Asiatrust Bank, Long on PDIC's Life Support, is Finally Sold for Scrap Value

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.

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:

1. Unrecognized losses on the sale of its Non-Performing Assets to Special Purpose Vehicles
2. Unrecognized credit losses the Notes Payable from the SPVs to Asiatrust
3. Unrecognized impairment losses on its “Investment Properties” or Acquired Real Estate
4. Unrecognized credit losses on its Loans and Receivables
5. 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

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:

1. 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
2. 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):

1. 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;
2. 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:

1. The transferor relinquishes effective control over the transferred NPAs; and
2. 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:

1. 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
2. Is made the beneficiary of a trust used as a vehicle for purchasing and securitizing the NPAs; or
3. Pays further expenses in relation to the NPAs after said NPAs have been sold/transferred to the transferee SPV; or
4. 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
5. 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
6. 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
7. Accepts as collateral for a loan extended by said FI the equity shares and IUIs of the SPV that acquired its NPAs; or
8. 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
9. Enters into any other transaction where the FI retains effective control over the transferred NPAs or shares in the losses of the SPV.