AUB, meaning that depositors will not lose
any money and those depositors will continue to be the depositors of AUB, the
surviving entity.
“We are happy to
entrust our customers to a strong, highly profitable and growing
bank, which has a proven track record in operational integration and
is at the forefront of enhancing customer service and experience.”
- Asiatrust Vice-Chairman Roland M. Garcia
The same cannot be said for Asiatrust's
shareholders, who will be left with a sizeable loss, if not a complete
wipeout of their stockholders equity. The strategic shareholders of
Asiatrust, namely the Social Security System (19.13%), Asian
Development Bank (7.55%), and the controlling Garcia family (34.15%)
will bear the brunt of the losses. If the sale of Export and
Industry Bank's (EIB) banking assets to Banco De Oro Unibank, Inc.
(BDO) last July 30, 2010 is any guide, recognition of the bank's
losses will only increase
http://www.abs-cbnnews.com/business/04/13/11/pdic-approves-bdo-export-bank-deal.
EIB continues to operate as a bank and its insolvency has only
worsened since December 31, 2010, racking up PHP 726.22 million in
losses for the first nine months of 2011, up from losses of PHP
535.93 million for the same period in 2010.
http://bancofilipinofailure.blogspot.com/2012/02/slight-improvement-in-philippine.html
Asiatrust has been on the auction block
for some time now. The auction was most likely based on which investor bid
will need the lowest financial assistance from the PDIC
http://business.inquirer.net/21431/biz-buzz-pros-and-cons.
Like BDO, AUB was wise to buy
Asiatrust's banking assets rather than its stock. A purchase of
Asiatrust's stock could have quickly led to buyer's remorse for AUB.
First of all, Asiatrust, which is a publicly-listed bank, has not
disclosed its financial statements since June 30, 2009. Its
published statement of condition on the BSP website is empty of
figures: http://www.bsp.gov.ph/banking/psoc_tb/asiatrustdb.htm.
It has been this way for a number of years. Despite being listed on
the Philippine Stock Exchange (PSE), its financial statements are not
available on the PSE website http://www2.pse.com.ph/.
Trading in its shares has been suspended. The latest available
closing price for its shares is at PHP 7.00 per share as of November
4, 2010, trapping thousands of its shareholders into continually
depreciating and now worthless stock. The only publicly available
financial statements are on Asiatrust's corporate website
http://www.asiatrustbank.com/
and even those are way out of date: June 30, 2009.
As of June 30, 2009, Asiatrust reported
total stockholders equity of PHP 1.217 billion supporting PHP 11.579
billion in assets. However, Asiatrust's auditor, SGV & Co.,
issued a qualified auditor's opinion saying that Asiatrust's
stockholders equity was overstated by as much as PHP 1.39 billion.
In other words, the value of Asiatrust's stockholders equity was a
negative PHP 174 million. These unbooked losses related to the
following items:
- Unrecognized losses on the sale of its Non-Performing Assets to Special Purpose Vehicles
- Unrecognized credit losses the Notes Payable from the SPVs to Asiatrust
- Unrecognized impairment losses on its “Investment Properties” or Acquired Real Estate
- Unrecognized credit losses on its Loans and Receivables
- Overstated Deferred Tax Assets
A summary of this is as follows:
Item | Amount (In PHP M) |
Stockholders Equity as of June 30, 2009 (Unadjusted) | 1,217.1 |
Unbooked Losses | |
SPV Sales | 880.1 |
Credit Losses on SPV Notes Payable | 97.5 |
Impairment of Investment Properties | 73.5 |
Credit Losses on Loans and Receivables | 229.1 |
Overstated Deferred Tax Assets | 110.5 |
Total Unbooked Losses | 1,390.7 |
Stockholders Equity as of June 30, 2009 (Adjusted) | -173.6 |
SPV Sales
Asiatrust did not book the losses on
the sale of its Non-Performing Assets (NPAs) to Special Purpose
Vehicles (SPVs) at the time these assets were sold. Instead, the
Bangko Sentral ng Pilipinas (BSP) granted “regulatory relief” and
allowed these losses to be booked as deferred charges and amortized
over a period of ten years.
http://bancofilipinofailure.blogspot.com/2011/09/bsps-ampaw-accounting-system.html.
The understated losses on SPV sales amounted to PHP 880.1 million as
of June 30, 2009.
SPV Notes Payable
Asiatrust “sold” its NPAs to SPVs
in 2004, 2005, and 2008 under the provisions of Republic Act (RA) No.
9182, “The Special Purpose Vehicle Act of 2002 (SPV Act of 2002).
In exchange for the NPAs, the SPVs issued subordinated notes to
Asiatrust. These subordinated notes are payable in 1 to 10 years.
