Overstated Capital of Philippine Banks as of June 30, 2018

On July 25, 2012, the Bangko Sentral ng Pilipinas (BSP) encouraged banks that continue to reflect unbooked losses or "deferred charges" on their balance sheets to charge those losses against retained earnings.  This implies that the BSP now considers that these banks have amassed so much in Stockholder's Equity (SE) and Retained Earnings (RE) that "they can now afford to absorb higher charges without impairing their capital and also without making their shareholders unhappy."

But can these banks do so? The answer is: yes but only for some banks.  As can be seen from the table below, six banks have Deferred Charges as of June 30, 2018:

1. Bataan Development Bank (Deferred Charges of 2.12% of SE)
2. Bank of Commerce (Deferred Charges of 0.43% of SE)
3. Wealth Development Bank Corporation (Deferred Charges of 0.06% of SE)
4. Card SME Bank, Inc. (Deferred Charges of 0.00% of SE)

It must also be noted that one of these banks were ranked as  distressed (highlighted in yellow) as of March 31, 2018:

1. Bataan Development Bank (Distressed Ratio of 101.68%) 

For more information on distressed banks, please see the previous blog post: "The Top Distressed Philippine Banks as of March 31, 2018.



Retained Earnings

Only three banks have sufficient Retained Earnings (RE) to absorb their unbooked losses as of June 30, 2018:

1. Bataan Development Bank (8.18% of RE)
2. Wealth Development Bank Corporation (1.09% of RE)
3. CARD SME Bank (0.02% of RE)

One of the banks with  Deferred Charges has negative Retained Earnings.  As such, it does not have the capacity to absorb additional losses.

1. Bank of Commerce (Retained Earnings of - Php 429.40 million vs. Deferred Charges of Php 8.35 million)

 

The Financial Strength of Philippine Banks according to BSP: From Weakest to Strongest - As of June 30, 2018

A bank's Capital Adequacy Ratio is a measure of a bank's capital and financial strength. BSP requires Philippine banks to measure their capital adequacy in at least three defined ratios:

1. Total Capital Adequacy Ratio
2. Tier One Capital Adequacy Ratio
3. Common Tier One Adequacy Ratio.

For a more detailed understanding of these ratios, you can consult BSP's own implementation guidelines, Investopedia.com, or numerous past posts about this subject.

The basic idea behind these ratios is that the higher the ratio, the more solid the bank is in financial strength, the greater it's ability to absorb losses.  BSP's own minimum for most of these ratios is 6.00 but it generally recommends a minimum of 10.00, especially for large and more systemically important banks (those that are Too Big To Fail or TBTF for short).

In the aggregate, Philippine Universal and Commercial Banks are well capitalized. As of June 30, 2018, Total CAR is 15.75%, within the range of 15% to 20% of the last 31 years.

 


Every quarter, several Philippine Banks do not meet these guidelines. As of June 30, 2018, the banks that failed to meet BSP's recommended minimum capital requirements are as follows:


 TOTAL CAR:  

1. United Coconut Planters Bank (Total CAR of 7.19) 
2. Philippine Veterans Bank (Total CAR of 8.25)

TIER ONE CAR

Seven banks reported Tier One CAR of 0.00 as of June 30, 2018. Of those that did report Tier One CAR greater than 0.00, three banks have less than the BSP-recommended Tier One CARs of 10.00. These banks are:

1. United Coconut Planters Bank (Tier One CAR of 7.19)
2. Sterling Bank of Asia (Tier One CAR of 7.34)
3. Philippine Veterans Bank (Tier One CAR of 7.62)

COMMON EQUITY TIER ONE CAR

The BSP's reporting guidelines on the Common Equity Tier One CAR (CET1) only took effect as of January 1, 2014.  Banks only started reporting this ratio in their Published Statements of Condition for June 30, 2014.  Forty-five banks reported their CET1 Ratio as 0.00 for June 30, 2018.

