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Monday, January 21, 2013

A Simple Stress Test of Philippine Commercial Banks as of June 30, 2012

Editor's Note: This is an updated version of an earlier blog post entitled: "A Simple Stress Test of Philippine Commercial Banks as of March 31, 2012".


In an April 9, 2012 article entitled "Stress Test Proves Strength of PH Banks", "Philippine banks are seen to survive a disaster in which the various lenders are forced to write off loans as large as PhP 36 billion without asking shareholders, the central bank, or the national government for bailout money."  This assertion stems from a recent stress test conducted by the Bangko Sentral ng Pilipinas (BSP) on all 55 regular and commercial and expanded license banks.

A Real Stress Test?

According to Johnny Noe Ravalo, BSP Managing Director, the balance sheet of Philippine Banks is so strong that they can afford a 20%, 30%, or even a 50% loan write-off and still have the liquidity to survive.  He maintained that the "Philippine banks have built a strong reserve of liquid assets over the years when profits were plowed back to the business instead of being distributed as dividends for shareholders who naturally covet them."  He declared that "even if the banks were forced today to declare half of the PhP 73.2 billion non-performing loans at end January this year as a total loss, all the banks should still be in operation and none the worse for wear the following day."

In a sense, this is true.  NPLs currently comprised PhP 72.102 billion or 9.54% of the Stockholders Equity of the Philippine Commercial Banking System as of June 30, 2012.  So, writing off 50% of the NPLs of the Philippine Commercial Banks would reduce their aggregate stockholders equity by a little less than 5%.  Naturally, some bank would be more affected than others.  The most affected bank is Standard Chartered Bank, a foreign bank whose local subsidiary has little or no capital.  In a crisis, it would rely on its "home-host" arrangement wherein the mother ship (the foreign parent) sends more funds and/or capital when local regulators or counterparties require it.  
Philippine Universal and Commercial Banking System
NPL as % of SE
June 30, 2012









NPL SE NPL/SE
Bank (In PHP) (In PHP) (In %)
Standard Chartered Bank 1,148,204,008.28 1,662,661,839.14 69.06%
United Coconut Planters Bank 4,550,757,595.97 18,524,593,394.88 24.57%
Bank of Commerce 4,127,215,374.37 17,557,056,210.05 23.51%
Philippine Veterans Bank 1,118,165,728.45 5,182,204,888.33 21.58%
Allied Banking Corporation 3,620,865,825.68 18,326,663,200.68 19.76%
Philippine National Bank 6,580,772,204.25 37,122,489,253.60 17.73%
Maybank Philippines Inc. 841,828,527.97 5,535,707,537.03 15.21%
HongKong & Shanghai Banking Corporation 815,276,281.02 5,388,712,213.20 15.13%
East West Banking Corporation 2,434,617,349.22 16,170,114,535.46 15.06%
Development Bank of the Philippines 4,891,977,135.48 39,139,801,398.21 12.50%
China Banking Corporation 4,182,883,177.08 36,037,127,084.48 11.61%
Citibank N.A. 882,189,033.18 7,841,168,502.18 11.25%
Land Bank of the Philippines 8,082,570,361.75 72,035,398,618.59 11.22%
Banco De Oro Unibank Inc. 11,005,621,686.35 101,929,325,323.67 10.80%
Robinsons Bank Corporation 463,679,512.21 5,400,718,494.91 8.59%
Union Bank of the Philippines 3,321,506,763.28 39,593,140,857.56 8.39%
Philippine Trust Company 1,187,297,173.28 15,758,749,258.44 7.53%
Asia United Bank 737,542,513.43 10,173,091,443.18 7.25%
Korea Exchange Bank 36,302,160.89 561,460,316.56 6.47%
Chinatrust (Philippines) Commercial Banking Corporation 373,752,807.11 6,118,237,659.45 6.11%
Bank of the Philippine Islands 4,527,776,844.83 87,074,496,134.62 5.20%
Metropolitan Bank & Trust Company 4,899,855,939.33 106,194,109,504.71 4.61%
Rizal Commercial Banking Corporation 1,267,514,279.70 40,339,304,322.02 3.14%
Security Bank Corporation 854,299,182.91 34,857,762,333.00 2.45%
Bank of China Limited - Manila Branch 8,660,895.91 610,490,846.11 1.42%
Philippine Bank of Communications 110,498,322.40 8,262,907,312.02 1.34%
ANZ Banking Group Ltd 23,339,114.85 2,023,998,541.56 1.15%
Bangkok Bank Public Co. Ltd. 5,804,155.55 1,150,161,682.46 0.50%
Al Amanah Islamic Bank of the Philippines 1,232,146.27 473,003,657.24 0.26%
The Bank of Tokyo - Mitsubishi UFJ Ltd 125,938.80 746,456,907.95 0.02%
Internationale Nederlanden Groep Bank 86.24 2,771,241,312.15 0.00%
Bank of America N.A. 0.00 596,946,705.20 0.00%
BDO Private Bank, Inc. 0.00 5,204,459,324.38 0.00%
Deutsche Bank AG 0.00 1,617,692,819.39 0.00%
JP Morgan Chase Bank National Association 0.00 1,727,884,545.30 0.00%
Mega International Commercial Bank Co. Ltd 0.00 691,445,235.15 0.00%
Mizuho Corporate Bank Ltd - Manila Branch 0.00 1,275,769,667.83 0.00%
Grand Total 72,102,132,126.04 755,676,552,880.69 9.54%

