Time is Running Out for Export and Industry Bank

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.



On March 13, 2012, Export and Industry Bank (EIB) sold its 18.4% stake in publicly-listed developer Arthaland Corp. for PHP 177.69 million, unloading non-core assets ahead of the sale of its banking operations to Banco De Oro Unibank.

As paraphrased from EIB's September 30, 2011 financial statements:

On July 30, 2010, EIB's Board of Directors approved the sale of all of EIB's assets to Banco de Oro Unibank, Inc. (BDO), in consideration of BDO's assumption of all of the bank's liabilities, including all of its deposit liabilities, after the transaction has been approved in principle by the BSP Monetary Board on July 16, 2010.  The transaction was approved by the Philippine Deposit Insurance Corporation (PDIC) on April 13, 2011.  The execution of the transaction is still pending and is subject to the execution of definitive agreements and documentation acceptable to the parties and PDIC and the fulfillment of certain closing conditions, which will include the final approval of the Monetary Board.

Luckily for EIB's depositors, the sale of EIB's banking assets is accompanied by an assumption of its banking liabilities by BDO, meaning that depositors will not lose any money and those depositors will continue to be the depositors of BDO, the surviving entity and one of the country's largest banks.

Like Asia United Bank's purchase of Asiatrust's banking assets, BDO is wise to pursue a purchase of EIB assets rather than its stock.  A purchase of EIB's stock could have quickly led to buyer's remorse for BDO.  Trading in EIB shares has been suspended in the Philippine Stock Exchange.  The latest available closing price of EIB shares is at PHP 0.26 per share as of May 14, 2009, leaving the bank with a market capitalization of PHP 715.84 million as of May 14, 2009.  Given that EIB's Total Capital Funds now stands at PHP 674.14 million as of September 30, 2011 and that the bank has likely lost more money since then, EIB shareholders are bound to be wiped out.

When that shareholder wipeout happens, the biggest losers will be foreign investors who collectively own 28.98% of the bank and plunked down PHP 1.372 billion in capital in the bank.  These foreign investors are:

1. Ridderbrecht B.V. (Netherlands, 11.62% or PHP 550 million)
2. Extra Year Investments Limited (British Virgin Islands: 9.50% or PHP 449.75 million)
3. Medco Asia Investment Corp. (7.86% or PHP 372.15 million)

The significant domestic investors that stand to lose a lot of money from a failing EIB are:

1. Lead BancFund Holdings (10.03% or PHP 475 million)
2. Apex Bancrights Holdings, Inc. (10.03% or PHP 475 million)
3. Asiawide Refreshments Corp. (8.45% or PHP 400 million)
4. Alfredo M. Yao (8.34% or PHP 300.25 million)

Based on EIB's financial statements as of September 30, 2011 as published on the website of the Philippine Stock Exchange (www.pse.com.ph), EIB lost PHP 726.22 million for the first nine months of 2011, or roughly PHP 242 million per quarter.  If the bank continues to lose money at this rate, the bank would have run through its entire Total Capital Funds base of PHP 674.14 million by June of 2012.  At that point, the bank would have officially become a "Ponzi Scheme" wherein new depositor money would fund the bank's continuing losses with very little to no capital backing up the bank.  Fortunately, with proper BSP support, EIB can operate with a negative capital base for a very long time.  Just look at the case of Banco Filipino.

EIB's recent move to unload its non-core assets, such as its stake in Arthaland Corp., can be seen as a move to raise cash and boost its balance sheet.  The amount raised by the sale, PHP 177.69 million, will do little to plug the hole in the bank's balance sheet, given that the bank currently ranks as the most insolvent commercial bank in the Philippines and has PHP 7.10 billion in Deferred Charges Not Yet Written Down as of June 30, 2011 (www.bsp.gov.ph) due to "Regulatory Relief" granted by the BSP.

According to EIB's auditor, Punongbayan & Araullo, EIB's Board of Directors "has yet to formulate a new business plan for the Bank after the execution of this transaction" (the sale of assets to BDO).  "This indicates the existence of a material uncertainty which may cast doubt on the Bank's ability to continue as a going concern."

Given that sale of assets has not been finalized to date since the deal was announced last July 16, 2010 and approved in principle by the PDIC last April 13, 2011, EIB may run out of capital in the not too distant future before the sale even gets executed.  Whether the sale pushes through or not, EIB may not be a going concern by mid-2012.  If the sale does not push through, BSP may have to step in and provide some emergency support.  If BSP doesn't step in if and when the finalized sale falls apart, both depositors and PDIC may be left holding the bag.