However, of those banks that did report a CET1 Ratio other than 0.00, one bank reported CET1 Ratios below BSP's recommended ratio:

1. Philippine Veterans Bank (Common Equity Tier One CAR of 6.31)

The Total CAR, Tier 1 CAR, and Common Equity Tier 1 CAR of Philippine Banks as of June  30, 2018 is as follows:(Banks that do not meet BSP's minimum capital requirements are highlighted in yellow):

 

Philippine Banking System
TOTAL CAR
June 30, 2018
Bank	Type of Bank	Total CAR
UNITED COCONUT PLANTERS BANK	U/KB	7.19
PHILIPPINE VETERANS BANK	U/KB	8.25
ENTERPRISE BANK INC (A THRIFT BANK)	Thrift Bank	11.05
EQUICOM SAVINGS BANK INC	Thrift Bank	11.36
LAND BANK OF THE  PHILIPPINES	U/KB	11.46
CHINA BANK SAVINGS INC	Thrift Bank	11.59
STERLING BANK OF ASIA INC (A SAVINGS BANK)	Thrift Bank	11.88
MUFG BANK INC	U/KB	12.08
PHIL NATIONAL BANK	U/KB	12.19
EAST WEST BANKING CORP	U/KB	13.16
RCBC SAVINGS BANK INC	Thrift Bank	13.29
CHINA BANKING CORP	U/KB	13.50
BDO UNIBANK INC	U/KB	13.56
FARMERS SAVINGS & LOAN BANK INC	Thrift Bank	13.60
MIZUHO BANK LTD - MANILA BRANCH	U/KB	13.66
PHIL SAVINGS BANK	Thrift Bank	13.67
PRODUCERS SAVINGS BANK CORPORATION	Thrift Bank	13.81
UNION BANK OF THE PHILS	U/KB	13.81
UCPB SAVINGS BANK	Thrift Bank	14.15
RIZAL COMM'L BANKING CORP	U/KB	14.34
PHILIPPINE BUSINESS BANK INC A SAVINGS BANK	Thrift Bank	14.37
ASIA UNITED BANK CORPORATION	U/KB	15.01
DEVELOPMENT BANK OF THE PHIL	U/KB	15.05
PHIL BANK OF COMMUNICATIONS	U/KB	15.10
MAYBANK PHILIPPINES INC	U/KB	15.24
MALAYAN BANK SAVINGS AND MORT BANK INC	Thrift Bank	15.73
CITYSTATE SAVINGS BANK INC	Thrift Bank	15.87
CITIBANK, N.A.	U/KB	16.09
KEB HANA BANK - MANILA BRANCH	U/KB	16.47
BANK OF THE PHIL ISLANDS	U/KB	16.54
BANGKO KABAYAN INC	Thrift Bank	16.97
STANDARD CHARTERED BANK	U/KB	16.99
BDO PRIVATE BANK, INC.	U/KB	17.02
BPI FAMILY SAVINGS BANK INC	Thrift Bank	17.06
METROPOLITAN BANK & TRUST CO	U/KB	17.24
ROBINSONS BANK CORPORATION	U/KB	17.29
CTBC BANK (PHILIPPINES) CORP	U/KB	17.68
SECURITY BANK CORP	U/KB	17.79
BANK OF COMMERCE	U/KB	17.81
CARD SME BANK INC A THRIFT BANK	Thrift Bank	17.92
BATAAN DEVELOPMENT BANK	Thrift Bank	19.33
HONGKONG & SHANGHAI BANKING CORP	U/KB	19.55
BANK OF MAKATI (A SAVINGS BANK) INC	Thrift Bank	20.13
PHILIPPINE RESOURCES SAVINGS BANKING CORPORATION (PR SAVINGS	Thrift Bank	20.65
PENBANK INC (A PDB) (FORMERLY: PENINSULA RB INC)	Thrift Bank	21.00
MEGA INT'L COMM'L BANK CO LTD	U/KB	21.17
