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.

Have Real Estate and Construction Loans Reached a Permanently High Plateau in December 2016?

Have Real Estate and Construction Loans as a percentage of the Total Loan Portfolio (TLP) in the Philippine Banking System reached a permanently high plateau?

It would appear so.  Sometime in 2011, these loans have rocketed past their historical range of 12.6% to 16.6% of TLP and have stayed there ever since.  As of December 2016, these loans have shown no sign of coming back down to their historical ranges.  Although that ratio peaked at 20.55% as of September 2013, the ratio remains substantially elevated at 19.83% as of December 2016.

Investment in Construction as a percentage of GDP also remains elevated and, in fact, is at an all time high. This ratio logged 12.22% as of 2016, the highest it has been in twenty-six years.



Philippine Real Estate and Construction Loans Are Out of Whack As of December 2015!

Philippine Real Estate and Construction Loans Are Even More Out of Whack As of September 2015!


Has the Philippine Real Estate Bubble Already Burst?

Is There a Real Estate Bubble in the Philippines?


Are Philippine Real Estate Loans Out of Whack?

A Simple Stress Test of Philippine Banks as of September 30, 2016

Editor's Note: This is an updated version of an earlier blog post A Simple Stress Test of Philippine Banks as of June 30, 2016

Editor's Note: For the purposes of this article, Philippine Banks or the Philippine Banking System refers to the Philippine Commercial and Universal Banking System and the Philippine Thrift Banking System.  We are ignoring the Philippine Rural and Cooperative Banking System whose asset base is tiny in comparison to the whole banking system (Php 205.91 billion or 1.64% of the Php 12,545.76 billion in assets held in the Philippine Banking System as of June 30, 2016).


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.

For Philippine Banks, these NPLs currently comprise PhP 135.31 billion or 9.21% of the PhP 1,469.01 billion in Stockholders Equity (SE) as of September 30, 2016.  So, writing off 50% of the Philippine Banks NPLs would reduce their aggregate stockholder's equity by a little less than 5%.

Naturally, some banks would be more affected than others. For more information regarding this, please read The Top Distressed Philippine Banks as of September 30, 2016).

The stockholder's equity of ten banks would be severely affected.  These banks are:

1. BPI Globe Banko Inc (2,154.37% decline in SE)
2. Philippine Postal Savings Bank Inc (77.50% decline in SE)
3. Opportunity Kauswagan Bank Inc (67.69% decline in SE)
4. Luzon Development Bank (63.98% decline in SE)
5. World Partners Bank (59.27% decline in SE)
6. Equicom Savings Bank (51.02% decline in SE)
7. Legazpi Savings Bank Inc (50.80% decline in SE)
8. Philippine Resources Savings Banking Corporation (39.77% decline in SE)
9. Maritime Savings Bank Corporation (34.35% decline in SE)
10. Enterprise Bank Inc (33.87% decline in SE)