Source: www.bsp.gov.ph
But are NPLs the right numbers to look at?  NPLs are at historic lows and, as a result, make up very little of Stockholders Equity.  (See"U/KBs' NPL Ratio at 2.23 Percent"  and "The NPL Ratio of the Philippine Commercial Banking System is at Historic Lows").  The reason for this  is that the Philippine economy is currently doing well and the Philippine Stock Market is at or near its all time highs.

 Classified Loans

Focusing on NPL write-offs is not the answer.  In an economic downturn, a loan that is current can very well become past due, and a past due loan can become a non-performing loan, and a non-performing loan can become a write-off.  The real number to look at are the loans that the banks and BSP already consider doubtful: Classified Loans.

Investopedia.com defines "Classified Loans" as:

"Any bank loan that is in danger of default. Classified loans have unpaid interest and principal outstanding, and it is unclear whether the bank will be able to recoup the loan proceeds from the borrower. Banks usually categorize such loans as adversely classified assets on their books."

The US Federal Deposit Insurance Corporation (FDIC), similar to our very own Philippine Deposit Insurance Corporation (PDIC), defines Classified Loans as:

"Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future."
In Circular #0247 dated May 19, 2000, the BSP defines Classified Loans as loans which possess the following characteristics:
  1. Loans especially mentioned because they have potential weaknesses that deserve Management's close attention;
  2. Substandard Loans are loans which appear to involve a substantial and unreasonable degree of risk to the institution because of unfavorable record or unsatisfactory characteristics;
  3. Doubtful Loans are Substandard Loans with the added characteristics that existing facts, conditions, and values make collection or liquidation in full highly improbable and in which substantial loss is probable;
  4. Loss are loans that are considered uncollectible or worthless and are of such little value that their continuance as bankable assets is not warranted although the loans may have some recovery or salvage value.
The circular mandates that an allowance for probable losses should be set up in accordance with the following schedule:
  1. Loans Especially Mentioned: 5%
  2. Substandard - Secured: 6% - 25%
  3. Substandard - Unsecured: 25%
  4. Doubtful: 50%
  5. Loss: 100%
As of June 30, 2012, "Classified Loans and Other Risky Assets" of the Philippine Commercial Banking System amounted to PhP 318.209 billion or more than 4.4 times the size of the commercial banking NPLs of PhP 72.102 billion as of the same period.  Consequently, any write-offs of classified loans will have more than four times the impact of an NPL write-off.