BPI DIRECT BANKO INC	Thrift Bank	21.44
WEALTH DEVELOPMENT BANK CORPORATION	Thrift Bank	21.77
HIYAS BANKING CORPORATION	Thrift Bank	21.88
PNB SAVINGS BANK	Thrift Bank	21.88
1st VALLEY BANK INC A DEVELOPMENT BANK	Thrift Bank	22.56
ANZ BANKING GROUP LTD	U/KB	22.58
INTER-ASIA DEVELOPMENT BANK	Thrift Bank	23.25
BUSINESS AND CONSUMERS BANK (A DB)	Thrift Bank	25.35
SUN SAVINGS BANK INC	Thrift Bank	26.36
UNIVERSITY SAVINGS BANK INC	Thrift Bank	26.60
METRO CEBU PUBLIC SAVINGS BANK	Thrift Bank	27.40
MARITIME SAVINGS BANK CORPORATION	Thrift Bank	28.18
DUMAGUETE CITY DEV BANK INC	Thrift Bank	29.71
FIRST CONSOLIDATED BANK INC (A PDB)	Thrift Bank	30.53
JP MORGAN CHASE BANK NATIONAL ASSN.	U/KB	31.58
PHIL TRUST COMPANY	U/KB	32.08
LEGAZPI SAVINGS BANK INC	Thrift Bank	32.95
QUEEN CITY DEVELOPMENT BANK INC OR QUEENBANK A THRIFT BANK	Thrift Bank	33.20
LIFE SAVINGS BANK INC	Thrift Bank	33.30
HSBC SAVINGS BANK PHILIPPINES	Thrift Bank	33.61
LEMERY SAVINGS & LOAN BANK, INC.	Thrift Bank	36.05
CORDILLERA SAVINGS BANK INC	Thrift Bank	36.11
MALASIQUI PROGRESSIVE SLB, INC	Thrift Bank	36.43
NORTHPOINT DEV'T BANK INC	Thrift Bank	37.61
BANGKOK BANK PUBLIC CO LTD	U/KB	37.73
MERCHANTS SAVINGS & LOAN ASSN INC	Thrift Bank	39.81
PAMPANGA DEVELOPMENT BANK	Thrift Bank	44.77
SHINHAN BANK - MANILA BRANCH	U/KB	46.71
YUANTA SAVINGS BANK PHILIPPINES INC	Thrift Bank	47.24
ING BANK N.V.	U/KB	49.47
ALLBANK	Thrift Bank	51.27
BANK OF CHINA LIMITED	U/KB	53.56
AL-AMANAH ISLAMIC INVESTMENT BANK OF THE PHILS	U/KB	56.56
SUMITOMO MITSUI BANKING CORPORATION - MANILA BRANCH	U/KB	57.81
QUEZON COCONUT BANK INC (A THRIFT BANK)	Thrift Bank	59.74
BANK OF AMERICA N.A.	U/KB	60.33
BANK ONE SAVINGS AND TRUST CORP.	Thrift Bank	60.57
PACIFIC ACE SAVINGS BANK INC	Thrift Bank	68.12
CENTURY SAVINGS BANK CORPORATION	Thrift Bank	75.14
PHIL STAR DEVELOPMENT BANK INC	Thrift Bank	78.75
INDUSTRIAL BANK OF KOREA MANILA BRANCH	U/KB	84.07
ISLA BANK(A THRIFT BANK) INC	Thrift Bank	118.06
UNITED OVERSEAS BANK LIMITED MANILA BRANCH	U/KB	128.24
FIRST COMMERCIAL BANK	U/KB	195.48
CATHAY UNITED BANK CO LTD - MANILA BRANCH	U/KB	334.63
HUA NAN COMMERCIAL BANK LTD MANILA BRANCH	U/KB	371.60
CITY SAVINGS BANK INC	Thrift Bank	NA
DEUTSCHE BANK AG	U/KB	NA
LUZON DEVELOPMENT BANK	Thrift Bank	NA
MAXIMUM SAVINGS BANK	Thrift Bank	NA
OVERSEAS FILIPINO BANK	Thrift Bank	NA
THE PALAWAN BANK (PALAWAN DB) INC	Thrift Bank	NA