Philippine Banking System
NPL as % of SE
September 30, 2016
	NPL	SE	NPL/SE
Bank	(In PHP)	(In PHP)	(In %)
BPI GLOBE BANKO INC A SAVINGS BANK	344,373,998.27	7,992,434.34	4308.75%
PHIL POSTAL SAVINGS BANK INC	1,640,187,915.83	1,058,216,633.31	155.00%
OPPORTUNITY KAUSWAGAN BANK INC (A MICROFINANCE THRIFT BANK)	100,478,233.20	74,224,506.93	135.37%
LUZON DEVELOPMENT BANK	517,066,469.62	404,058,012.13	127.97%
WORLD PARTNERS BANK (A THRIFT BANK)	137,429,309.44	115,938,824.05	118.54%
EQUICOM SAVINGS BANK INC	636,811,214.24	626,758,730.90	101.60%
LEGAZPI SAVINGS BANK INC	450,487,116.92	497,452,769.19	90.56%
PHILIPPINE RESOURCES SAVINGS BANKING CORPORATION (PR SAVINGS	1,472,388,536.66	1,850,946,782.29	79.55%
MARITIME SAVINGS BANK CORPORATION	27,430,460.04	39,925,577.13	68.70%
ENTERPRISE BANK INC (A THRIFT BANK)	198,058,282.51	292,355,245.38	67.75%
CHINA BANK SAVINGS INC	4,502,299,081.60	7,821,210,951.53	57.57%
BATAAN DEVELOPMENT BANK	40,443,319.15	75,400,409.55	53.64%
WEALTH DEVELOPMENT BANK CORPORATION	252,365,406.44	508,836,382.27	49.60%
THE PALAWAN BANK (PALAWAN DB) INC	20,180,212.89	45,345,870.51	44.50%
METRO CEBU PUBLIC SAVINGS BANK	25,320,036.75	58,630,483.01	43.19%
PHILIPPINE VETERANS BANK	1,920,148,532.73	4,478,437,038.24	42.88%
PAMPANGA DEVELOPMENT BANK	54,092,503.50	131,058,660.90	41.27%
UCPB SAVINGS BANK	985,724,574.61	2,621,729,090.68	37.60%
STERLING BANK OF ASIA INC (A SAVINGS BANK)	972,054,930.79	2,587,484,013.68	37.57%
MICROFINANCE MAXIMUM SB INC	5,801,774.13	15,535,135.56	37.35%
PENBANK INC (A PDB) (FORMERLY: PENINSULA RB INC)	151,518,194.30	417,720,105.11	36.27%
RCBC SAVINGS BANK INC	3,563,204,986.32	10,158,403,672.58	35.08%
MALAYAN BANK SAVINGS AND MORT BANK INC	335,052,548.11	1,004,429,782.08	33.36%
BPI FAMILY SAVINGS BANK INC	8,123,032,981.64	24,630,504,141.58	32.98%
1ST VALLEY BANK INC A DEVELOPMENT BANK	447,820,468.00	1,364,367,929.78	32.82%
STANDARD CHARTERED BANK	2,277,960,050.89	7,017,719,822.55	32.46%
FARMERS SAVINGS & LOAN BANK INC	37,783,485.46	117,906,642.16	32.05%
VILLAGE BANK INC (A THRIFT BANK)	25,552,620.63	81,097,139.42	31.51%
UNITED COCONUT PLANTERS BANK	6,312,050,076.31	21,411,774,394.94	29.48%
NORTHPOINT DEV'T BANK INC	100,382,035.16	347,512,047.45	28.89%
PRODUCERS SAVINGS BANK CORPORATION	426,272,143.49	1,523,530,979.32	27.98%
BANK OF MAKATI (A SAVINGS BANK) INC	1,715,453,783.07	6,355,580,191.55	26.99%
EAST WEST BANKING CORP	8,502,163,356.59	31,685,632,764.13	26.83%
CITYSTATE SAVINGS BANK INC	140,511,602.44	582,910,405.56	24.11%
PHIL STAR DEVELOPMENT BANK INC	20,032,181.12	84,143,922.59	23.81%
PHIL SAVINGS BANK	4,475,439,320.31	19,348,131,817.30	23.13%
PHIL BANK OF COMMUNICATIONS	2,283,081,027.49	10,035,381,618.31	22.75%
DUNGGANON BANK (A MICROFINANCE THRIFT BANK) INC	23,839,161.85	105,260,339.26	22.65%
UNIVERSITY SAVINGS BANK INC	89,865,132.18	409,195,561.92	21.96%
LIFE SAVINGS BANK INC	13,535,320.94	64,374,895.34	21.03%
MAYBANK PHILIPPINES INC	2,404,370,029.81	11,459,762,757.56	20.98%
BUSINESS AND CONSUMERS BANK (A DB)	15,921,373.30	80,166,313.16	19.86%
MALASIQUI PROGRESSIVE SLB, INC	8,390,479.25	52,893,282.63	15.86%
PHILIPPINE BUSINESS BANK INC A SAVINGS BANK	1,467,430,873.86	9,783,294,718.66	15.00%
DEVELOPMENT BANK OF THE PHIL	6,851,069,030.92	46,153,823,955.40	14.84%
CITY SAVINGS BANK INC	1,404,431,487.61	9,627,879,435.92	14.59%
INTER-ASIA DEVELOPMENT BANK	8,568,049.77	60,800,589.82	14.09%
UNION BANK OF THE PHILS	7,951,594,741.54	60,864,429,577.76	13.06%
OPTIMUM DEVELOPMENT BANK INC	109,784,239.74	843,689,148.13	13.01%
