Philippine U/KBs Improve in the 3rd Qtr. of 2012

Editor's Note: The Philippine Deposit Insurance Corporation (PDIC) advised consumers to wisely choose the banks where they will deposit their money. The trouble is, most depositors don't and can't read financial statements before they open a bank account. The regulators, whose job is to safeguard the public's money, have not done a good job recently.  In the past ten years, two commercial banks, twenty-one thrift banks, and a staggering 187 rural banks have collapsed, often quite suddenly and without warning. Regulators do have a problem bank list that they do not divulge to the public, for fear of sparking another bank run. So who can the public turn to, to advise them where to put their money? No one, except the banks themselves who will always promote their self-interests. This analysis is an attempt to fill in that knowledge gap, by screening out the weaker banks that seem ready to implode at any given moment.

Editor's Note: The ratio of Distressed Assets to Total Capital Cushion is a variant of the famous Texas Ratio, which was widely used by US financial regulators to predict bank failure during the US Savings and Loan Crisis in the 1980s and early 1990s. The basic premise is that a bank with Distressed Assets greater than its Capital Cushion is in danger of insolvency, because a significant drop in the value of  the Distressed Assets will eat into a significant amount of the bank's capital.  For a more detailed discussion of this ratio, please visit a previous blog post: The Texas Ratio of Select Philippine Banks  

Based on the individual Published Statements of Condition for the Philippine Commercial Banking Industry (from www.bsp.gov.ph), Total Distressed Assets of Philippine Commercial Banks decreased by Php 42.775 billion or 6.91% from June 30, 2012 to September 30, 2012.  This decrease was compounded by a 4.37% increase in their Total Capital Cushion during the same period.  As a result, the Ratio of Total Distressed Assets to Total Capital Cushion of Philippine Commercial Banks decreased by 10.81%, from 81.71% as of June 30, 2012 to 72.88% as of September 30, 2012.

Those banks that posted significant improvements in this ratio include:

1. Internationale Nederlanden Groep BK (70.92% decrease)
2. Deutsche Bank AG (46.32% decrease)
3. Security Bank (37.67% decrease)
4. Banco de Oro Unibank (26.88% decrease)
5. Citibank N.A. (24.79% decrease)
6. Standard Chartered Bank (15.73 decrease)

The banks that exhibited significant deterioration in this ratio include:

1. JP Morgan Chase National Bank Association (531.40% increase)
2. ANZ Banking Group Ltd (174.96% increase)
3. Mizuho Corporate Bank Ltd. - Manila Branch (163.84% increase)
4. Mega International Commercial Bank Company Limited (34.83% increase)

Distressed Banks

None of the banks with significant increases have been classified as distressed based on their ratio of Total Distressed Assets to Total Capital Cushion as of the 3rd Qtr. of  2012.  Three banks ranked as distressed in the 2nd Qtr. of 2012 showed some deterioration in their distressed ratios as of September 30, 2012.  These banks are:

1. Philippine National Bank (7.36% increase)
2. United Coconut Planters Bank (6.35% increase)
3. Bank of China Limited - Manila Branch (1.98% increase)

United Coconut Planters Bank continues to rank as the most distressed domestic Universal and Commercial bank in the country.  Its Total Distressed Assets are almost than seven times its Total Capital Cushion.  It must be noted that this ratio is down significantly from year-end 2011, when its Total Distressed Assets were ten times its Total Capital Cushion.

The list of banks classified as distressed as of September 30, 2012 are as follows:

1. Bank of China Limited - Manila Branch (Distressed Ratio of 815.07%)
2. United Coconut Planters Bank (Distressed Ratio of 691.24%)
3. Citibank N.A. (Distressed Ratio of 252.77)
4. Standard Chartered Bank (Distressed Ratio of 177.56%)
5. Bank of Commerce (Distressed Ratio of 164.70%)
6. Philippine Bank of Communications (Distressed Ratio of 158.86%)
7. Philippine National Bank (Distressed Ratio of 156.29%)
8. Korea Exchange Bank (Distressed Ratio of 110.69%)
9. Philippine Veterans Bank (Distressed Ratio of 102.14%)

Deutsche Bank AG, which had a Total Distressed Asset Ratio of 172.89% as of June 30, 2012, dropped out of the list of distressed banks, with a Total Distressed Asset Ratio of 92.81% as of September 30, 2012.