Philippine Universal and Commercial Banking System
Classified Loans vs. NPLs
June 30, 2012





Classified Loans NPLs Classified Loans/NPLs
Bank (In Php) (In Php) (In %)
Internationale Nederlanden Groep BK 452,128,750.00 86.24 524,268,031.08%
Bank of China Limited - Manila Branch 5,375,808,823.04 8,660,895.91 62,069.89%
Al-Amanah Islamic Bank of the Philippines 72,205,000.00 1,232,146.27 5860.10%
Citibank N.A. 32,722,022,000.00 882,189,033.18 3,709.18%
Korea Exchange Bank 662,592,248.69 36,302,160.89 1,825.21%
Security Bank Corporation 10,587,883,000.00 854,299,182.91 1,239.36%
Rizal Commercial Banking Corporation 12,717,148,444.49 1,267,514,279.70 1,003.31%
Philippine Bank of Communications 851,318,834.98 110,498,322.40 770.44%
Asia United Bank Corporation 5,529,173,112.28 737,542,513.43 749.68%
The Bank of Tokyo - Mitsubishi UFJ Ltd 931,892.52 125,938.80 739.96%
United Coconut Planters Bank 31,164,000,000.00 4,550,757,595.97 684.81%
Bank of Commerce 23,738,866,000.00 4,127,215,374.37 575.18%
Union Bank of the Philippines 18,152,377,667.27 3,321,506,763.28 546.51%
Philippine National Bank 31,545,250,641.58 6,580,772,204.25 479.35%
Metropolitan Bank & Trust Company 21,608,195,022.57 4,899,855,939.33 441.00%
Bank of the Philippine Islands 19,498,383,020.42 4,527,776,844.83 430.64%
ANZ Banking Group Ltd 92,775,375.74 23,339,114.85 397.51%
Banco De Oro Unibank 38,296,360,611.09 11,005,621,686.35 347.97%
Philippine Trust Company 3,647,399,860.82 1,187,297,173.28 307.20%
China Banking Corporation 11,496,662,992.24 4,182,883,177.08 274.85%
Land Bank of the Philippines 19,994,661,634.63 8,082,570,361.75 247.38%
Allied Banking Corporation 8,160,196,816.62 3,620,865,825.68 225.37%
Philippine Veterans Bank 2,273,657,872.89 1,118,165,728.45 203.34%
Maybank Philippines Inc. 1,686,707,790.93 841,828,527.97 200.36%
Development Bank of the Philippines 9,669,228,560.66 4,891,977,135.48 197.65%
East West Banking Corporation 3,693,052,000.00 2,434,617,349.22 151.69%
HongKong & Shanghai Banking Corporation 1,076,400,327.97 815,276,281.02 132.03%
Robinsons Bank Corporation 571,583,000.00 463,679,512.21 123.27%
Standard Chartered Bank 1,277,372,125.77 1,148,204,008.28 111.25%
Bangkok Bank Public Co. Ltd 5,804,155.55 5,804,155.55 100.00%
Chinatrust (Philippines) Commercial Banking Corporation 373,752,807.11 373,752,807.11 100.00%
Bank of America N.A. 6,655,115.17 0.00 NA
BDO Private Bank, Inc. 0.00 0.00 NA
Deutsche Bank AG 512,831,525.02 0.00 NA
JP Morgan Chase National Bank Association 0.00 0.00 NA
Mega International Commercial Bank Company Limited 538,638,717.26 0.00 NA
Mizuho Corporate Bank Ltd. - Manila Branch 157,088,607.67 0.00 NA
Grand Total 318,209,114,354.98 72,102,132,126.04 441.33%

Source: www.bsp.gov.ph


This level of classified loans should be measured against the bank's "capital cushion" or its ability to absorb losses.  Capital Cushion is normally defined as a bank's "Tangible Common Equity" plus its Loan Loss Reserves.  Tangible Common Equity (TCE) refers to the subset of shareholders' equity that is not preferred equity and not intangible assets.  So it excludes such items as Hybrid equity (like preferred shares) and goodwill.


By this measure, the level of "Classified Loans and other Risky Assets" amounts to 42.02% of the PhP 757.196 billion in Total Capital Cushion of Philippine Commercial Banks as of June 30, 2012.

Stress Test Scenarios

Aggregate

So how will a 10%, 20%, 30%, 40%, and even 50% write-off of Classified Loans affect the Total Capital Cushion of the Philippine Commercial Banking System?

In the aggregate, if Classified Loans amount to 42.02% of the commercial banking system's total capital cushion, then it follows that a 10% write-off of Classified Loans will reduce the total capital by 4.20% and a 50% write-off of Classified Loans will reduce the commercial banking system's Total Capital Cushion by 21.01%.