DUMAGUETE CITY DEV BANK INC	32,589,350.10	266,977,938.85	12.21%
FIRST CONSOLIDATED BANK INC (A PDB)	448,961,979.40	3,718,689,279.76	12.07%
BANK OF COMMERCE	1,855,644,519.55	15,874,738,964.29	11.69%
BPI DIRECT SAVINGS BANK INC	191,837,077.75	1,771,503,589.44	10.83%
SUN SAVINGS BANK INC	15,302,238.90	147,120,131.74	10.40%
YUANTA SAVINGS BANK PHILIPPINES INC	103,695,194.06	997,565,754.30	10.39%
CORDILLERA SAVINGS BANK INC	13,254,102.64	132,182,802.36	10.03%
HIYAS BANKING CORPORATION	13,845,821.64	151,955,107.40	9.11%
ANZ BANKING GROUP LTD	405,519,723.90	4,541,699,215.58	8.93%
LAND BANK OF THE PHILIPPINES	8,084,444,246.85	91,117,891,955.27	8.87%
PHIL NATIONAL BANK	8,518,905,151.86	101,895,482,350.76	8.36%
ASIA UNITED BANK CORPORATION	1,875,670,487.58	22,694,519,662.37	8.26%
CHINA BANKING CORP	4,609,661,975.35	57,928,346,393.89	7.96%
BANGKO KABAYAN INC	34,185,431.96	455,487,809.33	7.51%
BANK OF CHINA LIMITED-MANILA BRANCH	189,040,895.91	2,540,023,753.67	7.44%
BDO UNIBANK INC	15,455,700,305.05	214,669,254,074.54	7.20%
CARD SME BANK INC A THRIFT BANK	45,647,812.97	658,722,626.30	6.93%
CTBC BANK (PHILIPPINES) CORP	485,595,806.28	7,038,190,699.89	6.90%
PNB SAVINGS BANK	768,619,166.47	11,413,970,024.36	6.73%
CITIBANK, N.A.	788,325,974.03	13,062,838,862.23	6.03%
TOWER DEVELOPMENT BANK	7,396,175.06	123,987,587.27	5.97%
ROBINSONS BANK CORPORATION	713,818,768.00	12,573,381,884.01	5.68%
HONGKONG & SHANGHAI BANKING CORP	806,160,007.79	14,469,407,938.09	5.57%
BANK OF THE PHIL ISLANDS	7,996,789,257.69	160,250,998,256.40	4.99%
PACIFIC ACE SAVINGS BANK INC	3,201,492.69	67,968,259.21	4.71%
LEMERY SAVINGS & LOAN BANK, INC.	3,502,078.88	78,768,063.24	4.45%
PHIL TRUST COMPANY	1,179,597,115.48	27,533,789,981.24	4.28%
BANK ONE SAVINGS AND TRUST CORP.	23,103,734.39	570,575,638.03	4.05%
CENTURY SAVINGS BANK CORPORATION	35,947,320.47	977,205,775.87	3.68%
QUEEN CITY DEVELOPMENT BANK INC OR QUEENBANK A THRIFT BANK	21,604,255.85	655,995,854.61	3.29%
BATAAN SAVINGS AND LOAN BANK	1,889,208.47	58,264,413.67	3.24%
HSBC SAVINGS BANK(PHILS) INC	61,066,188.09	1,895,120,326.94	3.22%
RIZAL COMM'L BANKING CORP	1,939,990,833.94	60,497,738,050.16	3.21%
SECURITY BANK CORP	2,232,110,933.80	95,445,926,178.92	2.34%
BANGKOK BANK PUBLIC CO LTD	45,436,941.43	3,152,975,067.89	1.44%
KOREA EXCHANGE BANK	23,050,195.00	1,618,173,459.43	1.42%
METROPOLITAN BANK & TCO	2,689,483,124.87	192,439,269,508.81	1.40%
QUEZON COCONUT BANK INC (A THRIFT BANK)	604,828.80	58,577,305.35	1.03%
AL-AMANAH ISLAMIC INVESTMENT BANK OF THE PHILS	1,092,048.97	313,260,984.02	0.35%
ING BANK N.V.	99.00	2,472,002,251.34	0.00%
BANK OF AMERICA N.A.	0.00	2,091,322,952.20	0.00%
BDO PRIVATE BANK, INC.	0.00	5,530,263,921.85	0.00%
CATHAY UNITED BANK CO LTD - MANILA BRANCH	0.00	2,124,713,929.75	0.00%
DEUTSCHE BANK AG	0.00	3,057,324,212.59	0.00%
INDUSTRIAL BANK OF KOREA MANILA BRANCH	0.00	2,179,547,384.17	0.00%
ISLA BANK(A THRIFT BANK) INC	0.00	663,130,458.76	0.00%
JP MORGAN CHASE BANK NATIONAL ASSN.	0.00	1,312,606,965.00	0.00%
MEGA INT'L COMM'L BANK CO LTD	0.00	1,881,123,285.21	0.00%
MIZUHO BANK LTD - MANILA BRANCH	0.00	2,752,197,686.87	0.00%
SHINHAN BANK - MANILA BRANCH	0.00	2,181,650,622.30	0.00%
SUMITOMO MITSUI BANKING CORPORATION-MANILA BRANCH	0.00	12,894,505,582.44	0.00%
THE BNK OF TOKYO-MITSUBISHI UFJ LTD	0.00	4,616,507,682.90	0.00%
UNITED OVERSEAS BANK LIMITED MANILA BRANCH	0.00	2,410,100,420.13	0.00%
MERCHANTS SAVINGS & LOAN ASSN INC	NA	NA	NA
SAMPAGUITA SAVINGS BANK INC	NA	NA	NA
TONGYANG SAVINGS BANK INC	NA	NA	NA
Grand Total	135,311,544,562.34	1,469,009,398,388.55	9.21%