 

Philippine Banking System
Tier One CAR
June 30, 2018
Bank	Type of Bank	Tier One CAR
1st VALLEY BANK INC A DEVELOPMENT BANK	Thrift Bank	0.00
ALLBANK	Thrift Bank	0.00
BUSINESS AND CONSUMERS BANK (A DB)	Thrift Bank	0.00
ENTERPRISE BANK INC (A THRIFT BANK)	Thrift Bank	0.00
EQUICOM SAVINGS BANK INC	Thrift Bank	0.00
INTER-ASIA DEVELOPMENT BANK	Thrift Bank	0.00
MARITIME SAVINGS BANK CORPORATION	Thrift Bank	0.00
UNITED COCONUT PLANTERS BANK	U/KB	7.19
STERLING BANK OF ASIA INC (A SAVINGS BANK)	Thrift Bank	7.34
PHILIPPINE VETERANS BANK	U/KB	7.62
LAND BANK OF THE  PHILIPPINES	U/KB	10.61
CHINA BANK SAVINGS INC	Thrift Bank	10.66
RIZAL COMM'L BANKING CORP	U/KB	10.81
PHIL SAVINGS BANK	Thrift Bank	10.97
EAST WEST BANKING CORP	U/KB	11.01
UNION BANK OF THE PHILS	U/KB	11.23
DEVELOPMENT BANK OF THE PHIL	U/KB	11.37
MUFG BANK INC	U/KB	11.39
PHIL NATIONAL BANK	U/KB	11.42
ASIA UNITED BANK CORPORATION	U/KB	11.53
MAXIMUM SAVINGS BANK	Thrift Bank	11.87
MAYBANK PHILIPPINES INC	U/KB	11.98
BDO UNIBANK INC	U/KB	12.11
PHIL BANK OF COMMUNICATIONS	U/KB	12.25
RCBC SAVINGS BANK INC	Thrift Bank	12.65
MIZUHO BANK LTD - MANILA BRANCH	U/KB	12.73
CHINA BANKING CORP	U/KB	12.76
PRODUCERS SAVINGS BANK CORPORATION	Thrift Bank	13.26
UNIVERSITY SAVINGS BANK INC	Thrift Bank	13.30
UCPB SAVINGS BANK	Thrift Bank	13.39
PHILIPPINE BUSINESS BANK INC A SAVINGS BANK	Thrift Bank	13.44
FARMERS SAVINGS & LOAN BANK INC	Thrift Bank	13.60
METROPOLITAN BANK & TRUST CO	U/KB	14.63
MALAYAN BANK SAVINGS AND MORT BANK INC	Thrift Bank	15.23
CITIBANK, N.A.	U/KB	15.32
CITYSTATE SAVINGS BANK INC	Thrift Bank	15.38
SECURITY BANK CORP	U/KB	15.53
BANK OF THE PHIL ISLANDS	U/KB	15.65
KEB HANA BANK - MANILA BRANCH	U/KB	15.94
BPI FAMILY SAVINGS BANK INC	Thrift Bank	16.21
ROBINSONS BANK CORPORATION	U/KB	16.41
PHILIPPINE RESOURCES SAVINGS BANKING CORPORATION (PR SAVINGS	Thrift Bank	16.49
STANDARD CHARTERED BANK	U/KB	16.58
BANGKO KABAYAN INC	Thrift Bank	16.70
CTBC BANK (PHILIPPINES) CORP	U/KB	16.79
BDO PRIVATE BANK, INC.	U/KB	16.99
BANK OF COMMERCE	U/KB	17.11
CARD SME BANK INC A THRIFT BANK	Thrift Bank	17.18
HONGKONG & SHANGHAI BANKING CORP	U/KB	18.89
BANK OF MAKATI (A SAVINGS BANK) INC	Thrift Bank	20.13
PENBANK INC (A PDB) (FORMERLY: PENINSULA RB INC)	Thrift Bank	20.20
MEGA INT'L COMM'L BANK CO LTD	U/KB	20.22
BPI DIRECT BANKO INC	Thrift Bank	20.57
WEALTH DEVELOPMENT BANK CORPORATION	Thrift Bank	20.86
BATAAN DEVELOPMENT BANK	Thrift Bank	21.33
PNB SAVINGS BANK	Thrift Bank	21.39
HIYAS BANKING CORPORATION	Thrift Bank	21.52
ANZ BANKING GROUP LTD	U/KB	22.27
SUN SAVINGS BANK INC	Thrift Bank	25.47
METRO CEBU PUBLIC SAVINGS BANK	Thrift Bank	27.36
DUMAGUETE CITY DEV BANK INC	Thrift Bank	29.19
FIRST CONSOLIDATED BANK INC (A PDB)	Thrift Bank	29.65
JP MORGAN CHASE BANK NATIONAL ASSN.	U/KB	31.45
PHIL TRUST COMPANY	U/KB	31.73
LEGAZPI SAVINGS BANK INC	Thrift Bank	32.14
QUEEN CITY DEVELOPMENT BANK INC OR QUEENBANK A THRIFT BANK	Thrift Bank	32.47
HSBC SAVINGS BANK PHILIPPINES	Thrift Bank	32.91
LIFE SAVINGS BANK INC	Thrift Bank	33.06
LEMERY SAVINGS & LOAN BANK, INC.	Thrift Bank	34.86
CORDILLERA SAVINGS BANK INC	Thrift Bank	35.59
MALASIQUI PROGRESSIVE SLB, INC	Thrift Bank	36.43
BANGKOK BANK PUBLIC CO LTD	U/KB	36.76
NORTHPOINT DEV'T BANK INC	Thrift Bank	37.02
MERCHANTS SAVINGS & LOAN ASSN INC	Thrift Bank	39.16
SHINHAN BANK - MANILA BRANCH	U/KB	46.21
YUANTA SAVINGS BANK PHILIPPINES INC	Thrift Bank	47.24
ING BANK N.V.	U/KB	49.04
BANK OF CHINA LIMITED	U/KB	52.75
AL-AMANAH ISLAMIC INVESTMENT BANK OF THE PHILS	U/KB	55.91
SUMITOMO MITSUI BANKING CORPORATION - MANILA BRANCH	U/KB	56.99
QUEZON COCONUT BANK INC (A THRIFT BANK)	Thrift Bank	59.06
BANK ONE SAVINGS AND TRUST CORP.	Thrift Bank	59.94
BANK OF AMERICA N.A.	U/KB	60.06
PACIFIC ACE SAVINGS BANK INC	Thrift Bank	67.89
CENTURY SAVINGS BANK CORPORATION	Thrift Bank	74.16
PHIL STAR DEVELOPMENT BANK INC	Thrift Bank	78.56
INDUSTRIAL BANK OF KOREA MANILA BRANCH	U/KB	83.20
ISLA BANK(A THRIFT BANK) INC	Thrift Bank	117.65
UNITED OVERSEAS BANK LIMITED MANILA BRANCH	U/KB	127.37
FIRST COMMERCIAL BANK	U/KB	194.75
PAMPANGA DEVELOPMENT BANK	Thrift Bank	210.07
CATHAY UNITED BANK CO LTD - MANILA BRANCH	U/KB	333.91
HUA NAN COMMERCIAL BANK LTD MANILA BRANCH	U/KB	371.60
CITY SAVINGS BANK INC	Thrift Bank	NA
DEUTSCHE BANK AG	U/KB	NA
LUZON DEVELOPMENT BANK	Thrift Bank	NA
OVERSEAS FILIPINO BANK	Thrift Bank	NA
THE PALAWAN BANK (PALAWAN DB) INC	Thrift Bank	NA

