“Sunlight is the Best Disinfectant”
- U.S. Supreme Court Justice Louis
Brandeis (1916 to 1939)
Now that the Philippine Court of
Appeals has ruled last January 27, 2011 that Banco Filipino should be
reopened, this controversial bank and its colorful Vice-Chairman has once
again jumped back into the spotlight. In months prior, no less than
the Bangko Sentral ng Pilipinas (BSP) claimed that the bank was
closed because it was insolvent and “was operating as a pyramid or
Ponzi scheme, using new deposits to pay old ones, with its officers
paying themselves and their lawyers much more than the bank was
earning.”1
One major reason why Banco Filipino got
away with operating as a ponzi scheme for so long was that, outside of Banco
Filipino management, no one else but the BSP and its fellow
regulators knew the true financial condition of the bank. Why?
Because Banco Filipino had not issued financial statements - let
alone audited financial statements - since 2002!
So when the bank closed last March
2011, thousands of depositors (reportedly 33,000 depositors) were
taken by absolute surprise. Other than Banco Filipino's
tantalizingly higher interest rates (as much as 5.75% higher than
market average), depositors had absolutely no clue that the bank was
about to fail. After all, the bank was expanding, adding both depositors and branches. Because of this information vacuum, the decision to close BF looked arbitrary to the uninformed general public. Moreover, Banco Filipino management was able to use the public's cluelessness to their full advantage. They claimed that the bank was solvent because its inflated assets outweighed its liabilities and, thus, was arbitrarily closed by the BSP
and Monetary Board (MB). Apparently, no less than the Court of Appeals was
convinced.
Had the BSP/MB and their fellow
regulators such as the Securities and Exchange Commission (SEC), the Philippine Deposit Insurance Corporation (PDIC), as well as the Philippine Stock Exchange (PSE), exercised their
power as regulators and compelled the bank to submit audited
financial statements years ago, it would have possibly cast some
light on the financial rot in Banco Filipino. The general
public would have had a way of making their own independent
evaluation of Banco Filipino's health. Maybe some would-be
depositors would have stayed away, limiting the damage to the general
public.
One basic problem of Philippine
financial regulators is in the area of public disclosure. Public
disclosure is often:
- Limited or Non-Existent
- Irregularly Enforced
- Not Timely
- Not Granular
- DOSRI Loans and Insider Transactions are not adequately described or quantified.
Limited or Non-Existent Public
Disclosure
Banks are generally required to publish
their statement of condition every quarter. They are required to
make their financial data accessible to the public through BSP's
website at www.bsp.gov.ph. Banks that do not want their statement of
condition published must get approval from at least five members of
the seven-man Monetary Board.2 The regulators themselves may also decide to exclude certain kinds of banks from mandatory public disclosure. One curious result of this “opt-out” policy is that there is a
whole swath of the Philippine Banking System that is in the dark.
The general public cannot get any data on individual Rural and
Cooperative Banks from the BSP website. Only consolidated data is
available. (See here:
http://www.bsp.gov.ph/banking/bspsup_rural.asp)
Considering that 187 rural banks have failed in the past ten years3,
rural and cooperative bank depositors have no means of evaluating the
health of their bank other than what is disclosed in the individual
bank's website or what is available in back-dated issues of obscure rural
newspapers.
Irregular Enforcement of
Disclosure
Banco Filipino's years not disclosing its financial condition is not an isolated case.
Regulators can and do waive this requirement.
AsiaTrust Development Bank, which, like
Banco Filipino, is a publicly listed thrift bank, has not disclosed
its financial statements since 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, its financials are not available on
the PSE website http://www2.pse.com.ph/.
The same is true for its corporate website, which lists financial reports only until 2009. And yet the bank's existence is precarious. Like Banco Filipino,
it is surviving through continuous government support, this time
through another regulator, Philippine Deposit Insurance Corporation
(PDIC).4
Like Banco Filipino, once that government support vanishes or the government
deems the bank not viable, depositors will be left holding the bag.
Despite its inability to comply with
financial disclosure, which is a major requirement for listing on any
stock exchange throughout the world, AsiaTrust has not been delisted from the PSE. This
anomaly stands in stark contrast to the policies of other global exchanges,
which takes compliance with its basic listing requirements very
seriously.