Are NPLs the Right Numbers to Look At?

In a financial crisis, 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 loan 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, 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 loans 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 September 30, 2016, "Classified Loans and Other Risky Assets" of the Philippine Banks amounted to PhP 352.45 billion or almost 3 times the size of the Philippine Banking System's NPLs of PhP 135.31 billion for the same period.  Consequently, any write-offs of Classified Loans will have three times the impact of an NPL write-off.

Philippine Banking System
Classified Loans vs. NPLs
September 30, 2016
	Classified Loans	NPL	Classified Loans/NPL
Bank	(In PHP)	(In PHP)	(In %)
ING BANK N.V.	47,000,000.00	99.00	47474747.47%
BANK OF CHINA LIMITED-MANILA BRANCH	15,848,707,884.16	189,040,895.91	8383.75%
CITIBANK, N.A.	22,785,299,000.00	788,325,974.03	2890.34%
INTER-ASIA DEVELOPMENT BANK	209,357,052.81	8,568,049.77	2443.46%
VILLAGE BANK INC (A THRIFT BANK)	603,073,972.73	25,552,620.63	2360.13%
QUEZON COCONUT BANK INC (A THRIFT BANK)	12,152,688.84	604,828.80	2009.28%
AL-AMANAH ISLAMIC INVESTMENT BANK OF THE PHILS	14,086,000.00	1,092,048.97	1289.87%
YUANTA SAVINGS BANK PHILIPPINES INC	1,024,348,354.98	103,695,194.06	987.85%
QUEEN CITY DEVELOPMENT BANK INC OR QUEENBANK A THRIFT BANK	202,385,840.49	21,604,255.85	936.79%
BANK ONE SAVINGS AND TRUST CORP.	205,970,031.66	23,103,734.39	891.50%
KOREA EXCHANGE BANK	175,941,016.85	23,050,195.00	763.30%
TOWER DEVELOPMENT BANK	54,319,448.67	7,396,175.06	734.43%
METROPOLITAN BANK & TCO	19,055,851,661.68	2,689,483,124.87	708.53%
BANGKO KABAYAN INC	220,320,151.19	34,185,431.96	644.49%
PHIL TRUST COMPANY	5,841,000,000.00	1,179,597,115.48	495.17%
CORDILLERA SAVINGS BANK INC	59,782,351.93	13,254,102.64	451.05%
SECURITY BANK CORP	9,018,000,000.00	2,232,110,933.80	404.01%
RIZAL COMM'L BANKING CORP	7,321,622,960.92	1,939,990,833.94	377.41%
PHIL NATIONAL BANK	31,761,472,087.58	8,518,905,151.86	372.84%
MALAYAN BANK SAVINGS AND MORT BANK INC	1,221,032,114.50	335,052,548.11	364.43%
FARMERS SAVINGS & LOAN BANK INC	136,247,915.39	37,783,485.46	360.60%
DUMAGUETE CITY DEV BANK INC	117,490,000.00	32,589,350.10	360.52%
BANK OF COMMERCE	6,285,939,163.38	1,855,644,519.55	338.75%
PHIL SAVINGS BANK	13,459,363,941.73	4,475,439,320.31	300.74%
CHINA BANKING CORP	13,726,884,623.81	4,609,661,975.35	297.79%
BDO UNIBANK INC	43,544,934,195.49	15,455,700,305.05	281.74%
UNION BANK OF THE PHILS	21,878,011,030.89	7,951,594,741.54	275.14%
ASIA UNITED BANK CORPORATION	5,146,941,679.70	1,875,670,487.58	274.41%
METRO CEBU PUBLIC SAVINGS BANK	69,370,057.76	25,320,036.75	273.97%
UNITED COCONUT PLANTERS BANK	17,194,349,897.69	6,312,050,076.31	272.41%
BATAAN DEVELOPMENT BANK	102,400,000.00	40,443,319.15	253.19%
CENTURY SAVINGS BANK CORPORATION	86,759,396.79	35,947,320.47	241.35%
MAYBANK PHILIPPINES INC	5,706,664,523.85	2,404,370,029.81	237.35%
FIRST CONSOLIDATED BANK INC (A PDB)	1,024,528,452.58	448,961,979.40	228.20%
LAND BANK OF THE PHILIPPINES	18,259,498,896.97	8,084,444,246.85	225.86%
UCPB SAVINGS BANK	2,181,355,529.00	985,724,574.61	221.29%
ROBINSONS BANK CORPORATION	1,526,179,000.00	713,818,768.00	213.80%
PHILIPPINE VETERANS BANK	3,836,350,040.61	1,920,148,532.73	199.79%
LEGAZPI SAVINGS BANK INC	883,980,000.00	450,487,116.92	196.23%
PENBANK INC (A PDB) (FORMERLY: PENINSULA RB INC)	296,242,091.71	151,518,194.30	195.52%
RCBC SAVINGS BANK INC	6,940,955,925.00	3,563,204,986.32	194.80%
BANK OF THE PHIL ISLANDS	14,801,896,325.95	7,996,789,257.69	185.10%
PRODUCERS SAVINGS BANK CORPORATION	753,621,689.97	426,272,143.49	176.79%
PHIL STAR DEVELOPMENT BANK INC	33,908,809.09	20,032,181.12	169.27%
OPTIMUM DEVELOPMENT BANK INC	185,189,526.98	109,784,239.74	168.68%
