A Simple Stress Test of Philippine Commercial Banks as of December 31, 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 September 30, 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  71.726 billion or 8.46% of the Stockholders Equity of the Philippine Commercial Banking System as of December 31, 2012.  So, writing off 50% of the NPLs of the Philippine Commercial Banks would reduce their aggregate stockholders equity by a little more than 4%.  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
December 31, 2012
	NPL	SE	NPL/SE
Bank	(In PHP)	(In PHP)	(In %)
Standard Chartered Bank	1,160,321,541.24	2,277,966,955.65	50.94%
Bank of Commerce	4,239,823,353.38	17,938,069,569.84	23.64%
United Coconut Planters Bank	4,444,961,937.02	20,242,922,858.72	21.96%
East West Banking Corporation	3,405,265,847.54	16,938,383,492.18	20.10%
Philippine National Bank	6,464,605,207.08	32,243,410,311.17	20.05%
Citibank N.A.	1,474,237,283.72	8,038,267,923.48	18.34%
Allied Banking Corporation	3,565,542,331.66	21,307,175,097.24	16.73%
Philippine Veterans Bank	1,121,158,544.06	7,110,732,960.79	15.77%
Maybank Philippines Inc.	820,678,540.06	5,886,136,977.37	13.94%
HongKong & Shanghai Banking Corporation	817,921,062.56	6,141,851,796.63	13.32%
Development Bank of the Philippines	4,923,830,182.35	42,258,443,278.49	11.65%
Robinsons Bank Corporation	602,948,268.54	5,820,635,601.13	10.36%
China Banking Corporation	3,839,277,672.27	38,947,137,997.92	9.86%
Land Bank of the Philippines	7,157,063,430.01	74,604,257,815.40	9.59%
Banco De Oro Unibank	11,275,211,317.03	155,069,452,971.95	7.27%
Union Bank of the Philippines	3,185,840,700.87	44,579,598,110.83	7.15%
Philippine Trust Company	1,184,880,873.77	17,176,795,759.77	6.90%
Chinatrust (Philippines) Commercial Banking Corporation	328,443,082.62	6,304,196,679.74	5.21%
Bank of the Philippine Islands	4,604,037,769.69	92,347,246,015.92	4.99%
Asia United Bank Corporation	540,846,877.14	11,517,775,066.30	4.70%
Korea Exchange Bank	24,799,820.20	641,341,686.61	3.87%
Metropolitan Bank & Trust Company	4,192,899,043.46	114,682,415,970.32	3.66%
Rizal Commercial Banking Corporation	1,471,524,811.35	42,096,014,872.58	3.50%
Philippine Bank of Communications	131,371,192.79	5,775,710,961.51	2.27%
Security Bank Corporation	710,219,279.16	36,745,605,061.62	1.93%
Bank of China Limited - Manila Branch	8,660,895.91	558,019,357.44	1.55%
ANZ Banking Group Ltd	23,339,114.85	2,347,138,920.44	0.99%
Bangkok Bank Public Co. Ltd	5,384,155.55	1,183,788,778.87	0.45%
Al-Amanah Islamic Bank of the Philippines	1,156,048.97	460,318,999.12	0.25%
JP Morgan Chase National Bank Association	744,584.10	1,642,109,496.65	0.05%
Internationale Nederlanden Groep BK	84.10	2,916,417,050.90	0.00%
Bank of America N.A.	0.00	596,946,705.20	0.00%
BDO Private Bank, Inc.	0.00	5,184,586,582.92	0.00%
Deutsche Bank AG	0.00	2,164,092,348.17	0.00%
Mega International Commercial Bank Company Limited	0.00	785,231,548.35	0.00%
Mizuho Corporate Bank Ltd. - Manila Branch	0.00	1,283,451,561.81	0.00%
The Bank of Tokyo - Mitsubishi UFJ Ltd	0.00	1,942,812,476.19	0.00%
Grand Total	71,726,994,853.05	847,756,459,619.22	8.46%