 

Philippine Banking System
Common Tier 1 Ratio
June 30, 2018
Bank	Type of Bank	Common Tier 1 Ratio
1st VALLEY BANK INC A DEVELOPMENT BANK	Thrift Bank	0.00
ALLBANK	Thrift Bank	0.00
BANGKO KABAYAN INC	Thrift Bank	0.00
BANK OF AMERICA N.A.	U/KB	0.00
BANK OF CHINA LIMITED	U/KB	0.00
BANK OF MAKATI (A SAVINGS BANK) INC	Thrift Bank	0.00
BANK ONE SAVINGS AND TRUST CORP.	Thrift Bank	0.00
BATAAN DEVELOPMENT BANK	Thrift Bank	0.00
BUSINESS AND CONSUMERS BANK (A DB)	Thrift Bank	0.00
CARD SME BANK INC A THRIFT BANK	Thrift Bank	0.00
CENTURY SAVINGS BANK CORPORATION	Thrift Bank	0.00
CITYSTATE SAVINGS BANK INC	Thrift Bank	0.00
CORDILLERA SAVINGS BANK INC	Thrift Bank	0.00
DUMAGUETE CITY DEV BANK INC	Thrift Bank	0.00
ENTERPRISE BANK INC (A THRIFT BANK)	Thrift Bank	0.00
EQUICOM SAVINGS BANK INC	Thrift Bank	0.00
FARMERS SAVINGS & LOAN BANK INC	Thrift Bank	0.00
FIRST CONSOLIDATED BANK INC (A PDB)	Thrift Bank	0.00
HIYAS BANKING CORPORATION	Thrift Bank	0.00
INTER-ASIA DEVELOPMENT BANK	Thrift Bank	0.00
ISLA BANK(A THRIFT BANK) INC	Thrift Bank	0.00
LEMERY SAVINGS & LOAN BANK, INC.	Thrift Bank	0.00
LIFE SAVINGS BANK INC	Thrift Bank	0.00
MALASIQUI PROGRESSIVE SLB, INC	Thrift Bank	0.00
MALAYAN BANK SAVINGS AND MORT BANK INC	Thrift Bank	0.00
MARITIME SAVINGS BANK CORPORATION	Thrift Bank	0.00
MAXIMUM SAVINGS BANK	Thrift Bank	0.00
METRO CEBU PUBLIC SAVINGS BANK	Thrift Bank	0.00
NORTHPOINT DEV'T BANK INC	Thrift Bank	0.00
PACIFIC ACE SAVINGS BANK INC	Thrift Bank	0.00
PAMPANGA DEVELOPMENT BANK	Thrift Bank	0.00
PENBANK INC (A PDB) (FORMERLY: PENINSULA RB INC)	Thrift Bank	0.00
PHIL STAR DEVELOPMENT BANK INC	Thrift Bank	0.00
PHILIPPINE BUSINESS BANK INC A SAVINGS BANK	Thrift Bank	0.00
PHILIPPINE RESOURCES SAVINGS BANKING CORPORATION (PR SAVINGS	Thrift Bank	0.00
PRODUCERS SAVINGS BANK CORPORATION	Thrift Bank	0.00
QUEEN CITY DEVELOPMENT BANK INC OR QUEENBANK A THRIFT BANK	Thrift Bank	0.00
QUEZON COCONUT BANK INC (A THRIFT BANK)	Thrift Bank	0.00
STERLING BANK OF ASIA INC (A SAVINGS BANK)	Thrift Bank	0.00
SUN SAVINGS BANK INC	Thrift Bank	0.00
UNITED COCONUT PLANTERS BANK	U/KB	0.00
UNITED OVERSEAS BANK LIMITED MANILA BRANCH	U/KB	0.00
UNIVERSITY SAVINGS BANK INC	Thrift Bank	0.00
