Banks can absorb ‘significant’ write-downs

BSP, IMF calm markets on conglomerates’ risks

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A bank teller prepares stacks of P500 denomination for the bank’s automated cash dispenser in this file photo. The country’s banking system is strong enough to absorb “significant” write-downs from major conglomerates without causing any contagion that could restrict others’ access to finance, according to the Bangko Sentral ng Pilipinas. AFP PHOTO/ROMEO GACAD

The country’s banking system is strong enough to absorb “significant” write-downs from major conglomerates without causing any contagion that could restrict others’ access to finance and, in the process, choke economic activity.

The Bangko Sentral ng Pilipinas (BSP) on Wednesday tried to calm markets after reports citing a warning from the International Monetary Fund (IMF) regarding the possibility of defaults by “highly leveraged” conglomerates, which could destabilize the country’s growing economy.

“We continuously monitor risks. In doing so, we look out for possible stress points where risks can emanate,” BSP Governor Amando M. Tetangco Jr. told reporters. “Even our stress tests show that even with significant write-downs, the banks would still be able to absorb it and remain well above the minimum (capital adequacy ratio) requirement.”

A bank’s capital adequacy measures the amount of capital it has set aside to cover potential losses coming from defaults. Latest data from the BSP showed the country’s major large banks had an average capital adequacy ratio of 17.28 percent—well above the minimum 10 percent required by regulators.

Tetangco’s statement followed reports citing an April 2013 document from the IMF warning of possible defaults by local conglomerates that could lead to a sharp rise in bad loans held by banks.

This possible rise in bad loans could prompt local banks to either raise more capital to offset the deterioration in asset quality or lend less to the businesses and households.

The IMF said that while the risk of defaults by major conglomerates was “low,” the BSP should still consider restricting access to credit for companies facing a wider range of risk due to the nature of their diversified operations.

In a statement on Wednesday, the IMF pointed out that the risks for conglomerates was clearly classified as “low” and should not distract market players from the Philippines’ “solid macroeconomic fundamentals.”

The IMF warning that was originally published in April, but reported in local media only this week, spurred a selloff of shares in San Miguel Corp., which has interests in the food and beverage, oil, infrastructure, transportation and telecommunications sectors.

From P93 at the end of last week, San Miguel’s share price fell to a low of P76.40 on Wednesday before closing at P85 each.

Amid the sell-off of San Miguel shares, Tetangco said the IMF’s warning was “generic in nature.” “It was not referring to any specific conglomerate,” he said.

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  • eight_log

    Frankly, I make decisions based on the decisions or words from BSP … more often than not, I GO THE OPPOSITE!!!!

  • DonQuixoteDeRizal

    This is another ‘I told you so moment’ for me.

    Few months ago, I felt that SMC is in trouble based on a very simple observation.
    Mr. Ang, the president of the company, became the spokesperson of SMC telling us about the 30 billion us dollars he will invest on very diverse projects such as new international airport, power plants, civil infrastructure, etc. How on earth he can finance it while taking a loan of 2 billion USD to pay another loan? Something is amiss somewhere.

    Now the reality is coming out. There seems to be a SMC bubble and it is ready to burst at any moment.

    • kismaytami

      Don’t worry, chinky businessmen always have a tricky way out. Remember how ongpin defrauded the government and made taxpayers’ money as collateral? Oh, and danding cojuangco who defrauded coconut farmers.

  • Guest

    Sir Armand,

    Could you be more specific?

    a. If banks can absorb ‘significant’ write-downs, which specific banks po?
    b. If banks can absorb ‘significant’ write-downs, how much is ‘significant’?
    c. If banks can absorb ‘significant’ write-downs, do you foresee write-downs?
    d. If you do foresee write-downs, what are the likely causes?
    e. If you do foresee write-downs, which banks are likely to be affected?
    f.. If you do foresee write-downs, will you tighten audit on these banks now?
    g. If you had to issue a statement about RRR and write-downs, what does it mean?

  • Chrisnadal19

    lay down the figures..

  • Unicahija

    Of course BSP has to calm market jitters. That’s part of BSP’s job. It’s also part of BSP’s job not to be too open and transparent about the inadequacies and anomalies they find during their bank audits on a periodic basis. That’s because BSP employees could be hounded by lawsuits that can drag on for years. The best example of course is former CB governor Jobo Fernandez who was hounded by Banco Filipino forever. For small potatoes like BSP supervisors, being hounded by lawsuits from banks could ruin you financially. That’s why BSP supervisors learn to see no evil, speak no evil and hear no evil and report no evil. Reserve requirements may be overstated, bad loans may be understated, defaults may be under-reported, these are standard practices that BSP can not be too strict about or risk lawsuits from banks. BSP only comes in when sh*t finally hits the fan and the little guy, the ordinary helpless Filipino depositors are left holding the bag. By then, it’s always too late. To small depositors out there, just keep your eyes open, keen an ear on the ground.