Individual Banks

Under this scenario, a 10% write-off of Classified Loans would severely affect (reduce by 30% or more) the Total Capital Cushion of two banks: 

  1. Bank of China Limited - Manila Branch (79.49% to reduction in Total Capital Cushion)
  2. United Coconut Planters Bank (34.46% reduction in Total Capital Cushion)
A 20% write-off of Classified Loans would totally wipe out the Total Capital Cushion of two bank and severely affect the Total Capital Cushion of two banks:
  1. Bank of China Limited - Manila Branch (158.97% reduction in Total Capital Cushion)
  2. United Coconut Planters Bank (68.91% reduction in Total Capital Cushion)
  3. Citibank N.A. (50.54% reduction in Total Capital Cushion)
A 30% write-off of Classified Loans will totally wipe out the Total Capital Cushion of two banks and severely affect (reduce by 30% or more) the Total Capital Cushion of three banks:
  1. Bank of China Limited - Manila Branch (238.46% reduction in Total Capital Cushion)
  2. United Coconut Planters Bank (103.37% reduction in Total Capital Cushion)
  3. Citibank N.A. (75.82% reduction in Total Capital Cushion)
  4. Bank of Commerce (35.82% reduction in Total Capital Cushion)
  5. Korea Exchange Bank (33.97% reduction in Total Capital Cushion)
A 40% write-off of Classified Loans will totally wipe out the Total Capital Cushion of three banks and severely affect (reduce by 30% or more) the Total Capital Cushion of three more banks:
  1. Bank of China Limited - Manila Branch (317.94% reduction in Total Capital Cushion)
  2. United Coconut Planters Bank (137.83% reduction in Total Capital Cushion)
  3. Citibank N.A. (101.09% reduction in Total Capital Cushion)
  4. Bank of Commerce (47.76% reduction in Total Capital Cushion)
  5. Korea Exchange Bank (45.29% reduction in Total Capital Cushion)
  6. Philippine National Bank (30.75% reduction in Total Capital Cushion)

A 50% write-off of Classified Loans will severely affect the Total Capital Cushion of one more bank:
  1. Mega International Commercial Bank Co Ltd (34.82% reduction in Total Capital Cushion)
    Please bear in mind that a number of these banks are already very weak and are in distress.  See a previous blog post "Philippine U/KBs Show Some Deterioration in the 2nd Qtr. of 2012".  Moreover, their capital can be overstated.  See a previous blog post "Can Philippine Universal and Commercial Banks Charge their Unbooked Losses Against Retained Earnings? - June 30, 2012".  As such, any reduction in their capital cushion could knock down an already weak bank.

    Philippine Universal and Commercial Banking System
    Classified Loans as % of Total Capital Cushion
    June 30, 2012

















