With a PEACe Bonds Tax, PBCom is Left Holding the Bag

Crossposted from "The System is Broken" (www.systemisbroken.blogspot.com)

In a previous post entitled: "A Tax on the PEACe Bonds - Who is Left Holding the Bag?", we estimated the impact of a Final Withholding Tax (FWT) on the PEACe Bonds on the Capital Funds of nine banks that banks that were reported to be the final bondholders of the PEACe Bonds.  In that analysis, we used news reports and the individual banks reported holdings of Government Debt Securities to estimate the size of their PEACe Bond holdings as well as the estimated impact on the individual bank's balance sheet.  Based on those estimates, we arrived at this table:

Affected Banks Analysis of Impact of 20% Final Withholding Tax on Affected Bank Capital As of December 31, 2010
Bank	Total Holdings of Government Debt Securities8 (In PHP B)	%	PEACe Bonds Holdings (In PHP B)	FWT Due (In PHP B)	Capital Funds (In PHP B)9	Capital Affected (In %)
Banco De Oro	143.26	29.58%	10.200	1.416	88.302	1.60%
Bank of Commerce	14.17810	2.93%	1.010	0.140	14.56911	0.96%
BPI Family Bank	17.27912	3.57%	1.75013	0.243	12.56414	1.93%
China Banking Corporation	67.007	13.84%	4.77	0.663	32.221	2.06%
Metropolitan Bank and Trust Company	143.690	29.67%	10.232	1.421	95.772	1.48%
Philippine Bank of Communications	13.988	2.89%	0.996	0.138	4.033	3.43%
Philippine National Bank	69.906	14.44%	4.978	0.691	28.527	2.42%
Philippine Veterans Bank	8.58315	1.77%	0.611	0.085	5.39116	1.57%
Planters Development Bank	6.345	1.31%	0.452	0.063	1.276	4.92%
Total	484.234	100.00%	35.000	4.860	282.656	1.72%

Under this scenario, the biggest holders of the PEACe Bonds were, naturally, the bigger banks like Banco de Oro and Metrobank.  The PEACe Bond Tax would take a bite of the banks Capital Funds.  The most affected banks were, from highest to lowest:

1. Planters Development Bank (4.92% of Capital Funds Affected)
2. Philippine Bank of Communications (3.43% of Capital Funds Affected)
3. Philippine National Bank (2.42% of Capital Funds Affected)
4. China Banking Corporation (2.06% of Capital Funds Affected)

Based on new data from unimpeachable sources, we now have a definitive list of the Final PEACe Bondholders.  They are as follows:

Schedule of Final Holders of PEACe Bonds
As of October 12, 2011
(In Pesos)
PIBZ1011J029 (PEACe Bond)
Date of Issue: October 18, 2001
Date of Maturity: October 18, 2011
Principal	35,000,000,000.00
Price	10,168,961,017.95
Discount	24,831,038,982.05
Holders	Face Amount	Withholding Tax	Net of Tax
Asiatrust Development Bank	248,129,807.00	35,207,548.06	212,922,258.94
Banco De Oro Unibank, Inc.	4,860,000,000.00	689,593,425.44	4,170,406,574.56
Bank of Commerce	4,090,000,000.00	580,336,853.92	3,509,663,146.08
BPI Family Bank	2,500,000,000.00	354,729,128.32	2,145,270,871.68
China Bank Corp.	11,472,000,000.00	1,627,781,024.01	9,844,218,975.99
Metropolitan Bank and Trust Co.	3,000,000,000.00	425,674,953.98	2,574,325,046.02
Philippine Bank of Communications	3,000,000,000.00	425,674,953.98	2,574,325,046.02
Philippine Business Bank	259,000,000.00	36,749,937.69	222,250,062.31
Philippine National Bank	1,650,000,000.00	234,121,224.69	1,415,878,775.31
Philippine Veterans Bank	1,110,000,000.00	157,499,732.97	952,500,267.03
Planters Development Bank	800,000,000.00	113,513,321.06	686,486,678.94
Premiere Development Bank	70,000,000.00	9,932,415.59	60,067,584.41
RCBC Savings Bank	0.11	0.02	0.09
Rizal Commercial Banking Corp.	1,387,896,747.37	196,930,961.35	1,190,965,786.02
Union Bank of the Philippines	522,448,193.00	74,131,036.84	448,317,156.16
Beneficial - PNB Life Insurance Co., Inc.	4,444,444.44	630,629.56	3,813,814.88
Philippine First Insurance Co.	4,000,000.00	567,566.61	3,432,433.39
BMS Rural Bank	13,000,000.00	1,844,591.47	11,155,408.53
Yu, Francisco O/ Lester Joebert	1,000,000.00	141,891.65	858,108.35
Pacific Plans	8,080,808.08	1,146,599.20	6,934,208.88
Total	35,000,000,000.00	4,966,207,796.41	30,033,792,203.59

Source: Department of Finance

Based on this definitive list, the banks with the highest holdings of PEACe Bonds turns out to be the smaller and mid-level banks.  Topping the list was China Bank Corp., with a surprising PHP 11.472 billion in PEACe Bonds.  Next on the list is a large bank, Banco de Oro Unibank, Inc., with PHP 4.860 billion in PEACe Bonds.  Bank of Commerce is third on the list, with PHP 4.090 billion in PEACe Bonds.  Tied for fourth place in terms of PEACe Bonds holdings are Metrobank and PBCom, with PHP 3.000 billion each.

