Can Philippine Commercial Banks Charge their Unbooked Losses Against Retained Earnings?

Last July 25, 2012, the Bangko Sentral ng Pilipinas (BSP) encouraged banks, particularly Universal and Commercial Banks that continue to reflect unbooked losses or "deferred charges" on their balance sheets, to charge those losses against retained earnings.  This implies that the BSP now considers that these banks have amassed so much in retained earnings that "they can now afford to absorb higher charges without impairing their capital and also without making their shareholders unhappy."

But can these banks do so? The answer is: yes but only for some banks.  As can be seen from the table below, only five banks have the Stockholders Equity (SE) to absorb these Deferred Charges:

1. Bank of Commerce (Deferred Charges of 5.93% of SE)
2. Rizal Commercial Banking Corporation (Deferred Charges of 5.38% of SE)
3. Land Bank of the Philippines (Deferred Charges of 5.25% of SE)
4. Philippine Veterans Bank (Deferred Charges of 1.03% of SE)
5. Banco De Oro Unibank, Inc. (Deferred Charges of 0.27% of SE)

It must be noted that two of these banks are considered borderline insolvent (highlighted in yellow): Bank of Commerce and Philippine Veterans Bank.

For three of the banks, booking their Deferred Charges immediately will only serve to impair 25% or more of their Stockholders Equity:

1. United Coconut Planters Bank (Deferred Charges of 61.20% of SE)
2. Philippine Bank of Communications (Deferred Charges of 57.48% of SE)
3. Philippine National Bank (Deferred Charges of 25.11% of SE)

Naturally, these banks are considered distressed.

Retained Earnings

Only four banks have sufficient Retained Earnings (RE) to absorb their unbooked losses:

1. Rizal Commercial Banking Corporation (Deferred Charges of 19.11% of RE)
2. Land Bank of the Philippines (Deferred Charges of 11.77% of RE)
3. Philippine Veterans Bank (Deferred Charges of 2.01% of RE)
4. Banco de Oro Unibank Inc. (Deferred Charges of 0.79% of RE)

For two of the banks, Deferred Charges will exceed their Retained Earnings:

1. United Coconut Planters Bank (Deferred Charges of 357.31% of RE)
2. Philippine National Bank (Deferred Charges of 145.81% of RE)

It should be noted that Philippine National Bank recently merged with Allied Bank.  Although Allied Bank is smaller than PNB, it has a substantial amount of Retained Earnings (PhP 13.933 billion).  It is not clear how the this merger will impact the combined entities financial statements.

Two of the banks with substantial Deferred Charges have negative Retained Earnings.  As such, they do not have the capacity to absorb additional losses.

1. Bank of Commerce (Retained Earnings of - PhP 1.662 billion vs. Deferred Charges of PhP 1.158 billion)
2. Philippine Bank of Communications (Retained Earnings of - PhP 4.772 billion vs. Deferred Charges of PhP 4.559 billion)

For more information of these Deferred Charges, please consult two previous blog posts: "Philippine Commercial Banks with Overstated Capital as of December 31, 2011" and "BSP's Ampaw Accounting System"

Philippine Commercial Banking System
Deferred Charges Not Yet Written Down
Impact on Stockholders Equity
In PhP
March 31, 2012
Bank	Unbooked Losses	SE	Adjusted SE	Impact on SE
United Coconut Planters Bank	10,952,910,818.55	17,895,564,429.08	6,942,653,610.53	61.20%
Philippine Bank of Communications	4,558,528,301.25	7,931,155,088.99	3,372,626,787.74	57.48%
Philippine National Bank	9,205,543,993.31	36,654,293,490.05	27,448,749,496.74	25.11%
Bank of Commerce	1,158,163,428.10	19,531,355,463.52	18,373,192,035.42	5.93%
Rizal Commercial Banking Corporation	2,232,459,653.28	41,519,821,484.71	39,287,361,831.43	5.38%
Land Bank of the Philippines	3,678,530,026.28	70,094,481,720.76	66,415,951,694.48	5.25%
Philippine Veterans Bank	54,193,949.15	5,261,907,247.41	5,207,713,298.26	1.03%
Banco De Oro Unibank Inc.	271,086,875.17	98,807,290,670.51	98,536,203,795.34	0.27%
Al Amanah Islamic Bank of the Philippines	0.00	490,480,453.71	490,480,453.71	0.00%
Allied Banking Corporation	0.00	18,065,606,042.95	18,065,606,042.95	0.00%
ANZ Banking Group Ltd	0.00	2,262,570,661.61	2,262,570,661.61	0.00%
Asia United Bank	0.00	9,940,242,367.46	9,940,242,367.46	0.00%
Bangkok Bank Public Co. Ltd.	0.00	1,139,977,349.27	1,139,977,349.27	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	627,073,822.36	627,073,822.36	0.00%
Bank of the Philippine Islands	0.00	88,219,897,458.02	88,219,897,458.02	0.00%
BDO Private Bank, Inc.	0.00	5,129,217,466.83	5,129,217,466.83	0.00%
China Banking Corporation	0.00	36,835,361,632.68	36,835,361,632.68	0.00%
Chinatrust (Philippines) Commercial Banking Corporation	0.00	6,075,781,712.98	6,075,781,712.98	0.00%
Citibank N.A.	0.00	7,798,122,283.60	7,798,122,283.60	0.00%
Deutsche Bank AG	0.00	1,479,134,481.18	1,479,134,481.18	0.00%
Development Bank of the Philippines	0.00	38,140,888,446.93	38,140,888,446.93	0.00%
East West Banking Corporation	0.00	13,313,574,609.14	13,313,574,609.14	0.00%
HongKong & Shanghai Banking Corporation	0.00	4,852,503,309.39	4,852,503,309.39	0.00%
Internationale Nederlanden Groep Bank	0.00	2,666,677,041.42	2,666,677,041.42	0.00%
JP Morgan Chase Bank National Association	0.00	1,776,225,884.07	1,776,225,884.07	0.00%
Korea Exchange Bank	0.00	518,588,577.59	518,588,577.59	0.00%
Maybank Philippines Inc.	0.00	5,351,071,269.49	5,351,071,269.49	0.00%
Mega International Commercial Bank Co. Ltd	0.00	646,824,154.50	646,824,154.50	0.00%
Metropolitan Bank & Trust Company	0.00	105,180,575,473.51	105,180,575,473.51	0.00%
Mizuho Corporate Bank Ltd - Manila Branch	0.00	1,470,853,832.00	1,470,853,832.00	0.00%
Philippine Trust Company	0.00	15,430,714,876.97	15,430,714,876.97	0.00%
Robinsons Bank Corporation	0.00	5,315,208,370.33	5,315,208,370.33	0.00%
Security Bank Corporation	0.00	31,432,971,028.36	31,432,971,028.36	0.00%
Standard Chartered Bank	0.00	1,306,230,414.81	1,306,230,414.81	0.00%
The Bank of Tokyo - Mitsubishi UFJ Ltd	0.00	722,158,670.65	722,158,670.65	0.00%
Union Bank of the Philippines	0.00	40,655,375,592.49	40,655,375,592.49	0.00%
Grand Total	32,111,417,045.09	745,136,723,584.53	713,025,306,539.44	4.31%