All these banks were flagged as borderline insolvent (highlighted in yellow) as of June 30, 2012.  However, as a group the distressed banks showed some improvement in their Total Distressed Assets/Total Capital Cushion Ratios.  This ratio now stands at 223.31% as of September 30, 2012, down from 225.48% as of June 30, 2012.  For a list of Distressed Banks as of June 30, 2012, please check out a previous blog post: "Philippine U/KBs Show Some Deterioration in the 2nd Qtr. of 2012".

Philippine Universal and Commercial Banking System
Total Distressed Assets/ Total Capital Cushion
June 30, 2012 to September 30, 2012
In %
Bank	June 30, 2012	September 30, 2012	Variance	% Variance
JP Morgan Chase National Bank Association	8.45%	53.33%	44.88%	531.40%
ANZ Banking Group Ltd	7.16%	19.70%	12.54%	174.96%
Mizuho Corporate Bank Ltd. - Manila Branch	13.62%	35.95%	22.32%	163.84%
Mega International Commercial Bank Company Limited	71.69%	96.65%	24.97%	34.83%
Al-Amanah Islamic Bank of the Philippines	17.05%	18.71%	1.66%	9.73%
Philippine National Bank	145.57%	156.29%	10.72%	7.36%
East West Banking Corporation	46.65%	49.84%	3.19%	6.83%
United Coconut Planters Bank	649.99%	691.24%	41.24%	6.35%
Maybank Philippines Inc.	54.86%	57.16%	2.30%	4.19%
Union Bank of the Philippines	84.58%	87.48%	2.90%	3.43%
Bank of China Limited - Manila Branch	799.27%	815.07%	15.80%	1.98%
Robinsons Bank Corporation	21.22%	21.63%	0.41%	1.93%
Asia United Bank Corporation	88.80%	89.77%	0.97%	1.09%
BDO Private Bank, Inc.	3.48%	3.50%	0.02%	0.63%
HongKong & Shanghai Banking Corporation	70.84%	70.97%	0.13%	0.18%
Chinatrust (Philippines) Commercial Banking Corporation	20.55%	20.54%	-0.01%	-0.07%
Bank of Commerce	165.11%	164.70%	-0.41%	-0.25%
Allied Banking Corporation	65.12%	64.41%	-0.71%	-1.09%
Bangkok Bank Public Co. Ltd	2.39%	2.35%	-0.04%	-1.68%
Philippine Trust Company	50.51%	49.11%	-1.41%	-2.78%
Development Bank of the Philippines	48.68%	46.81%	-1.87%	-3.84%
Metropolitan Bank & Trust Company	61.57%	58.94%	-2.63%	-4.27%
Korea Exchange Bank	116.09%	110.69%	-5.40%	-4.65%
Philippine Bank of Communications	167.10%	158.86%	-8.23%	-4.93%
Bank of the Philippine Islands	53.53%	50.40%	-3.13%	-5.85%
Rizal Commercial Banking Corporation	73.34%	68.77%	-4.57%	-6.23%
The Bank of Tokyo - Mitsubishi UFJ Ltd	10.93%	10.17%	-0.76%	-6.98%
Bank of America N.A.	4.26%	3.96%	-0.30%	-7.14%
China Banking Corporation	59.65%	53.38%	-6.27%	-10.51%
Philippine Veterans Bank	116.61%	102.14%	-14.47%	-12.41%
Land Bank of the Philippines	62.73%	54.31%	-8.42%	-13.43%
Standard Chartered Bank	210.69%	177.56%	-33.14%	-15.73%
Citibank N.A.	336.10%	252.77%	-83.32%	-24.79%
Banco De Oro Unibank	65.94%	48.21%	-17.73%	-26.88%
Security Bank Corporation	39.09%	24.36%	-14.72%	-37.67%
Deutsche Bank AG	172.89%	92.81%	-80.08%	-46.32%
Internationale Nederlanden Groep BK	87.02%	25.31%	-61.71%	-70.92%
Grand Total	81.71%	72.88%	-8.83%	-10.81%

