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Monday, April 23, 2012

Philippine Commercial Banks with Overstated Capital

In a previous post "BSP's Ampaw Accounting System", we detailed how quite a few banks had overstated capital as a result of BSP's policy of granting "regulatory relief" and allowed the deferment and amortization of unbooked losses arising from:
  1. SPV Transactions;
  2. Acquisitions of failed/failing banks;
  3. Large credit losses
The premise behind this policy is regulatory forbearance that would allow the banks to earn back and write off those losses over time, reducing their need to raise additional capital and avoid  significant dilution of existing shareholders.

In other cases, such as in Asiatrust, banks were literally too weak to write down some additional charges and refused to take the losses.

These measures are not considered "kosher" under Philippine Financial Reporting Standards, resulting in qualified auditors opinions for the bulk of these banks accompanied by the auditor's own estimate on the impact of these unbooked losses on bank capital and assets.

However, the auditor's opinion is issued only once a year, making it difficult for the general public to gauge the financial health of a particular bank in between audited financial statements.  Fortunately, these banks are required to report these unbooked losses in their quarterly Published Statement of Condition as "Deferred Charges Not Yet Written Down," giving the public a way to track these unbooked losses on a quarterly basis. (See


Based on the Published Statements of Condition as of September 30, 2011, the Philippine Bank of Communications (PBCom) tops the list.  Its unbooked losses of PHP 5.265 billion more than wipes out its current shareholders equity of PHP 4.089 billion.

Fortunately, the Philippine Bank of Communications has undertaken an extensive quasi-reorganization of its capital structure, following its acquisition by the Ongpin group on July 26, 2011.  In its audited financial statements as of December 31, 2011, the bank wrote off its unbooked losses of PHP  5.921 billion and restated its audited financial statements for 2010 and 2009.  As a result of this conformance to Philippine Financial Reporting Standards, SGV & Co, the bank's auditor, expressed its unqualified opinion on the bank's financial statements.

This move, however, resulted in the bank posting a deficit of PHP 9.655 billion as of December 31, 2011.  The quasi-reorganization aimed to reduce this deficit by half, or PHP 3.9 billion, through the reduction in the par value of its shares from PHP 100 per share to PHP 25 per share.  The par value reduction created PHP 3.94 billion in additional paid-in capital that will be used to offset the  deficit.

The par value reduction will also be accompanies by the infusion of additional capital from the bank's former owners, the Chung and Nubla families, who, on December 28, 2011, reinvested PHP 2.37 billion as their advance subscription to the capital of PBCom.  The quasi-reorganization also called for an increase in the bank's authorized capital stock by PHP 9.5 billion to PHP 27 billion, possibly paving the way for a fresh capital infusion from Indonesian and Malaysian Investor Groups it is in discussions with.

The efforts undertaken by PBCom are a step in the right direction but are currently not sufficient. First of all, the creation of PHP 3.94 billion in additional paid-in capital through par value reduction measures merely shifts capital from one accounting bucket to another.  It bolsters the bank's ability to withstand accounting losses but not real losses.  It does not result in the infusion of real cash.  The net effect on cash flow from this measure is zero.  PBCom will have to undertake more capital infusions similar to the ones from the Chung and Nubla families to truly bolster its capital structure.  But the recognition of the truth behind the accounting fiction created by its regulatory relief measures is good and important first step to solving its financial issues.

Other Banks

Unfortunately, the other banks on this list continue to hang on to their unbooked losses in their audited financial statements, resulting in their auditors continuing to issue qualified opinions on their financial statements.  Let us hope that they adopt the same resolve of PBCom's management in recognizing and addressing the real problems in their capital structure.