For instance, in August 2006, Nasdaq OMX exchange threatened to delist Apple for failing to file its quarterly earnings statements or Form 10-Qs in a timely manner.5 At that time, Apple had some problems quantifying the financial impact of an options backdating scandal and was seeking an extension from the Nasdaq OMX exchange for the release of its financial statements. Apple, which has one of the largest market capitalizations in the world, was already a heavyweight (as much as 20% to 25%) of the Nasdaq 100 index back then. Its delisting would have sent shock waves throughout the global stock markets and drained market liquidity. This is like the PSE forcing a major component of the PSE Composite Index like PLDT or San Miguel Corporation to delist because it was late in its financial disclosures. Simply unthinkable in the Philippines.
For instance, in August 2006, Nasdaq OMX exchange threatened to delist Apple for failing to file its quarterly earnings statements or Form 10-Qs in a timely manner.5 At that time, Apple had some problems quantifying the financial impact of an options backdating scandal and was seeking an extension from the Nasdaq OMX exchange for the release of its financial statements. Apple, which has one of the largest market capitalizations in the world, was already a heavyweight (as much as 20% to 25%) of the Nasdaq 100 index back then. Its delisting would have sent shock waves throughout the global stock markets and drained market liquidity. This is like the PSE forcing a major component of the PSE Composite Index like PLDT or San Miguel Corporation to delist because it was late in its financial disclosures. Simply unthinkable in the Philippines.
Timeliness of Disclosures
Disclosures on the BSP's website are
not very timely. For instance, the latest available published
statement of condition for LBC Development Bank, at the time of closure in September 2011, was as of March 31, 2011 - some six months prior. To date, the latest available published
statements of condition for individual thrift banks on the BSP website is as of June 30,
20116.
As a result, the defunct LBC Bank's financial statements are still
reflected as part of the data and they show that its financial condition
continued to deteriorate.
Again, this stands in stark contrast to
other regulators. For instance, the latest available financial
statements of BankEast of Knoxville, Tennessee in the USA, which was
closed by the FDIC (the US counterpart of PDIC) last January 27, 20127,
are as of December 31, 2011 - less than thirty days prior to its
closure. The files can be downloaded by anyone at the Chicago Federal Reserve
website: https://cdr.ffiec.gov/public/.
Moreover, the financial disclosures of most FDIC-insured banks, even
the tiniest rural bank, can be found on that website.
Granularity or Level of Disclosure
As can be seen in the downloadable report on the now defunct BankEast, US financial regulators have made
Bank Call Reports (financial disclosures in the form of a balance
sheet, income statement, and supporting schedules8)
as well as other financial data publicly available. The financial
disclosures are fairly detailed, providing schedules on assets,
liabilities, capital accounts, income and expenses. And they can be
downloaded in bulk, allowing the general public to make detailed
assessments of an individual bank's financial condition, if they
wanted to.
This level of disclosure allows
independent research firms such as Institutional Risk Analytics
(http://us1.institutionalriskanalytics.com/www/index.asp)
to provide individual or institutional investors with ratings on
individual banks. It also allows consumer advocacy groups such as
“Move Your Money” http://moveyourmoneyproject.org/, which is against the so-called "Too Big To Fail" banks, to point consumers to smaller institutions that they deem safer for
ordinary depositors. The bulk extraction also allows third-party data providers such as SNL
Financial http://www.snl.com/Sectors/Fig/Default.aspx
to provide financial analysts, corporate treasurers, and financial
institutions with detailed financial profiles on more than 20,000
financial institutions.
This level of disclosure on financial
institutions is simply not available in the Philippines.
DOSRI Loans and Transactions
DOSRI Loans
All major Philippine banks and
financial institutions are significantly owned and controlled by
families. These families often use the banks they control as funding
vehicles for their diverse business interests. As a result of
this, Philippine financial authorities have issued what is known as
DOSRI rules - rules that limit loans to Directors, Officers, Stockholders, and Related Interests (DOSRI). In the aggregate, DOSRI loans
generally should not exceed the total capital funds or 15% of the
total loan portfolio of the Parent Company and/or any of its lending
and nonbanking financial subsidiaries, whichever is lower.