Source: www.bsp.gov.ph

Philippine Universal and Commercial Banking System
Total Distressed Assets/ Total Capital Cushion
June 30, 2012 to September 30, 2012
In PhP
		June 30, 2012				September 30, 2012				Variance				% Variance
Bank	Total Distressed Assets (In PhP)	Total Capital Cushion (In PhP)	Distressed Assets/ Total Capital Cushion (In %)		Total Distressed Assets (In PhP)	Total Capital Cushion (In PhP)	Distressed Assets/ Total Capital Cushion (In %)		Total Distressed Assets (In PhP)	Total Capital Cushion (In PhP)	Distressed Assets/ Total Capital Cushion (In %)		Total Distressed Assets (In %)	Total Capital Cushion (In %)	Distressed Assets/ Total Capital Cushion (In %)
Bank of China Limited - Manila Branch	5,405,705,862.53	676,326,353.64	799.27%		5,499,250,349.88	674,694,698.46	815.07%		93,544,487.35	-1,631,655.18	15.80%		1.73%	-0.24%	1.98%
United Coconut Planters Bank	58,788,229,194.25	9,044,452,080.29	649.99%		57,684,765,438.46	8,345,167,762.71	691.24%		-1,103,463,755.79	-699,284,317.58	41.24%		-1.88%	-7.73%	6.35%
Citibank N.A.	43,517,279,276.49	12,947,871,227.56	336.10%		32,833,020,831.09	12,989,088,119.39	252.77%		-10,684,258,445.40	41,216,891.83	-83.32%		-24.55%	0.32%	-24.79%
Standard Chartered Bank	5,949,712,292.86	2,823,851,791.39	210.69%		5,005,651,960.87	2,819,162,911.12	177.56%		-944,060,331.99	-4,688,880.27	-33.14%		-15.87%	-0.17%	-15.73%
Bank of Commerce	32,829,846,240.56	19,883,188,091.20	165.11%		32,651,852,421.91	19,825,006,462.21	164.70%		-177,993,818.65	-58,181,628.99	-0.41%		-0.54%	-0.29%	-0.25%
Philippine Bank of Communications	8,982,915,157.84	5,375,920,381.27	167.10%		8,517,589,737.08	5,361,593,642.74	158.86%		-465,325,420.76	-14,326,738.53	-8.23%		-5.18%	-0.27%	-4.93%
Philippine National Bank	59,734,643,323.51	41,035,624,017.49	145.57%		50,799,838,940.95	32,504,359,516.71	156.29%		-8,934,804,382.56	-8,531,264,500.78	10.72%		-14.96%	-20.79%	7.36%
Korea Exchange Bank	679,346,318.32	585,197,642.77	116.09%		659,493,409.58	595,807,841.52	110.69%		-19,852,908.74	10,610,198.75	-5.40%		-2.92%	1.81%	-4.65%
Philippine Veterans Bank	7,345,774,272.58	6,299,438,025.35	116.61%		6,780,597,813.35	6,638,430,212.16	102.14%		-565,176,459.23	338,992,186.81	-14.47%		-7.69%	5.38%	-12.41%
Mega International Commercial Bank Company Limited	554,443,146.65	773,440,353.49	71.69%		762,510,428.62	788,932,134.30	96.65%		208,067,281.97	15,491,780.81	24.97%		37.53%	2.00%	34.83%
Deutsche Bank AG	2,447,977,790.34	1,415,912,691.23	172.89%		1,315,888,813.12	1,417,807,886.43	92.81%		-1,132,088,977.22	1,895,195.20	-80.08%		-46.25%	0.13%	-46.32%
Asia United Bank Corporation	10,330,877,520.13	11,633,890,525.31	88.80%		10,752,972,323.67	11,978,818,330.22	89.77%		422,094,803.54	344,927,804.91	0.97%		4.09%	2.96%	1.09%