PHILIPPINE RESOURCES SAVINGS BANKING CORPORATION (PR SAVINGS	2,418,782,266.67	1,472,388,536.66	164.28%
PHILIPPINE BUSINESS BANK INC A SAVINGS BANK	2,367,490,000.00	1,467,430,873.86	161.34%
PHIL POSTAL SAVINGS BANK INC	2,534,624,128.80	1,640,187,915.83	154.53%
DUNGGANON BANK (A MICROFINANCE THRIFT BANK) INC	36,335,937.51	23,839,161.85	152.42%
CHINA BANK SAVINGS INC	6,852,660,489.96	4,502,299,081.60	152.20%
DEVELOPMENT BANK OF THE PHIL	10,226,118,883.42	6,851,069,030.92	149.26%
BANK OF MAKATI (A SAVINGS BANK) INC	2,551,784,516.35	1,715,453,783.07	148.75%
WORLD PARTNERS BANK (A THRIFT BANK)	187,799,679.96	137,429,309.44	136.65%
MARITIME SAVINGS BANK CORPORATION	37,184,837.32	27,430,460.04	135.56%
BPI FAMILY SAVINGS BANK INC	10,993,600,193.21	8,123,032,981.64	135.34%
STERLING BANK OF ASIA INC (A SAVINGS BANK)	1,313,560,000.00	972,054,930.79	135.13%
BPI DIRECT SAVINGS BANK INC	259,013,705.05	191,837,077.75	135.02%
PNB SAVINGS BANK	964,941,290.93	768,619,166.47	125.54%
LUZON DEVELOPMENT BANK	630,256,316.41	517,066,469.62	121.89%
EQUICOM SAVINGS BANK INC	767,785,477.86	636,811,214.24	120.57%
LIFE SAVINGS BANK INC	16,228,158.28	13,535,320.94	119.89%
CITY SAVINGS BANK INC	1,633,658,263.08	1,404,431,487.61	116.32%
UNIVERSITY SAVINGS BANK INC	100,558,998.28	89,865,132.18	111.90%
CTBC BANK (PHILIPPINES) CORP	535,248,141.84	485,595,806.28	110.23%
STANDARD CHARTERED BANK	2,430,141,947.52	2,277,960,050.89	106.68%
EAST WEST BANKING CORP	8,692,840,178.42	8,502,163,356.59	102.24%
SUN SAVINGS BANK INC	15,632,062.04	15,302,238.90	102.16%
1ST VALLEY BANK INC A DEVELOPMENT BANK	454,388,480.71	447,820,468.00	101.47%
LEMERY SAVINGS & LOAN BANK, INC.	3,508,364.52	3,502,078.88	100.18%
BANGKOK BANK PUBLIC CO LTD	45,436,941.43	45,436,941.43	100.00%
BATAAN SAVINGS AND LOAN BANK	1,889,208.47	1,889,208.47	100.00%
BPI GLOBE BANKO INC A SAVINGS BANK	344,373,998.27	344,373,998.27	100.00%
HIYAS BANKING CORPORATION	13,845,821.64	13,845,821.64	100.00%
MALASIQUI PROGRESSIVE SLB, INC	8,390,479.25	8,390,479.25	100.00%
OPPORTUNITY KAUSWAGAN BANK INC (A MICROFINANCE THRIFT BANK)	100,478,233.20	100,478,233.20	100.00%
PAMPANGA DEVELOPMENT BANK	47,394,335.63	54,092,503.50	87.62%
WEALTH DEVELOPMENT BANK CORPORATION	168,239,239.00	252,365,406.44	66.66%
HONGKONG & SHANGHAI BANKING CORP	440,764,978.22	806,160,007.79	54.67%
HSBC SAVINGS BANK(PHILS) INC	12,105,944.12	61,066,188.09	19.82%
PHIL BANK OF COMMUNICATIONS	111,033,320.42	2,283,081,027.49	4.86%
ANZ BANKING GROUP LTD	1,278,160.40	405,519,723.90	0.32%
BUSINESS AND CONSUMERS BANK (A DB)	0.00	15,921,373.30	0.00%
CARD SME BANK INC A THRIFT BANK	0.00	45,647,812.97	0.00%
CITYSTATE SAVINGS BANK INC	0.00	140,511,602.44	0.00%
ENTERPRISE BANK INC (A THRIFT BANK)	0.00	198,058,282.51	0.00%
MICROFINANCE MAXIMUM SB INC	0.00	5,801,774.13	0.00%
NORTHPOINT DEV'T BANK INC	0.00	100,382,035.16	0.00%
PACIFIC ACE SAVINGS BANK INC	0.00	3,201,492.69	0.00%
THE PALAWAN BANK (PALAWAN DB) INC	0.00	20,180,212.89	0.00%
BANK OF AMERICA N.A.	5,514,000.00	0.00	NA
BDO PRIVATE BANK, INC.	0.00	0.00	NA
CATHAY UNITED BANK CO LTD - MANILA BRANCH	0.00	0.00	NA
DEUTSCHE BANK AG	0.00	0.00	NA
INDUSTRIAL BANK OF KOREA MANILA BRANCH	0.00	0.00	NA
ISLA BANK(A THRIFT BANK) INC	0.00	0.00	NA
JP MORGAN CHASE BANK NATIONAL ASSN.	0.00	0.00	NA
MEGA INT'L COMM'L BANK CO LTD	1,031,431,578.00	0.00	NA
MERCHANTS SAVINGS & LOAN ASSN INC	NA	NA	NA
MIZUHO BANK LTD - MANILA BRANCH	230,576,340.62	0.00	NA
SAMPAGUITA SAVINGS BANK INC	NA	NA	NA
SHINHAN BANK - MANILA BRANCH	0.00	0.00	NA
SUMITOMO MITSUI BANKING CORPORATION-MANILA BRANCH	0.00	0.00	NA
THE BNK OF TOKYO-MITSUBISHI UFJ LTD	48,015,000.00	0.00	NA
TONGYANG SAVINGS BANK INC	NA	NA	NA
UNITED OVERSEAS BANK LIMITED MANILA BRANCH	0.00	0.00	NA
Grand Total	352,447,680,230.14	135,311,544,562.34	260.47%