Impact on Bank's Financial Statements

As mentioned on this blog before, the surprise imposition of the 20% Final Withholding Tax will affect each of the banks financial condition to varying degrees.  What is clear is that:

1. None of the banks have properly accrued for the presumed tax liability
2. None of the banks have prepared themselves to receive less cash from the redemption payment of the  PEACe Bonds.

The imposition of the tax will definitely take a bite out of the bank earnings and capital funds.  Based on their latest available Published Statements of Condition courtesy of www.bsp.gov.ph, the most affected banks are as follows:

1. Philippine Bank of Communications (10.41% of Stockholders Equity)
2. China Bank Corp. (4.88% of Stockholders Equity)
3. Bank of Commerce (3.37% of Stockholders Equity)
4. Philippine Veterans Bank (2.95% of Stockholders Equity)
5. Asiatrust Development Bank (2.89% of Stockholders Equity)

Affected Banks
Analysis of Impact of 20% Final Withholding Tax
on Affected Bank Capital
As of September 30, 2011
	Final	Stockholders Equity	% Impact on
Bank	Withholding Tax	As of 9/30/2011	Stockholders Equity
Philippine Bank of Communications	425,674,953.98	4,088,965,572.94	10.41%
China Bank Corp.	1,627,781,024.01	33,346,295,133.54	4.88%
Bank of Commerce	580,336,853.92	17,216,195,258.88	3.37%
Philippine Veterans Bank	157,499,732.97	5,338,983,472.43	2.95%
Asiatrust Development Bank*	35,207,548.06	1,217,067,800.00	2.89%
BPI Family Bank	354,729,128.32	13,215,459,607.20	2.68%
Planters Development Bank	113,513,321.06	4,699,048,148.39	2.42%
Premiere Development Bank	9,932,415.59	768,276,843.83	1.29%
Philippine Business Bank	36,749,937.69	3,078,009,090.67	1.19%
Banco De Oro Unibank, Inc.	689,593,425.44	88,975,509,887.06	0.78%
Philippine National Bank	234,121,224.69	31,740,513,590.20	0.74%
Rizal Commercial Banking Corp.	196,930,961.35	40,739,143,784.29	0.48%
Metropolitan Bank and Trust Co.	425,674,953.98	98,546,088,987.74	0.43%
Union Bank of the Philippines	74,131,036.84	33,802,457,673.54	0.22%
RCBC Savings Bank	0.02	7,350,378,695.23	0.00%
Total	4,961,876,517.92	384,122,393,545.94	1.29%
*Latest Financial Statements: June 30, 2009

It must be noted that of the fifteen banks in this list, nine are considered distressed (highlighted in yellow) because their Total Distressed Assets exceed their Total Capital Cushion by a magnitude of more than 1.  Since the level of their distressed assets is so high relative to their capital base, that any significant deterioration in the value of these distressed assets has the potential to take a huge chunk of the bank's capital or even wipe it out completely.

Philippine Thrift Banking System
Total Distressed Assets/Total Capital Cushion
September 30, 2011
		September 30, 2010
Bank	Total Distressed Assets (In PHP Billion)	Total Capital Cushion (In PHP Billion)	Distressed Assets/ Total Capital Cushion (In %)
Planters Development Bank	11,502,781,363.87	4,362,965,164.27	263.65%
Asiatrust Development Bank*	4,638,280,785	1,807,777,528	256.57%
Philippine Veterans Bank	10,879,880,413.60	5,737,758,181.67	189.62%
Bank of Commerce	32,699,114,872.49	18,361,861,626.49	178.08%
RCBC Savings Bank	13,649,319,087.69	7,765,864,931.44	175.76%
Philippine National Bank	64,949,186,122.23	38,021,318,336.45	170.82%
Philippine Bank of Communications	9,291,519,325.92	6,103,760,074.12	152.23%
Premiere Development Bank	1,278,226,045.20	907,972,696.40	140.78%
Union Bank of the Philippines	38,582,465,913.28	38,301,194,129.33	100.73%
Philippine Business Bank	2,097,844,212.18	2,792,487,751.08	75.12%
Rizal Commercial Banking Corp.	27,086,579,563.52	36,598,227,573.49	74.01%
Metropolitan Bank and Trust Co.	63,938,649,304.53	89,510,341,778.10	71.43%
Banco De Oro Unibank, Inc.	67,521,482,859.14	110,621,563,730.79	61.04%
BPI Family Bank	12,378,223,253.81	13,932,797,475.79	58.51%
China Bank Corp.	21,369,318,244.66	36,522,588,097.69	58.51%
Total	381,862,871,367.12	411,348,479,075.11	92.83%
*Latest Available Financial Statement: June 30, 2009

Several of these Distressed Banks have already undergone significant changes in ownership in the last two years.  Asiatrust Development Bank's banking assets were recently sold to Asia United Bank (See a previous blog post: "Asiatrust Bank, Long on PDIC's Life Support, is Finally Sold for Scrap Value").  Bank of Commerce was acquired by the San Miguel Group.  Philippine Bank of Communications was acquired by the Ongpin Group.  Premiere Development Bank was acquired by Security Bank Corp. in June 2011.

Given their precarious state of condition, it is very probable that more asset sales and/or mergers will take place, particularly among the distressed banks.  It is also highly likely that the Ongpin Group will have to infuse more capital into PBCom, particularly if the Supreme Court upholds the Philippine Governments position that a Final Withholding Tax of 20% must be imposed on the PEACe Bonds.

Postscript:

For a more complete list of distressed Philippine Banks, check out the following blog posts: "Export and Industry Bank Becomes Even More Insolvent! - September 30, 2011" for commercial banks and "Thrift Banks Improve Due to Survivorship Bias" for thrift banks.