Union Bank of the Philippines	37,057,875,238.54	43,813,870,129.41	84.58%		38,394,556,414.92	43,887,492,186.78	87.48%		1,336,681,176.38	73,622,057.37	2.90%		3.61%	0.17%	3.43%
HongKong & Shanghai Banking Corporation	3,767,660,649.19	5,318,385,931.73	70.84%		3,655,699,755.29	5,150,945,595.76	70.97%		-111,960,893.90	-167,440,335.97	0.13%		-2.97%	-3.15%	0.18%
Rizal Commercial Banking Corporation	27,253,199,123.56	37,161,140,871.17	73.34%		25,702,007,474.49	37,372,568,399.29	68.77%		-1,551,191,649.07	211,427,528.12	-4.57%		-5.69%	0.57%	-6.23%
Allied Banking Corporation	13,293,564,136.14	20,414,316,567.43	65.12%		13,279,854,327.12	20,618,612,108.27	64.41%		-13,709,809.02	204,295,540.84	-0.71%		-0.10%	1.00%	-1.09%
Metropolitan Bank & Trust Company	61,292,038,764.54	99,545,913,839.90	61.57%		58,589,388,144.26	99,399,052,866.07	58.94%		-2,702,650,620.28	-146,860,973.83	-2.63%		-4.41%	-0.15%	-4.27%
Maybank Philippines Inc.	3,213,237,618.59	5,857,123,131.49	54.86%		3,323,846,393.57	5,814,812,043.44	57.16%		110,608,774.98	-42,311,088.05	2.30%		3.44%	-0.72%	4.19%
Land Bank of the Philippines	34,323,507,164.53	54,718,065,876.33	62.73%		27,972,005,647.66	51,508,971,680.69	54.31%		-6,351,501,516.87	-3,209,094,195.64	-8.42%		-18.50%	-5.86%	-13.43%
China Banking Corporation	23,029,458,379.20	38,608,797,970.99	59.65%		21,113,412,180.64	39,555,560,128.40	53.38%		-1,916,046,198.56	946,762,157.41	-6.27%		-8.32%	2.45%	-10.51%
JP Morgan Chase National Bank Association	118,057,556.01	1,397,724,000.00	8.45%		745,416,697.32	1,397,724,000.00	53.33%		627,359,141.31	0.00	44.88%		531.40%	0.00%	531.40%
Bank of the Philippine Islands	46,504,024,846.43	86,872,774,623.13	53.53%		43,970,127,077.78	87,241,945,395.08	50.40%		-2,533,897,768.65	369,170,771.95	-3.13%		-5.45%	0.42%	-5.85%
East West Banking Corporation	8,359,973,804.77	17,919,833,842.14	46.65%		9,107,712,599.78	18,274,068,390.58	49.84%		747,738,795.01	354,234,548.44	3.19%		8.94%	1.98%	6.83%
Philippine Trust Company	8,459,763,719.54	16,748,089,910.80	50.51%		8,158,501,407.67	16,613,937,357.88	49.11%		-301,262,311.87	-134,152,552.92	-1.41%		-3.56%	-0.80%	-2.78%
Banco De Oro Unibank	79,795,225,219.71	121,005,042,628.13	65.94%		79,441,752,672.48	164,765,851,685.01	48.21%		-353,472,547.23	43,760,809,056.88	-17.73%		-0.44%	36.16%	-26.88%
Development Bank of the Philippines	17,429,510,384.31	35,802,778,658.05	48.68%		16,706,116,367.70	35,686,157,877.06	46.81%		-723,394,016.61	-116,620,780.99	-1.87%		-4.15%	-0.33%	-3.84%
Mizuho Corporate Bank Ltd. - Manila Branch	231,656,017.89	1,700,291,104.27	13.62%		584,697,791.26	1,626,550,127.94	35.95%		353,041,773.37	-73,740,976.33	22.32%		152.40%	-4.34%	163.84%