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 Php 352.45 billion or 23.55% of the Php 1.50 trillion in Total Capital Cushion of Philippine Banks as of September 30, 2016.

Philippine Banking System
Classified Loans as % of Total Capital Cushion
September 30, 2016
	Classified Loans	Total Capital Cushion	Classified Loans/Total Capital Cushion
Bank	(In Php)	(In Php)	(In %)
VILLAGE BANK INC (A THRIFT BANK)	603,073,972.73	98,494,178.93	612.29%
BANK OF CHINA LIMITED-MANILA BRANCH	15,848,707,884.16	2,689,164,904.41	589.35%
INTER-ASIA DEVELOPMENT BANK	209,357,052.81	60,584,384.65	345.56%
PHIL POSTAL SAVINGS BANK INC	2,534,624,128.80	1,391,970,544.82	182.09%
UNITED COCONUT PLANTERS BANK	17,194,349,897.69	11,498,031,004.25	149.54%
CITIBANK, N.A.	22,785,299,000.00	18,852,261,103.84	120.86%
BATAAN DEVELOPMENT BANK	102,400,000.00	95,255,014.64	107.50%
MALAYAN BANK SAVINGS AND MORT BANK INC	1,221,032,114.50	1,180,703,393.55	103.42%
METRO CEBU PUBLIC SAVINGS BANK	69,370,057.76	68,780,352.78	100.86%
FARMERS SAVINGS & LOAN BANK INC	136,247,915.39	135,581,798.70	100.49%
LEGAZPI SAVINGS BANK INC	883,980,000.00	882,809,874.96	100.13%
EQUICOM SAVINGS BANK INC	767,785,477.86	802,760,372.06	95.64%
PHILIPPINE RESOURCES SAVINGS BANKING CORPORATION (PR SAVINGS	2,418,782,266.67	2,594,212,149.30	93.24%
YUANTA SAVINGS BANK PHILIPPINES INC	1,024,348,354.98	1,101,801,279.40	92.97%
LUZON DEVELOPMENT BANK	630,256,316.41	681,879,488.39	92.43%
WORLD PARTNERS BANK (A THRIFT BANK)	187,799,679.96	218,147,250.07	86.09%
BPI GLOBE BANKO INC A SAVINGS BANK	344,373,998.27	458,848,427.45	75.05%
UCPB SAVINGS BANK	2,181,355,529.00	2,930,976,589.08	74.42%
CHINA BANK SAVINGS INC	6,852,660,489.96	9,231,129,298.27	74.23%
OPPORTUNITY KAUSWAGAN BANK INC (A MICROFINANCE THRIFT BANK)	100,478,233.20	154,721,453.56	64.94%
PHIL SAVINGS BANK	13,459,363,941.73	22,246,259,757.61	60.50%
PENBANK INC (A PDB) (FORMERLY: PENINSULA RB INC)	296,242,091.71	501,085,850.93	59.12%
RCBC SAVINGS BANK INC	6,940,955,925.00	11,784,892,977.02	58.90%
PHILIPPINE VETERANS BANK	3,836,350,040.61	6,882,691,056.50	55.74%
MARITIME SAVINGS BANK CORPORATION	37,184,837.32	71,452,966.96	52.04%
MEGA INT'L COMM'L BANK CO LTD	1,031,431,578.00	2,105,844,697.67	48.98%
BANGKO KABAYAN INC	220,320,151.19	455,558,644.74	48.36%
PRODUCERS SAVINGS BANK CORPORATION	753,621,689.97	1,612,656,579.39	46.73%
CORDILLERA SAVINGS BANK INC	59,782,351.93	134,785,913.82	44.35%
DUMAGUETE CITY DEV BANK INC	117,490,000.00	270,074,160.98	43.50%
STERLING BANK OF ASIA INC (A SAVINGS BANK)	1,313,560,000.00	3,112,303,401.13	42.21%
TOWER DEVELOPMENT BANK	54,319,448.67	128,821,638.67	42.17%
MAYBANK PHILIPPINES INC	5,706,664,523.85	14,005,171,618.14	40.75%
BPI FAMILY SAVINGS BANK INC	10,993,600,193.21	28,622,351,260.29	38.41%
WEALTH DEVELOPMENT BANK CORPORATION	168,239,239.00	450,764,257.74	37.32%
BANK OF MAKATI (A SAVINGS BANK) INC	2,551,784,516.35	6,959,682,748.89	36.67%
UNIVERSITY SAVINGS BANK INC	100,558,998.28	276,973,352.60	36.31%
PHIL STAR DEVELOPMENT BANK INC	33,908,809.09	94,193,073.16	36.00%
BANK ONE SAVINGS AND TRUST CORP.	205,970,031.66	575,561,384.50	35.79%
BANK OF COMMERCE	6,285,939,163.38	17,903,872,851.40	35.11%
UNION BANK OF THE PHILS	21,878,011,030.89	62,404,019,383.94	35.06%
PAMPANGA DEVELOPMENT BANK	47,394,335.63	155,826,308.90	30.41%
QUEEN CITY DEVELOPMENT BANK INC OR QUEENBANK A THRIFT BANK	202,385,840.49	680,011,705.67	29.76%
DUNGGANON BANK (A MICROFINANCE THRIFT BANK) INC	36,335,937.51	122,172,520.67	29.74%
1ST VALLEY BANK INC A DEVELOPMENT BANK	454,388,480.71	1,578,449,331.56	28.79%
STANDARD CHARTERED BANK	2,430,141,947.52	8,465,797,581.97	28.71%
PHIL NATIONAL BANK	31,761,472,087.58	110,733,779,078.20	28.68%