Editors Note: Banks highlighted in yellow have been classified as distressed based on their ratio of Total Distressed Assets to their Total Capital Cushion.  For more information regarding this, see a previous blog post "Export and Industry Bank Becomes Even More Insolvent! - September 30, 2011"

Philippine Commercial Banking System
Deferred Charges Not Yet Written Down
Impact on Stockholders Equity
September 30, 2011

Bank Unbooked Losses SE Adjusted SE Impact on SE
Philippine Bank of Communications 5,265,016,082.22 4,088,965,572.94 -1,176,050,509.28 128.76%
United Coconut Planters Bank 10,952,910,818.55 15,700,882,354.87 4,747,971,536.32 69.76%
Philippine National Bank 10,458,498,342.59 31,740,513,590.20 21,282,015,247.61 32.95%
Rizal Commercial Banking Corporation 5,329,074,749.59 40,739,143,784.29 35,410,069,034.70 13.08%
Bank of Commerce 1,259,961,766.40 17,216,195,258.88 15,956,233,492.48 7.32%
Land Bank of the Philippines 4,226,396,188.55 65,642,839,960.25 61,416,443,771.70 6.44%
Philippine Veterans Bank 55,780,113.53 5,338,983,472.43 5,283,203,358.90 1.04%
Banco De Oro Unibank Inc. 308,053,267.21 88,975,509,887.06 88,667,456,619.85 0.35%
Al Amanah Islamic Bank of the Philippines 0.00 500,709,874.02 500,709,874.02 0.00%
Allied Banking Corporation 0.00 16,956,676,338.10 16,956,676,338.10 0.00%
ANZ Banking Group Ltd 0.00 2,541,203,929.44 2,541,203,929.44 0.00%
Asia United Bank 0.00 8,696,451,178.16 8,696,451,178.16 0.00%
Bangkok Bank Public Co. Ltd. 0.00 300,705,341.04 300,705,341.04 0.00%
Bank of America N.A. 0.00 596,946,705.20 596,946,705.20 0.00%
Bank of China Limited - Manila Branch 0.00 599,578,966.35 599,578,966.35 0.00%
Bank of the Philippine Islands 0.00 82,819,658,436.74 82,819,658,436.74 0.00%
BDO Private Bank, Inc. 0.00 4,786,066,028.40 4,786,066,028.40 0.00%
China Banking Corporation 0.00 33,346,295,133.54 33,346,295,133.54 0.00%
Chinatrust (Philippines) Commercial Banking Corporation 0.00 5,943,623,655.41 5,943,623,655.41 0.00%
Citibank N.A. 0.00 8,416,476,308.62 8,416,476,308.62 0.00%
Deutsche Bank AG 0.00 2,237,137,603.64 2,237,137,603.64 0.00%
Development Bank of the Philippines 0.00 39,111,276,979.79 39,111,276,979.79 0.00%
East West Banking Corporation 0.00 10,363,422,827.73 10,363,422,827.73 0.00%
HongKong & Shanghai Banking Corporation 0.00 5,312,053,255.20 5,312,053,255.20 0.00%
Internationale Nederlanden Groep Bank 0.00 5,299,477,995.43 5,299,477,995.43 0.00%
JP Morgan Chase Bank National Association 0.00 1,776,303,428.35 1,776,303,428.35 0.00%
Korea Exchange Bank 0.00 622,999,254.69 622,999,254.69 0.00%
Maybank Philippines Inc. 0.00 3,229,189,616.24 3,229,189,616.24 0.00%
Mega International Commercial Bank Co. Ltd 0.00 518,994,163.50 518,994,163.50 0.00%
Metropolitan Bank & Trust Company 0.00 98,546,088,987.74 98,546,088,987.74 0.00%
Mizuho Corporate Bank Ltd - Manila Branch 0.00 1,290,955,398.99 1,290,955,398.99 0.00%
Philippine Trust Company 0.00 14,306,872,181.03 14,306,872,181.03 0.00%
Robinsons Bank Corporation 0.00 5,068,300,216.25 5,068,300,216.25 0.00%
Security Bank Corporation 0.00 28,137,051,304.08 28,137,051,304.08 0.00%
Standard Chartered Bank 0.00 2,084,570,659.58 2,084,570,659.58 0.00%
The Bank of Tokyo - Mitsubishi UFJ Ltd 0.00 798,272,818.08 798,272,818.08 0.00%
Union Bank of the Philippines 0.00 33,802,457,673.54 33,802,457,673.54 0.00%
Grand Total 37,855,691,328.64 687,452,850,139.80 649,597,158,811.16 5.51%


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