WEALTH DEVELOPMENT BANK CORPORATION	Thrift Bank	0.00
YUANTA SAVINGS BANK PHILIPPINES INC	Thrift Bank	0.00
PHILIPPINE VETERANS BANK	U/KB	6.31
LAND BANK OF THE  PHILIPPINES	U/KB	10.61
CHINA BANK SAVINGS INC	Thrift Bank	10.66
RIZAL COMM'L BANKING CORP	U/KB	10.81
PHIL SAVINGS BANK	Thrift Bank	10.97
EAST WEST BANKING CORP	U/KB	11.01
UNION BANK OF THE PHILS	U/KB	11.23
DEVELOPMENT BANK OF THE PHIL	U/KB	11.37
MUFG BANK INC	U/KB	11.39
PHIL NATIONAL BANK	U/KB	11.42
ASIA UNITED BANK CORPORATION	U/KB	11.53
BDO UNIBANK INC	U/KB	11.86
MAYBANK PHILIPPINES INC	U/KB	11.98
PHIL BANK OF COMMUNICATIONS	U/KB	12.25
RCBC SAVINGS BANK INC	Thrift Bank	12.65
MIZUHO BANK LTD - MANILA BRANCH	U/KB	12.73
CHINA BANKING CORP	U/KB	12.76
UCPB SAVINGS BANK	Thrift Bank	13.39
METROPOLITAN BANK & TRUST CO	U/KB	14.63
CITIBANK, N.A.	U/KB	15.32
SECURITY BANK CORP	U/KB	15.53
BANK OF THE PHIL ISLANDS	U/KB	15.65
KEB HANA BANK - MANILA BRANCH	U/KB	15.94
BPI FAMILY SAVINGS BANK INC	Thrift Bank	16.21
ROBINSONS BANK CORPORATION	U/KB	16.41
STANDARD CHARTERED BANK	U/KB	16.58
CTBC BANK (PHILIPPINES) CORP	U/KB	16.79
BDO PRIVATE BANK, INC.	U/KB	16.99
BANK OF COMMERCE	U/KB	17.11
HONGKONG & SHANGHAI BANKING CORP	U/KB	18.89
MEGA INT'L COMM'L BANK CO LTD	U/KB	20.22
BPI DIRECT BANKO INC	Thrift Bank	20.57
PNB SAVINGS BANK	Thrift Bank	21.39
ANZ BANKING GROUP LTD	U/KB	22.27
JP MORGAN CHASE BANK NATIONAL ASSN.	U/KB	31.45
PHIL TRUST COMPANY	U/KB	31.73
LEGAZPI SAVINGS BANK INC	Thrift Bank	32.14
HSBC SAVINGS BANK PHILIPPINES	Thrift Bank	32.91
BANGKOK BANK PUBLIC CO LTD	U/KB	36.76
MERCHANTS SAVINGS & LOAN ASSN INC	Thrift Bank	39.16
SHINHAN BANK - MANILA BRANCH	U/KB	46.21
ING BANK N.V.	U/KB	49.04
AL-AMANAH ISLAMIC INVESTMENT BANK OF THE PHILS	U/KB	55.91
SUMITOMO MITSUI BANKING CORPORATION - MANILA BRANCH	U/KB	56.99
INDUSTRIAL BANK OF KOREA MANILA BRANCH	U/KB	83.20
FIRST COMMERCIAL BANK	U/KB	194.75
CATHAY UNITED BANK CO LTD - MANILA BRANCH	U/KB	333.91
HUA NAN COMMERCIAL BANK LTD MANILA BRANCH	U/KB	371.60
CITY SAVINGS BANK INC	Thrift Bank	NA
DEUTSCHE BANK AG	U/KB	NA
LUZON DEVELOPMENT BANK	Thrift Bank	NA
OVERSEAS FILIPINO BANK	Thrift Bank	NA
THE PALAWAN BANK (PALAWAN DB) INC	Thrift Bank	NA

