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Tuesday, March 28, 2017

MBank Philippines: This "Smart Bank" Did a Very Dumb Thing - It Lost Money Very Fast

Last July 14, 2016, MBank Philippines voluntarily surrendered its banking license as well as it's license as an electronic money issuer. The bank was designed as a "smart bank," meaning it was expected to roll out innovative financial services in the area of wireless payments and microfinance products for consumers. The bank was owned by the Smart Communications, the mobile subsidiary of the giant PLDT.  It was the second mobile-powered microfinance-oriented savings bank, after BANKO, now BPI Globe Banko.

The bank had impeccable backers: Finnish development finance company Finnfund and Dutch development bank FMO, two international development organizations with presumably extensive experience in microfinance.

You would think that with all this technology, financial firepower, and expertise, the bank would be a roaring success. Yet, this "smart bank" lost so much money so fast (within less than three years of operations) that there was no hope of recovery.

Although the bank was incorporated in 2012, it only began operations in October 16, 2013. As of year-end December 31, 2013, the bank had a very fresh and very clean balance sheet: zero NPLs and around Php 125 million in Stockholder's Equity. Yet, within one year, the NPLs piled on very quickly, reaching a peak of almost Php 60 million as of December 31, 2014, The NPLs never really dropped very significantly after that, hovering between a low of Php 37 million in March 31, 2015 and climbing again to Php 54 million as of September 30, 2015.  When the bank closed, it still had Php 44 million of Gross NPLs on its books as of June 30, 2016.

A lot of these NPLs were written off very quickly, reducing the bank's capital base from Php 125 million as of December 31, 2013 to just Php 26 million on June 30, 2016 - less than three years after it began operations. So, it lost Php 99 million or almost four fifths of its Stockholder's Equity in 2.75 years.

The bank never made it to our Top Distressed Banks of the Philippines list, but it was getting there. On March 31, 2016, it posted its peak distressed ratio of 90.04%. Just 2.5 years earlier, this ratio was only 11.02%. However, the bank did consistently rank at or near the top of banks with very high NPLs relative to their equity base. Very often, it ranked second in this ratio, right behind the now-defunct GSIS Family Bank/Comsavings Bank.

By BSP standards, the bank was not failing. As of June 30, 2016, it's last Published Balance Sheet before it closed down, the bank sported capital adequacy ratios of 22.75% for both Total CAR and Tier 1 CAR ratios - well above the BSP recommended minimm of 10.00%. So, there was no danger of imminent collapse. GSIS Family Bank/Comsavings Bank survived for a very long time with numbers much worse than MBank's.  MBank could have continued as a zombie bank: not quite dead, not quite alive, and propped up by the sizable financial resources of its parent, Smart Communications.

But, just like Export and Industry Bank, it would have taken years, decades even for the bank to get back to where it was at the start of 2014: a capital base of Php 125 million. At an average thrift bank Return on Equity of roughly 11% per annum, it would have taken 16 to 17 years just to reach its highwater mark of Php 125 million in Stockholder's Equity.  Moreover, there was no indication that any telco backed bank had cracked the code of profitability. The bank, had it continued, would only have served as distraction to the management of Smart Communications, which makes Php 125 million or MBank's capital base, in a little over two days.

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