The bank has recognized the losses on these subordinated notes on a
staggered basis over a ten year period as allowed by the BSP for
“prudential reporting purposes.” However, Philippine Financial
Reporting Standards (PFRS) do not allow the staggered recognition of
losses. Instead, PFRS requires that the credit losses be charged to
current operations. The understated credit losses on the SPV notes
amount to PHP 97.5 million as of June 30, 2009.
Impairment of Investment Properties
Despite the significant amount of
“regulatory relief” provided by the BSP on the recognition of
Asiatrust's losses on SPV Sales and SPV Notes Payable, the bank was
so weak that it deferred impairment losses on its Investment
Properties, otherwise known as Acquired Real Estate to the tune of
PHP 73.5 million. This means that the carrying value of Asiatrust's
Investment Properties is approximately PHP 73.5 million above what
the auditor expects Asiatrust can recover from those Investment
Properties.
Credit Losses on Loans and Receivables
Asiatrust also deferred credit losses
on its Loans and Receivables to the tune of PHP 229.1 million. These
deferments are simply not allowed by the BSP under its program of
regulatory relief. Management simply chose to understate its losses.
Deferred Tax Assets
As of June 30, 2009, Asiatrust
“recognized deferred tax assets on NOLCO (Net Operating Loss Carry
Over) amounting to PHP 110.5 million in excess of available future
taxable profit. PFRS requires that deferred tax assets on NOLCO be
recognized to the extent that it is probable that future taxable
profit will be available against which the unused NOLCO can be
utilized.” In other words, the auditor does not believe
that Asiatrust will earn enough future profits to utilize all its
NOLCO. The auditor believes that NOLCO has to be written down to the
tune of PHP 110.5 million. The amount of NOLCO that Asiatrust
carries on its books is substantial, amounting to PHP 1,588.235
million as of June 30, 2009. It can also be argued that if Asiatrust continually loses money, the value of its NOLCO should decline substantially or be entirely written off if the bank will not earn any money that NOLCO can be utilized to reduce taxable income.
Weak, Insolvent Bank
As a result of the bank's large credit losses, the bank's distressed assets of PHP 4.638 million amounted to more than 2.57 times its total capital cushion of PHP 1.808 million as of June 30, 2009. This placed it as one of the top insolvent banks: http://bancofilipinofailure.blogspot.com/2011/09/texas-ratio-of-select-philippine-banks.html
Weak, Insolvent Bank
As a result of the bank's large credit losses, the bank's distressed assets of PHP 4.638 million amounted to more than 2.57 times its total capital cushion of PHP 1.808 million as of June 30, 2009. This placed it as one of the top insolvent banks: http://bancofilipinofailure.blogspot.com/2011/09/texas-ratio-of-select-philippine-banks.html
Consolidation of SPV Transactions
In 2004, Asiatrust sold NPAs with a
book value of PHP 204.1 million. In 2005, it sold NPAs with book
value of PHP 1.0 billion to two SPVs:
- RIS (SPV-AMC), which is majority owned by RIS Development Corporation, a developer of RIS Industrial Complex, a 10-hectare Industrial Subdivision in Guiguinto, Bulacan
- Schuylkill Asset Strategists (SPV-AMC) Inc., which is run under Cesar M. Mayo, a financier who has figured prominently in other large financial transactions: Please see: http://systemisbroken.blogspot.com/2011/10/revisiting-peace-bonds.html
In 2008, Asiatrust sold NPAs with a
book value of PHP 184.0 million. A summary of all these SPV transactions is
as follows:
Amount (In PHP M) | ||||
2004 | 2005 | 2008 | Total | |
Book Value of NPAs sold SPVs | 204.1 | 1,000.0 | 184.0 | 1,388.1 |
Subordinated Notes Payable of SPVs | 65.6 | 163.6 | 7.6 | 236.8 |
Cash Payments of SPVs | 9.2 | 9.0 | 2.8 | 21.0 |
Total Consideration for SPV Sales | 74.8 | 172.6 | 10.4 | 257.8 |
Losses Realized from SPV Sales | 129.3 | 850.2 | 171.3 | 1,150.8 |
Total Consideration as % of Book Value of NPAs sold to SPVs | 36.65% | 17.26% | 5.65% | 18.57% |
Total Cash Consideration as % of Book Value of NPAs sold to SPVs | 4.51% | 0.90% | 1.52% | 1.51% |
Discount Realized on Book Value of NPAs Sold to SPVs | 63.35% | 82.74% | 94.35% | 81.43% |
Together, Asiatrust has sold NPAs with
a cumulative book value of PHP 1.388 billion, leading to losses of
PHP 1.151 billion on the book value of these assets. The discount to
book value of these NPAs amounted to 81.43%. These assets were sold
for a cumulative total consideration of PHP 257.8 million, of which
only 8.15% consisted of cash payments. The rest of the consideration (91.85%) given for the SPV sales consisted of Subordinated Notes payable by
the SPVs to Asiatrust amounted to PHP 236.8 million. The
subordinated notes are payable in one to ten years and bear interest
at 0.00% to 8.00% per annum.