PHIL TRUST COMPANY	5,841,000,000.00	21,870,665,739.27	26.71%
FIRST CONSOLIDATED BANK INC (A PDB)	1,024,528,452.58	3,977,305,800.36	25.76%
EAST WEST BANKING CORP	8,692,840,178.42	35,017,063,657.03	24.82%
LIFE SAVINGS BANK INC	16,228,158.28	67,061,879.66	24.20%
LAND BANK OF THE PHILIPPINES	18,259,498,896.97	76,380,341,399.61	23.91%
PHILIPPINE BUSINESS BANK INC A SAVINGS BANK	2,367,490,000.00	10,183,864,044.55	23.25%
CHINA BANKING CORP	13,726,884,623.81	59,196,817,840.27	23.19%
DEVELOPMENT BANK OF THE PHIL	10,226,118,883.42	48,006,013,548.91	21.30%
OPTIMUM DEVELOPMENT BANK INC	185,189,526.98	872,676,014.05	21.22%
ASIA UNITED BANK CORPORATION	5,146,941,679.70	24,331,987,761.55	21.15%
QUEZON COCONUT BANK INC (A THRIFT BANK)	12,152,688.84	59,221,680.74	20.52%
BDO UNIBANK INC	43,544,934,195.49	222,999,322,839.75	19.53%
CITY SAVINGS BANK INC	1,633,658,263.08	8,388,672,790.43	19.47%
BPI DIRECT SAVINGS BANK INC	259,013,705.05	1,770,071,069.57	14.63%
MALASIQUI PROGRESSIVE SLB, INC	8,390,479.25	59,947,162.60	14.00%
RIZAL COMM'L BANKING CORP	7,321,622,960.92	60,934,061,092.34	12.02%
ROBINSONS BANK CORPORATION	1,526,179,000.00	13,274,165,117.42	11.50%
KOREA EXCHANGE BANK	175,941,016.85	1,582,187,086.00	11.12%
SUN SAVINGS BANK INC	15,632,062.04	158,182,089.41	9.88%
METROPOLITAN BANK & TCO	19,055,851,661.68	193,503,073,725.35	9.85%
SECURITY BANK CORP	9,018,000,000.00	93,222,924,135.67	9.67%
BANK OF THE PHIL ISLANDS	14,801,896,325.95	161,652,937,291.06	9.16%
CENTURY SAVINGS BANK CORPORATION	86,759,396.79	969,488,170.41	8.95%
PNB SAVINGS BANK	964,941,290.93	11,680,844,277.56	8.26%
HIYAS BANKING CORPORATION	13,845,821.64	174,414,155.90	7.94%
MIZUHO BANK LTD - MANILA BRANCH	230,576,340.62	3,071,984,357.75	7.51%
CTBC BANK (PHILIPPINES) CORP	535,248,141.84	7,441,382,931.55	7.19%
LEMERY SAVINGS & LOAN BANK, INC.	3,508,364.52	79,492,740.49	4.41%
AL-AMANAH ISLAMIC INVESTMENT BANK OF THE PHILS	14,086,000.00	354,210,597.42	3.98%
BATAAN SAVINGS AND LOAN BANK	1,889,208.47	60,558,902.93	3.12%
HONGKONG & SHANGHAI BANKING CORP	440,764,978.22	14,185,618,654.53	3.11%
ING BANK N.V.	47,000,000.00	2,567,469,911.66	1.83%
BANGKOK BANK PUBLIC CO LTD	45,436,941.43	3,438,679,927.00	1.32%
PHIL BANK OF COMMUNICATIONS	111,033,320.42	10,809,644,841.50	1.03%
THE BNK OF TOKYO-MITSUBISHI UFJ LTD	48,015,000.00	4,967,420,166.75	0.97%
HSBC SAVINGS BANK(PHILS) INC	12,105,944.12	1,940,149,361.55	0.62%
BANK OF AMERICA N.A.	5,514,000.00	2,123,761,205.20	0.26%
ANZ BANKING GROUP LTD	1,278,160.40	4,421,958,168.30	0.03%
BDO PRIVATE BANK, INC.	0.00	5,064,379,487.11	0.00%
BUSINESS AND CONSUMERS BANK (A DB)	0.00	97,578,376.44	0.00%
CARD SME BANK INC A THRIFT BANK	0.00	603,735,496.45	0.00%
CATHAY UNITED BANK CO LTD - MANILA BRANCH	0.00	2,134,582,377.08	0.00%
CITYSTATE SAVINGS BANK INC	0.00	628,667,648.72	0.00%
DEUTSCHE BANK AG	0.00	2,144,753,150.08	0.00%
ENTERPRISE BANK INC (A THRIFT BANK)	0.00	318,128,721.32	0.00%
INDUSTRIAL BANK OF KOREA MANILA BRANCH	0.00	2,179,577,546.63	0.00%
ISLA BANK(A THRIFT BANK) INC	0.00	667,204,109.68	0.00%
JP MORGAN CHASE BANK NATIONAL ASSN.	0.00	1,406,989,114.78	0.00%
MICROFINANCE MAXIMUM SB INC	0.00	44,821,096.62	0.00%
NORTHPOINT DEV'T BANK INC	0.00	416,546,047.01	0.00%
PACIFIC ACE SAVINGS BANK INC	0.00	73,307,008.59	0.00%
SHINHAN BANK - MANILA BRANCH	0.00	2,204,319,050.00	0.00%
SUMITOMO MITSUI BANKING CORPORATION-MANILA BRANCH	0.00	13,065,157,352.82	0.00%
THE PALAWAN BANK (PALAWAN DB) INC	0.00	52,757,089.98	0.00%
UNITED OVERSEAS BANK LIMITED MANILA BRANCH	0.00	2,406,778,051.65	0.00%
MERCHANTS SAVINGS & LOAN ASSN INC		0.00	NA
SAMPAGUITA SAVINGS BANK INC		0.00	NA
TONGYANG SAVINGS BANK INC		0.00	NA
Grand Total	352,495,695,230.14	1,496,768,090,827.22	23.55%