As it stands right now, banks are
required to disclose the amount of these DOSRI loans and receivables,
the amount of past due DOSRI loans and receivables, the ratio of the
unsecured DOSRI accounts to total DOSRI loans, and the ratio of past
due DOSRI loans and receivables to the Total Loan Portfolio (TLP).
For instance, the Rizal Commercial
Banking Corporation (RCBC), a bank owned and controlled by the
Yuchengco family, reported PHP 4.627 billion in DOSRI loans as of
June 30, 2011 - around 12.5% of RCBC's Total Stockholders Equity of
PHP 36.969 billion. The DOSRI loans represent roughly 3.7% of RCBC's Total Loan Portfolio. Of this amount, around 11.3% of the DOSRI
loans or PHP 525 million is past due. These past due DOSRI loans
represent 0.40% of RCBC's Total Loan Portfolio.9
DOSRI limits are often prone to abuse
and DOSRI violations have led to the downfall of many Philippine
banks. As recently as November 30, 2010, BSP placed as many as 8 big
commercial banks under close monitoring for DOSRI violations.10
Although bank policies often state that these DOSRI loans are “on
commercial, arm's length terms, i.e., substantially on the same terms
as loans to other individuals and businesses of comparable risks”,11
very little is disclosed regarding the nature of these loans such
as:
- Names of DOSRI Borrowers
- Amount of Loan
- Date of Loan
- Loan Tenor and Maturity Date
- Price of Loan (Interest Rates)
- Purpose of Loan
- Nature of the Collateral provided
- Collateral Valuation and Appraisal
- Loan Status such as Current, Past Due, Restructured
As a result, it is hard for the public
to ascertain whether the loans were really given at market rates or at preferential rates, whether the collateral provided was widely overvalued, or whether
the DOSRI loans were restructured to keep them from being labeled as past
due.
DOSRI violations commonly include
excess or breach of DOSRI caps and failure to report the loans. For
instance, the now defunct LBC Development Bank, which reported only
PHP 19.145 million in DOSRI loans as of June 30, 2011 and zero as in zero past due
DOSRI loans), failed because it had unpaid cash advances to a sister
company, the remittance firm LBC Express, running into the billions
of pesos.12
Instead reflecting these cash advances as DOSRI loans in its Total Loan Portfolio, it book them as "Other Assets." As a result, LBC Development Bank had PHP 4.760 billion in “Other Assets” as of June
30, 2011.13
In other cases, such as in the case of Banco Filipino, other banks used dummy
accounts for the borrowers to circumvent DOSRI limits (See
http://bancofilipinofailure.blogspot.com/2011/08/system-is-broken.html).
Insider Transactions
Philippine banks disclosures on Insider
or Related Party Transactions, are very limited. Very often, they do
not quantify the transactions themselves and only provide a general
description.
For example, RCBC does not quantify the
costs of its lease with RCBC Realty:
“The Bank is a
lessee of RCBC Realty of which it directly owns 25.0 per cent. and indirectly owns
9.8 per cent. through its equity holdings in RCBC Land. RCBC owns
49.0 per cent. of RCBC
Land, which owns 20 per cent. of RCBC Realty.”14
Furthermore, RCBC did not quantify the
cost savings of its agreement with House of Investments, a Yuchengco
Group Company, for the procurement of outsourcing services. So there
is no way to substantiate the bank's claim that it getting a fair
deal for its public shareholders. Very often, controlling
stockholders use such outsourcing deals to extract money away from the
business entities they do not fully own, at the expense of minority
shareholders.
“The Bank
entered into a Memorandum of Agreement with HI, a member of the YGC,
for the procurement of outsourcing services. Under the agreement, HI
is the Bank’s sole representative in negotiating the terms of the
contracts with selected suppliers or service providers for the
procurement of certain outsourcing services, primarily IT related
services. The agreement stipulated that HI would not charge fees for
its service except for its share in the savings generated from
suppliers and service providers. Moreover, HI is obligated to ensure
that the contracts they initiate do not prejudice the Bank in any way
and that the Bank does not pay more than the cost of buying the items
without aggregation.”
RCBC also does not quantify the cost of
legal services provided by non-executive, non-independent director Atty.