    		Classified Loans Total Capital Cushion Impact of 10% Loss on Total Capital Cushion Impact of 20% Loss on Total Capital Cushion Impact of 30% Loss on Total Capital Cushion Impact of 40% Loss on Total Capital Cushion Impact of 50% Loss on Total Capital Cushion
    Bank (In Php) (In Php) (In %) (In %) (In %) (In %) (In %)
    Bank of China Limited - Manila Branch 5,375,808,823.04 676,326,353.64 79.49% 158.97% 238.46% 317.94% 397.43%
    United Coconut Planters Bank 31,164,000,000.00 9,044,452,080.29 34.46% 68.91% 103.37% 137.83% 172.28%
    Citibank N.A. 32,722,022,000.00 12,947,871,227.56 25.27% 50.54% 75.82% 101.09% 126.36%
    Bank of Commerce 23,738,866,000.00 19,883,188,091.20 11.94% 23.88% 35.82% 47.76% 59.70%
    Korea Exchange Bank 662,592,248.69 585,197,642.77 11.32% 22.65% 33.97% 45.29% 56.61%
    Philippine National Bank 31,545,250,641.58 41,035,624,017.49 7.69% 15.37% 23.06% 30.75% 38.44%
    Mega International Commercial Bank Company Limited 538,638,717.26 773,440,353.49 6.96% 13.93% 20.89% 27.86% 34.82%
    Asia United Bank Corporation 5,529,173,112.28 11,633,890,525.31 4.75% 9.51% 14.26% 19.01% 23.76%
    Standard Chartered Bank 1,277,372,125.77 2,823,851,791.39 4.52% 9.05% 13.57% 18.09% 22.62%
    Union Bank of the Philippines 18,152,377,667.27 43,813,870,129.41 4.14% 8.29% 12.43% 16.57% 20.72%
    Allied Banking Corporation 8,160,196,816.62 20,414,316,567.43 4.00% 7.99% 11.99% 15.99% 19.99%
    Land Bank of the Philippines 19,994,661,634.63 54,718,065,876.33 3.65% 7.31% 10.96% 14.62% 18.27%
    Deutsche Bank AG 512,831,525.02 1,415,912,691.23 3.62% 7.24% 10.87% 14.49% 18.11%
    Philippine Veterans Bank 2,273,657,872.89 6,299,438,025.35 3.61% 7.22% 10.83% 14.44% 18.05%
    Rizal Commercial Banking Corporation 12,717,148,444.49 37,161,140,871.17 3.42% 6.84% 10.27% 13.69% 17.11%
    Security Bank Corporation 10,587,883,000.00 32,292,308,063.21 3.28% 6.56% 9.84% 13.12% 16.39%
    Banco De Oro Unibank 38,296,360,611.09 121,005,042,628.13 3.16% 6.33% 9.49% 12.66% 15.82%
    China Banking Corporation 11,496,662,992.24 38,608,797,970.99 2.98% 5.96% 8.93% 11.91% 14.89%
    Maybank Philippines Inc. 1,686,707,790.93 5,857,123,131.49 2.88% 5.76% 8.64% 11.52% 14.40%
    Development Bank of the Philippines 9,669,228,560.66 35,802,778,658.05 2.70% 5.40% 8.10% 10.80% 13.50%
    Bank of the Philippine Islands 19,498,383,020.42 86,872,774,623.13 2.24% 4.49% 6.73% 8.98% 11.22%
    Philippine Trust Company 3,647,399,860.82 16,748,089,910.80 2.18% 4.36% 6.53% 8.71% 10.89%
    Metropolitan Bank & Trust Company 21,608,195,022.57 99,545,913,839.90 2.17% 4.34% 6.51% 8.68% 10.85%
    East West Banking Corporation 3,693,052,000.00 17,919,833,842.14 2.06% 4.12% 6.18% 8.24% 10.30%
    HongKong & Shanghai Banking Corporation 1,076,400,327.97 5,318,385,931.73 2.02% 4.05% 6.07% 8.10% 10.12%
    Internationale Nederlanden Groep BK 452,128,750.00 2,640,172,199.22 1.71% 3.42% 5.14% 6.85% 8.56%
    Philippine Bank of Communications 851,318,834.98 5,375,920,381.27 1.58% 3.17% 4.75% 6.33% 7.92%
    Al-Amanah Islamic Bank of the Philippines 72,205,000.00 493,191,649.00 1.46% 2.93% 4.39% 5.86% 7.32%
    Robinsons Bank Corporation 571,583,000.00 5,586,015,378.89 1.02% 2.05% 3.07% 4.09% 5.12%
    Mizuho Corporate Bank Ltd. - Manila Branch 157,088,607.67 1,700,291,104.27 0.92% 1.85% 2.77% 3.70% 4.62%
    Chinatrust (Philippines) Commercial Banking Corporation 373,752,807.11 6,363,267,438.22 0.59% 1.17% 1.76% 2.35% 2.94%
    ANZ Banking Group Ltd 92,775,375.74 2,481,489,811.94 0.37% 0.75% 1.12% 1.50% 1.87%
    Bank of America N.A. 6,655,115.17 602,446,709.20 0.11% 0.22% 0.33% 0.44% 0.55%
    Bangkok Bank Public Co. Ltd 5,804,155.55 1,203,755,981.00 0.05% 0.10% 0.14% 0.19% 0.24%
    The Bank of Tokyo - Mitsubishi UFJ Ltd 931,892.52 1,075,343,701.11 0.01% 0.02% 0.03% 0.03% 0.04%
    BDO Private Bank, Inc. 0.00 5,079,157,036.06 0.00% 0.00% 0.00% 0.00% 0.00%
    JP Morgan Chase National Bank Association 0.00 1,397,724,000.00 0.00% 0.00% 0.00% 0.00% 0.00%
    Grand Total 318,209,114,354.98 757,196,410,233.81 4.20% 8.40% 12.61% 16.81% 21.01%

    Source: www.bsp.gov.ph
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