Source: www.bsp.gov.ph

Philippine Commercial Banking System
Deferred Charges Not Yet Written Down
Impact on Retained Earnings
In PhP
March 31, 2012
Bank	Unbooked Losses	Retained Earnings	Adjusted RE	Impact on RE
United Coconut Planters Bank	10,952,910,818.55	3,065,366,259.24	-7,887,544,559.31	357.31%
Philippine National Bank	9,205,543,993.31	6,313,203,873.17	-2,892,340,120.14	145.81%
Rizal Commercial Banking Corporation	2,232,459,653.28	11,679,858,877.50	9,447,399,224.22	19.11%
Land Bank of the Philippines	3,678,530,026.28	31,266,202,811.37	27,587,672,785.09	11.77%
Philippine Veterans Bank	54,193,949.15	2,700,254,888.85	2,646,060,939.70	2.01%
Banco De Oro Unibank Inc.	271,086,875.17	34,475,752,697.42	34,204,665,822.25	0.79%
Al Amanah Islamic Bank of the Philippines	0.00	-475,151,005.46	-475,151,005.46	0.00%
Allied Banking Corporation	0.00	13,932,890,526.81	13,932,890,526.81	0.00%
ANZ Banking Group Ltd	0.00	0.00	0.00	NA
Asia United Bank	0.00	7,100,356,771.47	7,100,356,771.47	0.00%
Bangkok Bank Public Co. Ltd.	0.00	0.00	0.00	NA
Bank of America N.A.	0.00	0.00	0.00	NA
Bank of China Limited - Manila Branch	0.00	0.00	0.00	NA
Bank of the Philippine Islands	0.00	40,076,231,456.16	40,076,231,456.16	0.00%
BDO Private Bank, Inc.	0.00	2,886,574,342.72	2,886,574,342.72	0.00%
China Banking Corporation	0.00	21,824,203,225.87	21,824,203,225.87	0.00%
Chinatrust (Philippines) Commercial Banking Corporation	0.00	3,433,933,822.57	3,433,933,822.57	0.00%
Citibank N.A.	0.00	0.00	0.00	NA
Deutsche Bank AG	0.00	49,938,476.22	49,938,476.22	0.00%
Development Bank of the Philippines	0.00	18,030,917,022.59	18,030,917,022.59	0.00%
East West Banking Corporation	0.00	2,978,359,947.69	2,978,359,947.69	0.00%
HongKong & Shanghai Banking Corporation	0.00	63,709,996.17	63,709,996.17	0.00%
Internationale Nederlanden Groep Bank	0.00	0.00	0.00	NA
JP Morgan Chase Bank National Association	0.00	0.00	0.00	NA
Korea Exchange Bank	0.00	0.00	0.00	NA
Maybank Philippines Inc.	0.00	-1,510,541,023.85	-1,510,541,023.85	0.00%
Mega International Commercial Bank Co. Ltd	0.00	0.00	0.00	NA
Metropolitan Bank & Trust Company	0.00	35,580,249,691.74	35,580,249,691.74	0.00%
Mizuho Corporate Bank Ltd - Manila Branch	0.00	0.00	0.00	NA
Philippine Trust Company	0.00	4,699,527,784.90	4,699,527,784.90	0.00%
Robinsons Bank Corporation	0.00	-557,485,495.84	-557,485,495.84	0.00%
Security Bank Corporation	0.00	22,029,149,953.97	22,029,149,953.97	0.00%
Standard Chartered Bank	0.00	65,848,567.71	65,848,567.71	0.00%
The Bank of Tokyo - Mitsubishi UFJ Ltd	0.00	0.00	0.00	NA
Union Bank of the Philippines	0.00	24,200,952,276.12	24,200,952,276.12	0.00%
Bank of Commerce	1,158,163,428.10	-1,662,480,682.35	-2,820,644,110.45	-69.66%
Philippine Bank of Communications	4,558,528,301.25	-4,771,769,397.18	-9,330,297,698.43	-95.53%
Grand Total	32,111,417,045.09	277,476,055,665.58	245,364,638,620.49	11.57%

Source: www.bsp.gov.ph