A Simple Stress Test of Philippine Banks as of March 31, 2018

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 138.02 billion or 8.58% of the PhP 1,708.92 billion in Stockholders Equity (SE) as of March 31, 2018.  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.

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

1. Overseas Filipino Bank Inc (206.16% decline in SE)
2. Enterprise Bank Inc (72.74% decline in SE)
3. Equicom Savings Bank (42.35% of SE)
4. Luzon Development Bank (36.57% decline in SE)
5. UCPB Savings Bank (33.87% decline in SE)
6. Sterling Bank of Asia Inc (32.46% decline in SE)
7. Philippine Veterans Bank (30.75% decline in SE)
8. Legazpi Savings Bank Inc (30.31% decline in SE)
9. The Palawan Bank Inc (26.27% decline in SE)

Some of these banks are distressed. For more information regarding this, please read The Top Distressed Philippine Banks as of March 31, 2018).

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 March 31, 2018, "Classified Loans and Other Risky Assets" of the Philippine Banks amounted to PhP 378.13 billion or more than two times the size of the Philippine Banking System's NPLs of PhP 146.70 billion for the same period.  Consequently, any write-offs of Classified Loans will have more than twice the impact of an NPL write-off.

 
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 378.13 billion or 20.32% of the Php 1.86 trillion in Total Capital Cushion of Philippine Banks as of March 31, 2018.

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 20.32% 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 2.03% and a 50% write-off of classified loans will reduce the banking system's Total Capital Cushion by 10.16%.


Individual Banks

A 10% write-off of Classified Loans would severely impact (by 25% or more) the Total Capital Cushion of two banks (severely affected banks highlighted in yellow).