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 Banking System?

In the aggregate, if Classified Loans amount to 23.55% of the banking system's Total Capital Cushion, then it follows that a 10% write-off of Classified Loans will reduce the total capital by 2.35% and a 50% write-off of classified loans will reduce the banking system's Total Capital Cushion by 11.78%.

Individual Banks

A 10% write-off of Classified Loans would severely impact (by 30% or more) the Total Capital Cushion of three banks (severely affected banks highlighted in yellow).

1. Village Bank Inc (61.23% reduction in Total Capital Cushion)
2. Bank of China Limited - Manila Branch (58.94% reduction in Total Capital Cushion)
3. Inter-Asia Development Bank (34.56% reduction in Total Capital Cushion)

A 20% write-off of Classified Loans will totally wipe out the Total Capital Cushion of two banks and severely impact the Total Capital Cushion of two more banks:

1. Village Bank Inc (122.46% reduction in Total Capital Cushion)
2. Bank of China Limited - Manila Branch (117.87% reduction in Total Capital Cushion)
3. Inter-Asia Development Bank (69.11% reduction in Total Capital Cushion)
4. Philippine Postal Savings Bank Inc (36.42% reduction in Total Capital Cushion)

A 30% 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 eight other banks:

1. Village Bank Inc (183.69% reduction in Total Capital Cushion)
2. Bank of China Limited - Manila Branch (176.81% reduction in Total Capital Cushion)
3. Inter-Asia Development Bank (103.67% reduction in Total Capital Cushion)
4. Philippine Postal Savings Bank Inc (54.63% reduction in Total Capital Cushion)
5. United Coconut Planters Bank (44.86% reduction in Total Capital Cushion)
6. Citibank, N.A. (36.26% reduction in Total Capital Cushion)
7. Bataan Development Bank (32.25% reduction in Total Capital Cushion)
8. Malayan Bank Savings and Mortgage Bank Inc (31.02% reduction in Total Capital Cushion)
9. Metro Cebu Public Savings Bank (30.26% reduction in Total Capital Cushion)
10. Farmers Savings & Loan Bank Inc (30.15% reduction in Total Capital Cushion)
11. Legazpi Savings Bank Inc (30.04% 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 fourteen more banks:

1. Village Bank Inc (244.92% reduction in Total Capital Cushion)
2. Bank of China Limited - Manila Branch (235.74% reduction in Total Capital Cushion)
3. Inter-Asia Development Bank (138.23% reduction in Total Capital Cushion)
4. Philippine Postal Savings Bank Inc (72.84% reduction in Total Capital Cushion)
5. United Coconut Planters Bank (59.82% reduction in Total Capital Cushion)
6. Citibank, N.A. (48.34% reduction in Total Capital Cushion)
7. Bataan Development Bank (43.00% reduction in Total Capital Cushion)
8. Malayan Bank Savings and Mortgage Bank Inc (41.37% reduction in Total Capital Cushion)
9. Metro Cebu Public Savings Bank (40.34% reduction in Total Capital Cushion)
10. Farmers Savings & Loan Bank Inc (40.20% reduction in Total Capital Cushion)
11. Legazpi Savings Bank Inc (40.05% reduction in Total Capital Cushion)
12. Equicom Savings Bank Inc (38.26% reduction in Total Capital Cushion)
13. Philippine Resources Savings Banking Corporation (37.30% reduction in Total Capital Cushion)
14. Yuanta Savings Bank Philippines Inc (37.19% reduction in Total Capital Cushion)
15. Luzon Development Bank (36.97% reduction in Total Capital Cushion)
16. World Partners Bank (34.44% reduction in Total Capital Cushion)
17. BPI Globe Banko Inc (30.02% 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 eighteen more banks:

1. 
   

1. Village Bank Inc (306.15% reduction in Total Capital Cushion)
2. Bank of China Limited - Manila Branch (294.68% reduction in Total Capital Cushion)
3. Inter-Asia Development Bank (172.78% reduction in Total Capital Cushion)
4. Philippine Postal Savings Bank Inc (91.04% reduction in Total Capital Cushion)
5. United Coconut Planters Bank (74.77% reduction in Total Capital Cushion)
6. Citibank, N.A. (60.43% reduction in Total Capital Cushion)
7. Bataan Development Bank (53.75% reduction in Total Capital Cushion)
8. Malayan Bank Savings and Mortgage Bank Inc (51.71% reduction in Total Capital Cushion)
9. Metro Cebu Public Savings Bank (50.43% reduction in Total Capital Cushion)
10. Farmers Savings & Loan Bank Inc (50.25% reduction in Total Capital Cushion)
11. Legazpi Savings Bank Inc (50.07% reduction in Total Capital Cushion)
12. Equicom Savings Bank Inc (47.82% reduction in Total Capital Cushion)
13. Philippine Resources Savings Banking Corporation (46.62% reduction in Total Capital Cushion)
14. Yuanta Savings Bank Philippines Inc (46.49% reduction in Total Capital Cushion)
15. Luzon Development Bank (46.21% reduction in Total Capital Cushion)
16. World Partners Bank (43.04% reduction in Total Capital Cushion)
17. BPI Globe Banko Inc (37.53% reduction in Total Capital Cushion)
18. UCPB Savings Bank (37.21% reduction in Total Capital Cushion)
19. China Bank Savings Inc (37.12% reduction in Total Capital Cushion)
20. Opportunity Kauswagan Bank Inc (32.47% reduction in Total Capital Cushion)
21. Philippine Savings Bank (30.25% reduction in Total Capital Cushion)

Please bear in mind that a number of these banks are already very weak and are in distress.  Please see a previous blog post: "The Top Distressed Philippine Banks as of September 30, 2016".  Moreover, their capital can be overstated.  See a previous blog post "Overstated Capital of Philippine Banks as of September 30, 2016".  As such, any reduction in their capital cushion could knock down an already weak bank.

Source: www.bsp.gov.ph