Teodoro Dy-Liaco Regala, who is a partner in ACCRA, which serves as RCBC's external legal counsel:
“The law firm of
Angara Abello Concepcion Regala & Cruz (ACCRA) Law Office is
among the firms engaged
by the Bank to render legal services. Atty. Teodoro Dy-Liaco Regala, Board Member, is a
Senior Partner of ACCRA Law Office. During the year, the Company paid ACCRA legal
fees that the Company believes to be reasonable for the services provided.”
RCBC's disclosures are typical of
Philippine banks and are compliant with current laws and regulations.
But they are “de minimis” as compared to the disclosures of global banks that operate in regulatory regimes with stricter disclosure requirements.
For instance, under its corporate
governance guidelines, Citigroup has almost no “DOSRI” loans.
“The Guidelines
restrict certain financial transactions between Citi and its
subsidiaries on the one hand and directors, senior management and
their immediate family members on the other. Personal loans to
executive officers and directors of Citi and its public issuer
subsidiaries and the most senior executives of the company, or
immediate family members who share any such person’s household, are
prohibited, except for mortgage loans, home equity loans, consumer
loans, credit cards, charge cards, overdraft checking privileges and
margin loans to employees of a broker-dealer subsidiary of Citi made
on market terms in the ordinary course of business.”15
Citigroup's guidelines on business
relationships severely limit business relationships between the bank and its affiliated directors and officers.
"All business
relationships, lending relationships, deposit and other banking
relationships between the company and a director’s primary business
affiliation or the primary business affiliation of an immediate
family member of a director must be made in the ordinary course of
business and on substantially the same terms as those prevailing at
the time for comparable transactions with non-affiliated persons."
"In addition, the aggregate amount of payments for property or services in any of the last three fiscal years by the company to, and to the company from, any company of which a director is an executive officer or employee or where an immediate family member of a director is an executive officer, must not exceed the greater of $1 million or 2% of such other company’s consolidated gross revenues in any single fiscal year."
Under its guidelines, even charitable contributions of Citigroup's directors are covered and disclosed.
"Annual
contributions in any of the last three calendar years from the
company and/or the Citi Foundation to a charitable organization of
which a director, or an immediate family member who shares the
director’s household, serves as a director, trustee or executive
officer (other than the Citi Foundation and other charitable
organizations sponsored by the company) may not exceed the greater of
$250,000 or 10% of the charitable organization’s annual
consolidated gross revenue."
The disclosures are very painstakingly detailed. Here's Citigroup's disclosure on the purchase of CEO Vikram Pandit's hedge fund, prior to his assumption of the CEO title.
“In
April 2007, Citi entered into an agreement to purchase 100% of the
outstanding partnership interests in Old Lane Partners L.P. (Old
Lane), a hedge fund firm co-founded by Vikram Pandit and John Havens
in which each of Vikram Pandit, John Havens and Brian Leach had an
interest. At the time of the Old Lane acquisition in 2007, a
substantial portion of the purchase price paid to the former owners
of Old Lane was required to be invested in the Old Lane Fund until
July 2011, the fourth anniversary of the closing of the transaction.
Accordingly, on behalf of each of Vikram Pandit and John Havens,
$100,273,630 was invested (a substantial portion of which was subject
to forfeiture until July 2011), and on behalf of Brian Leach,
$10,862,222 was invested in the Old Lane Fund. In June 2008, Citi
purchased substantially all of the assets in the Old Lane Fund and
redeemed substantially all of the interests of investors in the Old
Lane Fund. In connection with the redemptions of investors’
interests, distributions were made in respect of a portion of the
investments made by the former owners of Old Lane in the Old Lane
Fund, including $79,706,630 each, in the case of Mr. Pandit and
Mr. Havens, and $8,634,283, in the case of Mr. Leach. The
amounts distributed are invested, and all future distributions will
be invested, in an account at the Citi Private Bank for the remainder
of the period ending July 2011. The funds may be withdrawn earlier in
the event the executive dies or his employment with Citi terminates
by reason of his disability or without cause or for good reason or,
in the case of Mr. Leach, upon termination of his employment
with Citi for any reason. A substantial portion of Mr. Pandit’s
and Mr. Havens’ investment remains subject to forfeiture if
the executive’s employment with Citi terminates for cause or
without good reason before July 2011.”