1. Overseas Filipino Bank (40.45% reduction in Total Capital Cushion)
2. Inter-Asia Development Bank (38.13% reduction in Total Capital Cushion)

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

1. Overseas Filipino Bank (80.89% reduction in Total Capital Cushion)
2. Inter-Asia Development Bank (76.26% reduction in Total Capital Cushion)
3. Bangko Kabayan Inc (41.22% reduction in Total Capital Cushion)
4. United Coconut Planters Bank (39.74% reduction in Total Capital Cushion)
5. Yuanta Savings Bank (33.16% reduction in Total Capital Cushion)
6. Bank of China Limited - Manila Branch (25.28% 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 25% or more) the Total Capital Cushion of nine other banks:

1. Overseas Filipino Bank (121.34% reduction in Total Capital Cushion)
2. Inter-Asia Development Bank (114.39% reduction in Total Capital Cushion)
3. Bangko Kabayan Inc (61.83% reduction in Total Capital Cushion)
4. United Coconut Planters Bank (59.61% reduction in Total Capital Cushion)
5. Yuanta Savings Bank (49.74% reduction in Total Capital Cushion)
6. Bank of China Limited - Manila Branch (37.93% reduction in Total Capital Cushion)
7. Malayan Bank Savings and Mortgage Bank Inc (36.77% reduction in Total Capital Cushion)
8. RCBC Savings Bank Inc (34.02% reduction in Total Capital Cushion)
9. Bataan Development Bank (28.85% reduction in Total Capital Cushion)
10. Luzon Development Bank (26.70% reduction in Total Capital Cushion)
11. Legazpi Savings Bank Inc (26.17% 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 25% or more) the Total Capital Cushion of thirteen more banks:

1. Overseas Filipino Bank (161.79% reduction in Total Capital Cushion)
2. Inter-Asia Development Bank (152.52% reduction in Total Capital Cushion)
3. Bangko Kabayan Inc (82.44% reduction in Total Capital Cushion)
4. United Coconut Planters Bank (79.48% reduction in Total Capital Cushion)
5. Yuanta Savings Bank (66.32% reduction in Total Capital Cushion)
6. Bank of China Limited - Manila Branch (50.57% reduction in Total Capital Cushion)
7. Malayan Bank Savings and Mortgage Bank Inc (49.03% reduction in Total Capital Cushion)
8. RCBC Savings Bank Inc (45.36% reduction in Total Capital Cushion)
9. Bataan Development Bank (38.46% reduction in Total Capital Cushion)
10. Luzon Development Bank (35.60% reduction in Total Capital Cushion)
11. Legazpi Savings Bank Inc (34.90% reduction in Total Capital Cushion)
12. Equicom Savings Bank Inc (31.62% reduction in Total Capital Cushion)
13. China Bank Savings Inc (29.68% reduction in Total Capital Cushion)
14. Philippine Resources Savings Banking Corporation (29.07% reduction in Total Capital Cushion)
15. Robinson Bank Corporation (28.75% 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 sixteen more banks:

 

 

1. Overseas Filipino Bank (202.23% reduction in Total Capital Cushion)
2. Inter-Asia Development Bank (190.65% reduction in Total Capital Cushion)
3. Bangko Kabayan Inc (103.05% reduction in Total Capital Cushion)
4. United Coconut Planters Bank (99.35% reduction in Total Capital Cushion)
5. Yuanta Savings Bank (82.89% reduction in Total Capital Cushion)
6. Bank of China Limited - Manila Branch (63.21% reduction in Total Capital Cushion)
7. Malayan Bank Savings and Mortgage Bank Inc (61.29% reduction in Total Capital Cushion)
8. RCBC Savings Bank Inc (56.70% reduction in Total Capital Cushion)
9. Bataan Development Bank (48.08% reduction in Total Capital Cushion)
10. Luzon Development Bank (44.50% reduction in Total Capital Cushion)
11. Legazpi Savings Bank Inc (43.62% reduction in Total Capital Cushion)
12. Equicom Savings Bank Inc (39.53% reduction in Total Capital Cushion)
13. China Bank Savings Inc (37.10% reduction in Total Capital Cushion)
14. Philippine Resources Savings Banking Corporation (29.07% reduction in Total Capital Cushion)
15. Robinson Bank Corporation (36.34% reduction in Total Capital Cushion)
16. UCPB Savings Bank (30.19% reduction in Total Capital Cushion)
17. Philippine Savings Bank (27.78% reduction in Total Capital Cushion)
18. Penbank Inc (27.11% reduction in Total Capital Cushion)
19. Philippine Veterans Bank (26.81% 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 Marc 31, 2018".  Moreover, their capital can be overstated.  See a previous blog post "Overstated Capital of Philippine Banks as of March 31, 2018".  As such, any reduction in their capital cushion could knock down an already weak bank.

 

 Source: www.bsp.gov.ph