Internationale Nederlanden Groep BK	2,297,368,164.50	2,640,172,199.22	87.02%		670,240,278.79	2,648,446,754.05	25.31%		-1,627,127,885.71	8,274,554.83	-61.71%		-70.83%	0.31%	-70.92%
Security Bank Corporation	12,621,692,039.25	32,292,308,063.21	39.09%		7,848,582,981.88	32,217,229,745.77	24.36%		-4,773,109,057.37	-75,078,317.44	-14.72%		-37.82%	-0.23%	-37.67%
Robinsons Bank Corporation	1,185,449,722.06	5,586,015,378.89	21.22%		1,212,428,304.10	5,604,797,239.62	21.63%		26,978,582.04	18,781,860.73	0.41%		2.28%	0.34%	1.93%
Chinatrust (Philippines) Commercial Banking Corporation	1,307,686,619.44	6,363,267,438.22	20.55%		1,304,469,684.46	6,351,881,327.94	20.54%		-3,216,934.98	-11,386,110.28	-0.01%		-0.25%	-0.18%	-0.07%
ANZ Banking Group Ltd	177,798,100.43	2,481,489,811.94	7.16%		484,915,387.63	2,461,442,124.07	19.70%		307,117,287.20	-20,047,687.87	12.54%		172.73%	-0.81%	174.96%
Al-Amanah Islamic Bank of the Philippines	84,112,650.05	493,191,649.00	17.05%		85,395,047.44	456,309,084.47	18.71%		1,282,397.39	-36,882,564.53	1.66%		1.52%	-7.48%	9.73%
The Bank of Tokyo - Mitsubishi UFJ Ltd	117,537,674.60	1,075,343,701.11	10.93%		109,327,678.10	1,075,343,701.11	10.17%		-8,209,996.50	0.00	-0.76%		-6.98%	0.00%	-6.98%
Bank of America N.A.	25,691,904.80	602,446,709.20	4.26%		23,912,893.44	603,846,709.20	3.96%		-1,779,011.36	1,400,000.00	-0.30%		-6.92%	0.23%	-7.14%
BDO Private Bank, Inc.	176,561,855.52	5,079,157,036.06	3.48%		167,156,062.49	4,778,546,612.60	3.50%		-9,405,793.03	-300,610,423.46	0.02%		-5.33%	-5.92%	0.63%
Bangkok Bank Public Co. Ltd	28,734,990.68	1,203,755,981.00	2.39%		28,423,142.55	1,211,004,687.00	2.35%		-311,848.13	7,248,706.00	-0.04%		-1.09%	0.60%	-1.68%
Grand Total	618,718,136,740.34	757,196,410,233.81	81.71%		575,943,378,881.40	790,261,967,346.05	72.88%		-42,774,757,858.94	33,065,557,112.24	-8.83%		-6.91%	4.37%	-10.81%

Source: www.bsp.gov.ph

Disclaimer:

This list only serves as a screening guide.  It is not a definitive guide and must be taken in the context of other factors.  The figures are based on the individual banks' Published Statements of Condition as of June 30, 2012 and September 30, 2012 as published in the BSP website (www.bsp.gov.ph). For this analysis, no attempt was made to go through the audited financial statements of each bank. Readers are suggested to make their own investigations and verify the figures presented. Both BSP and PDIC have their own problem bank screening systems that are much more sophisticated in scope and design, given that they have more access to information over the banks they regulate. 

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