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 December 31, 2012, "Classified Loans and Other Risky Assets" of the Philippine Commercial Banking System amounted to PhP 304.897 billion or more than 4.25 times the size of the commercial banking NPLs of PhP 71.727 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
December 31, 2012
	Classified Loans	NPLs	Classified Loans/NPLs
Bank	(In Php)	(In Php)	(In %)
Internationale Nederlanden Groep BK	462,628,750.00	84.10	550093638.53%
Bank of China Limited - Manila Branch	6,062,991,464.73	8,660,895.91	70004.21%
Al-Amanah Islamic Bank of the Philippines	72,205,000.00	1,156,048.97	6245.84%
Korea Exchange Bank	607,214,890.42	24,799,820.20	2448.46%
Citibank N.A.	16,220,330,000.00	1,474,237,283.72	1100.25%
Rizal Commercial Banking Corporation	14,002,368,356.67	1,471,524,811.35	951.56%
Asia United Bank Corporation	5,052,894,805.02	540,846,877.14	934.26%
United Coconut Planters Bank	36,866,000,000.00	4,444,961,937.02	829.39%
Security Bank Corporation	5,766,000,000.00	710,219,279.16	811.86%
Union Bank of the Philippines	19,919,356,818.05	3,185,840,700.87	625.25%
Philippine Bank of Communications	799,805,260.59	131,371,192.79	608.81%
Bank of Commerce	23,738,866,000.00	4,239,823,353.38	559.90%
Philippine National Bank	31,763,013,186.92	6,464,605,207.08	491.34%
Metropolitan Bank & Trust Company	20,557,591,078.37	4,192,899,043.46	490.30%
Banco De Oro Unibank	35,634,832,612.12	11,275,211,317.03	316.05%
Philippine Trust Company	3,626,047,101.13	1,184,880,873.77	306.03%
China Banking Corporation	10,930,461,763.68	3,839,277,672.27	284.70%
Philippine Veterans Bank	3,138,090,960.06	1,121,158,544.06	279.90%
Land Bank of the Philippines	18,885,602,864.27	7,157,063,430.01	263.87%
Allied Banking Corporation	8,160,196,816.62	3,565,542,331.66	228.86%
Robinsons Bank Corporation	1,355,020,000.00	602,948,268.54	224.73%
Development Bank of the Philippines	9,914,662,080.51	4,923,830,182.35	201.36%
Maybank Philippines Inc.	1,594,857,760.73	820,678,540.06	194.33%
East West Banking Corporation	6,004,578,000.00	3,405,265,847.54	176.33%
ANZ Banking Group Ltd	31,841,662.94	23,339,114.85	136.43%
Chinatrust (Philippines) Commercial Banking Corporation	394,937,638.67	328,443,082.62	120.25%
Standard Chartered Bank	1,289,580,445.86	1,160,321,541.24	111.14%
HongKong & Shanghai Banking Corporation	884,319,263.25	817,921,062.56	108.12%
Bangkok Bank Public Co. Ltd	5,384,155.55	5,384,155.55	100.00%
Bank of the Philippine Islands	19,126,464,774.96	4,604,037,769.69	415.43%
JP Morgan Chase National Bank Association	744,584.10	744,584.10	100.00%
Bank of America N.A.	5,534,000.00	0.00	NA
BDO Private Bank, Inc.	0.00	0.00	NA
Deutsche Bank AG	532,380,880.56	0.00	NA
Mega International Commercial Bank Company Limited	704,963,084.00	0.00	NA
Mizuho Corporate Bank Ltd. - Manila Branch	780,842,610.15	0.00	NA
The Bank of Tokyo - Mitsubishi UFJ Ltd	4,097,639.08	0.00	NA
Grand Total	304,896,706,309.01	71,726,994,853.05	425.08%

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 36.80% of the PhP 828.434 billion in Total Capital Cushion of Philippine Commercial Banks as of December 31, 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 38.14% 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 3.81% and a 50% write-off of Classified Loans will reduce the commercial banking system's Total Capital Cushion by 19.07%.