Here's Citigroup's disclosure of its consulting relationship with non-executive, non-independent director Robert L. Joss:
“On
April 5, 2010, Citi entered into an agreement with Robert L.
Joss, who serves as a director of Citi. Pursuant to the agreement,
Mr. Joss would receive $350,000, payable quarterly in arrears,
to provide consulting services during 2010 to the company and its
subsidiaries and affiliates. Mr. Joss’ agreement was renewed
for 2011. Pursuant to Citi’s Policy on Related Party Transactions,
the nomination and governance committee approved the agreement with
Mr. Joss.”
Here's Citigroup's disclosure of services provided by the son of Citigroup executive Manuel Medina Mora, who is CEO of Citigroup's Global Consumer Banking:
“In
2010, a Citi subsidiary entered into an agreement with a company that
is majority owned by Mr. Jose Manuel Medina Mora, a son of
Manuel Medina Mora, to provide web design services for a
transactional website focusing on the subsidiary’s products and
services. The vendor was paid approximately $800,000 for its
services. The assignment has been fulfilled and the agreement is no
longer in effect.”
Citigroup even details the compensation of the spouse of Citigroup Vice-Chairman Lewis Kaden's adult child:
“An
adult spouse of an adult child of Lewis Kaden, an executive officer,
was employed full time during part of 2010 by Citi’s Global
Consumer Group. As of May 2010, this employee became a part-time
employee. The total compensation paid to this employee in 2010 for
the full-time and part-time work was $225,540. This employee is one
of the approximately 260,000 employees of Citi.”
Conclusion
It is highly unlikely that the BSP will severely limit DOSRI loans and transactions to a tiny sliver of bank capital. Large global banks such as Citigroup are not family owned. Instead, ownership is dispersed widely among various large financial institutions such as asset management firms and pension funds. But providing more detail as to the nature, status, and cost of these loans and transactions will go a long way in providing market discipline to the banking system. Shedding more light in the form of more regular, detailed, and timely public disclosures will certainly go a long way in purging the rot of the Philippine Banking System.
1“BSP:
Our lawyers will review CA ruling on reopening Banco Filipino,”
February 2, 2012, GMA News Network.
http://www.gmanetwork.com/news/story/246533/economy/moneyandbanking/bsp-our-lawyers-will-review-ca-ruling-on-reopening-banco-filipino?ref=section_latest
2“BSP
asked to identify banks similar to Legacy Group,” May 11, 2009, by
Eileen A. Mencias, Manila Standard Today.
http://www.manilastandardtoday.com/2009/may/11/business2.htm
3Saksi:
Pagsasara ng Banco Filipino at LBC Devt. Bank, ikinadismaya”,
October 4 2011, GMA News Online,
http://www.gmanetwork.com/news/video/93600/saksi-pagsasara-ng-banco-filipino-at-lbc-devt-bank-ikinadismaya
4“Bizz
Buzz: Pros and Cons, September 26, 2011, Philippine Daily Inquirer.
http://business.inquirer.net/21431/biz-buzz-pros-and-cons
5“Apple
Receives Stock Delisting Threat”, by Ed Oswald, August 11, 2006,
Betanews.com,
http://betanews.com/2006/08/11/apple-receives-stock-delisting-threat/
10“8
big banks violated DOSRI rule - BSP”, by Lee C. Chipongian,
November 30, 2010, Philippine Development Finance
http://phildevfinance.posterous.com/8-big-banks-violated-dosri-rule-bsp
11RCBC's
Consolidated Financial Statements as of December 31, 2010. http://www.docstoc.com/docs/111840464/RCBC-Financial-Statements-2010
12“BSP:
LBC Bank doomed by huge cash advances to LBC Express”, by Michelle
V. Remo, September 13, 2011, Philippine Daily Inquirer.
http://business.inquirer.net/18915/bsp-lbc-bank-doomed-by-huge-cash-advances-to-lbc-express
14RCBC's
Definitive Information Statement, as of May 28, 2011, page 19, http://www.docstoc.com/docs/111840222/RCBC-Proxy-Statement-2011
15Citigroup
2011 Proxy Statement,
http://www.citigroup.com/citi/fin/data/ar11cp.pdf?ieNocache=96
depsoitors should not be prejudiced by the faults or failure of a bank.
ReplyDeleteI agree wholeheartedly.
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