As of June 30, 2009, Asiatrust has
recognized PHP 37.5 million of credit losses on these subordinated
notes, amounting to 15.84% of the subordinated notes. Asiatrust's
external auditor believes that Asiatrust should book an additional
PHP 97.5 million in credit losses on these subordinated notes,
bringing total credit losses on the subordinated notes to PHP 135.0
million or 57.01% of the total subordinated notes balance of PHP
236.8 million.
Asiatrust's external auditor states
that PFRS requires that the accounts of the SPVs be consolidated into
Asiatrusts accounts but states that the effects of consolidating the
SPV accounts into the bank's accounts cannot be determined. Given
that Asiatrust has accumulated credit losses on over 50% of the total
consideration for the SPV sales, Asiatrust has retained the risks of its NPA. There seems to be an incomplete
transfer of the risks and rewards of ownership of the NPAs from
Asiatrust to the SPVs. This indicates that the SPV transactions of
Asiatrust do not satisfy the following conditions under the Financial
Reporting Standards in the Philippines for Banks (FRSPB):
- The entity retaining the majority of the residual risks and rewards of ownership of certain assets of the SPV should reflect in its financial statements its proportionate interest in such SPV;
- an entity should substantially transfer all the risks and rewards of ownership of an asset before such asset could be derecognized.
The SPV transactions continue to
qualify as “true sales” under the rules of R.A. 9182. Under the
Implementing Rules and Regulations (IRR) of The Special Purpose
Vehicle Act of 2002 (R.A. 9182), a “True Sale” refers to a sale
wherein the selling Financial Institution (FI) transfers or sells its
NPAs without recourse for cash or property to an SPV with the
following results:
- The transferor relinquishes effective control over the transferred NPAs; and
- The transferred NPAs are legally isolated and put beyond the reach of the transferor and its creditors. Provided, That the transferring FI shall not have direct or indirect management of the transferee SPV: Provided, further, that the selling FI does not possess a claim of beneficial ownership of more than five percent (5%) of the transferee SPV.
Under R.A. 9182's IRR, a True Sales
does not take place under the following conditions: If the FI:
- Purchases/invests in the Investment Unit Instruments (IUIs or participation certificates, debt instruments issued by the SPV) of the SPV that acquired its NPAs through its trust department including the trust department of its Subsidiaries/Affiliates, Parent bank and the trust department of the Parent bank's Subsidiaries/Affiliates; or
- Is made the beneficiary of a trust used as a vehicle for purchasing and securitizing the NPAs; or
- Pays further expenses in relation to the NPAs after said NPAs have been sold/transferred to the transferee SPV; or
- Extends any credit facility, guaranty or any similar financial transaction to any party for the purpose of investing in the equity or IUIs of the SPV, or for acquiring the NPAs from the SPV; or
- Extends any credit facility, guaranty or any similar financial transaction to any party for the purpose of acquiring the NPAs from the transferring FI; or
- Acts as trustee (FI's trust department) or if the trust department of any of the FIs subsidiaries/Affiliates, Parent bank or Parent bank's Subsidiaries/Affiliates acting as trustee, under any circumstances, in the securitization of NPAs that it has transferred to the SPV; or
- Accepts as collateral for a loan extended by said FI the equity shares and IUIs of the SPV that acquired its NPAs; or
- Enters into a buy-back and other similar arrangements, or financial derivative transactions with similar effect, involving the NPAs or the securities backed by such NPAs; or
- Enters into any other transaction where the FI retains effective control over the transferred NPAs or shares in the losses of the SPV.
Asiatrust Bank will always be remembered as an example of management incompetence.
ReplyDeleteDionisio Ong's incompetence was mentioned as early as 1996 during the Bank's IPO. The offer price of 44/share stood for a few minutes on opening and then glided down and never went back past 30. From 1996 to 2012, Dionisio Ong shepherded the Bank's net worth from 1.2 billion to negative 173 million. Loan levels flew (down) from 6.0 billion to just 2.5 billion (and most of that 2.5 billion was already NPL.)
ReplyDeleteAnd what about the employees who've been sweating it out under Ong's mediocre management? They lost their jobs, receiving a mere pittance in benefits.
And Ong still thinks he can manage a company. Incredible.
Ong presided over the company's downfall for a long long time. How did he manage to do that for so long? Why didn't the board remove him when it was clear he was not performing? By all accounts, it appears that the company's board members were they themselves direct owners of the company. They had every reason to safeguard the value of their investment which was declining in value almost every year by installing better management. Ultimately, it was a failure of corporate governance at the board level that did the bank in.
ReplyDelete