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 (88.60% to reduction in Total Capital Cushion)
2. United Coconut Planters Bank (40.06% reduction in Total Capital Cushion)

A 20% write-off of Classified Loans would totally wipe out the Total Capital Cushion of one bank and severely affect the Total Capital Cushion of two more banks:

1. Bank of China Limited - Manila Branch (177.20% reduction in Total Capital Cushion)
2. United Coconut Planters Bank (80.13% reduction in Total Capital Cushion)
3. Philippine Bank of Communications (40.30% 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 four more banks:

1. Bank of China Limited - Manila Branch (265.80% reduction in Total Capital Cushion)
2. United Coconut Planters Bank (120.19% reduction in Total Capital Cushion)
3. Philippine Bank of Communications (60.44% reduction in Total Capital Cushion)
4. Citibank N.A. (37.55% reduction in Total Capital Cushion)
5. Bank of Commerce (36.17% reduction in Total Capital Cushion)
6. Korea Exchange Bank (31.24% reduction in Total Capital Cushion)

A 40% 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 six more banks:

1. Bank of China Limited - Manila Branch (354.41% reduction in Total Capital Cushion)
2. United Coconut Planters Bank (160.26% reduction in Total Capital Cushion)
3. Philippine Bank of Communications (80.59% reduction in Total Capital Cushion)
4. Citibank N.A. (50.07% reduction in Total Capital Cushion)
5. Bank of Commerce (48.23% reduction in Total Capital Cushion)
6. Korea Exchange Bank (4.66% reduction in Total Capital Cushion)
7. Philippine National Bank (34.85% reduction in Total Capital Cushion)
8. Mega International Commercial Bank Company Limited (34.85% reduction in Total Capital Cushion)

A 50% 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 five more banks:

1. Bank of China Limited - Manila Branch (443.01% reduction in Total Capital Cushion)
2. United Coconut Planters Bank (200.32% reduction in Total Capital Cushion)
3. Philippine Bank of Communications (100.74% reduction in Total Capital Cushion)
4. Citibank N.A. (62.59% reduction in Total Capital Cushion)
5. Bank of Commerce (60.29% reduction in Total Capital Cushion)
6. Korea Exchange Bank (52.07% reduction in Total Capital Cushion)
7. Philippine National Bank (43.57% reduction in Total Capital Cushion)
8. Mega International Commercial Bank Company Limited (43.46% 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 Improve in the 4th 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? - December 31, 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
December 31, 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	6,062,991,464.73	684,298,180.30	88.60%	177.20%	265.80%	354.41%	443.01%
United Coconut Planters Bank	36,866,000,000.00	9,201,765,912.89	40.06%	80.13%	120.19%	160.26%	200.32%
Philippine Bank of Communications	799,805,260.59	396,965,737.97	20.15%	40.30%	60.44%	80.59%	100.74%
Citibank N.A.	16,220,330,000.00	12,957,591,045.32	12.52%	25.04%	37.55%	50.07%	62.59%
Bank of Commerce	23,738,866,000.00	19,687,666,611.58	12.06%	24.12%	36.17%	48.23%	60.29%
Korea Exchange Bank	607,214,890.42	583,041,140.10	10.41%	20.83%	31.24%	41.66%	52.07%
Philippine National Bank	31,763,013,186.92	36,454,637,515.91	8.71%	17.43%	26.14%	34.85%	43.57%
Mega International Commercial Bank Company Limited	704,963,084.00	809,226,402.15	8.71%	17.42%	26.13%	34.85%	43.56%
Mizuho Corporate Bank Ltd. - Manila Branch	780,842,610.15	1,620,945,314.41	4.82%	9.63%	14.45%	19.27%	24.09%
Philippine Veterans Bank	3,138,090,960.06	6,643,455,486.88	4.72%	9.45%	14.17%	18.89%	23.62%
Standard Chartered Bank	1,289,580,445.86	2,834,198,027.55	4.55%	9.10%	13.65%	18.20%	22.75%
Asia United Bank Corporation	5,052,894,805.02	11,557,038,013.51	4.37%	8.74%	13.12%	17.49%	21.86%
Allied Banking Corporation	8,160,196,816.62	21,015,035,816.61	3.88%	7.77%	11.65%	15.53%	19.42%
Rizal Commercial Banking Corporation	14,002,368,356.67	36,272,524,028.31	3.86%	7.72%	11.58%	15.44%	19.30%
Union Bank of the Philippines	19,919,356,818.05	52,249,323,368.83	3.81%	7.62%	11.44%	15.25%	19.06%
Land Bank of the Philippines	18,885,602,864.27	51,456,405,333.75	3.67%	7.34%	11.01%	14.68%	18.35%
Deutsche Bank AG	532,380,880.56	1,465,660,409.12	3.63%	7.26%	10.90%	14.53%	18.16%
East West Banking Corporation	6,004,578,000.00	17,697,163,565.41	3.39%	6.79%	10.18%	13.57%	16.96%
Development Bank of the Philippines	9,914,662,080.51	35,387,649,348.25	2.80%	5.60%	8.41%	11.21%	14.01%
Maybank Philippines Inc.	1,594,857,760.73	5,833,302,969.32	2.73%	5.47%	8.20%	10.94%	13.67%
China Banking Corporation	10,930,461,763.68	44,573,150,968.01	2.45%	4.90%	7.36%	9.81%	12.26%
Robinsons Bank Corporation	1,355,020,000.00	5,643,568,553.73	2.40%	4.80%	7.20%	9.60%	12.00%
Philippine Trust Company	3,626,047,101.13	16,641,374,510.58	2.18%	4.36%	6.54%	8.72%	10.89%
Banco De Oro Unibank	35,634,832,612.12	164,200,302,494.77	2.17%	4.34%	6.51%	8.68%	10.85%
Bank of the Philippine Islands	19,126,464,774.96	98,659,354,960.12	1.94%	3.88%	5.82%	7.75%	9.69%
Security Bank Corporation	5,766,000,000.00	31,614,925,250.60	1.82%	3.65%	5.47%	7.30%	9.12%
Metropolitan Bank & Trust Company	20,557,591,078.37	114,491,444,450.66	1.80%	3.59%	5.39%	7.18%	8.98%
Internationale Nederlanden Groep BK	462,628,750.00	2,682,900,657.30	1.72%	3.45%	5.17%	6.90%	8.62%
HongKong & Shanghai Banking Corporation	884,319,263.25	5,524,361,185.42	1.60%	3.20%	4.80%	6.40%	8.00%
Al-Amanah Islamic Bank of the Philippines	72,205,000.00	493,416,267.73	1.46%	2.93%	4.39%	5.85%	7.32%
Chinatrust (Philippines) Commercial Banking Corporation	394,937,638.67	6,330,948,365.80	0.62%	1.25%	1.87%	2.50%	3.12%
ANZ Banking Group Ltd	31,841,662.94	2,483,140,793.85	0.13%	0.26%	0.38%	0.51%	0.64%
Bank of America N.A.	5,534,000.00	604,696,709.20	0.09%	0.18%	0.27%	0.37%	0.46%
Bangkok Bank Public Co. Ltd	5,384,155.55	1,219,794,847.00	0.04%	0.09%	0.13%	0.18%	0.22%
The Bank of Tokyo - Mitsubishi UFJ Ltd	4,097,639.08	2,278,505,311.02	0.02%	0.04%	0.05%	0.07%	0.09%
JP Morgan Chase National Bank Association	744,584.10	1,405,934,000.00	0.01%	0.01%	0.02%	0.02%	0.03%
BDO Private Bank, Inc.	0.00	4,778,255,132.13	0.00%	0.00%	0.00%	0.00%	0.00%
Grand Total	304,896,706,309.01	828,433,968,686.09	3.68%	7.36%	11.04%	14.72%	18.40%