  • Roland_F

    It’s not only San Miguel which is expanding rapidly on a debt financed spree (from their core F&B, now into airports, road construction, power plants, airlines …etc…) especially since the Cojuanco-Aquino dynasty regained presidency 3 years ago.

    When the real estate bubble (building ten-thousands of high price condos in Manila and central Luzon) bursts then high leveraged Ayala Land (BPI) or SM properties (BDO) are in deep trouble as well.

    And do not to forget that a decade ago Lucio Tan bought PNB only because they were financing the main loan portfolio of notorious loss making PAL.

    All big banks in PH are belonging to some tycoons conglomerate with lots of in-group risk taking – tycoon first – risk limitlast. Whereas in Europe usually the credit exposure to a single client (conglomerate) is limited to a fraction of the core capital of the bank – but nothing like this is done in Philippines.

    • Unicahija

      “All big banks in PH are belonging to some tycoons conglomerate with lots
      of in-group risk taking – tycoon first – risk limit last.”

      Reminds me of the DOSRI loans of the 70s and 80s. What a headache it was for Licaros and Laya. At one point, Laya even had to flat out lie to IMF or WB about our foreign reserves by overstating it by several hundreds of millions. In short, I’d be careful where I place my money.

    • Guest

      stay out of real-estate and property development stocks then.

      • Roland_F

        Thinking a little deeper:

        (1) It’s not only the real estate, sector what if a high ‘sin’ tax or smoking ban or …… is hitting some cash cow of a conglomerate ? Or some airline is grounded, or banned from international routes, or …. — a heavy hit for a bank who is the main lender when the loan turns nonperforming.

        (2) The problem is that there is a conflict of interest between risk management of a bank (not all eggs into 1 basket) and the strategic expansion goals of the tycoons conglomerate it belongs to. So guess who will get his will some small bank employee of risk management or the tycoon owner of the bank …..

        (3) And this risk is endangering investments/deposits of normal customers of a bank, who don’t want to gamble on a specific industry with stocks or corporate bonds – just deposit at a bank.

        (4) The PDIC can only bail out smaller rural banks or max the B.F. size — if a big bank is failing, millions of depositors will go empty handed as PDIC reserves are tiny compared to the deposits in the big 4 for example. So it will be like during the Euro-crisis : too big to fail – the state comes to the rescue to bail out irresponsible risky lending habits of banks – and the state finances goes bust in the rescue process itself.

  • joni_depp

    This could open up a Pandora’s box about the true state of the Philippine economy. Philippine banks were shielded from the 2008 world financial meltdown because they were highly regulated and were very prudent. However, the effects of QE created huge pools of liquidity and may have enticed banks to take on more risks. The dizzying rise of stocks and real property also prompted banks to become less vigilant.

    President Aquino himself fed this frenzy, declaring last January at the World Economic Forum at Davos that:

    “I won’t be surprised if we make it to the Guinness Book of World Records because of the strong performance of our stock exchange.”

    No doubt, excess liquidity during the past 5 years has created bubbles within the Philippine economy. The case of San Miguel is only one bubble. There is also a huge real estate bubble. The IMF itself has called attention to these dangers. President Aquino and his economic managers have been denying the existence of bubbles. Now they have to face reality squarely.

  • carlcid

    The IMF was pointing out the existence of potential flashpoints in the Philippine economy when it cited a certain overleveraged conglomerate. Philippine banks have a total exposure of about P800 billion in loans to this conglomerate. For an economy as puny as the Philippines’, any default on this amount is massive enough to cause widespread damage in the banking system. This was the IMF’s way of warning Philippine economic policymakers that banks were falling into the trap of being lulled into thinking that some borrowers were “too big to fail”.

    In the end, Ramon Ang outed himself as the culprit although, with typical bravado, he defiantly declared that he MAY buy back SMC shares and take it private. Audacious, perhaps, but foolish. Because if RSA seriously wanted to buy back SMC shares, he would have allowed the rumors to run their course and let the shares drop to bargain basement prices before buying them back.

    End of the story? I think not. Because what the IMF has pointed out is that the Philippine banking system, and the Philippine economy, are not as sound as the President and his economic managers have been boasting. The hype has gotten ahead of itself, and created a sense of complacency among Philippine leaders and regulators who seem to have swallowed their own propaganda hook, line and sinker.

  • Weder-Weder Lang

    Tetangco is being less than forthright, and he has reasons to be. The IMF report already came out in Tiglao’s article in Manila Times last Sunday Jul 14.

  • http://www.cloudcomputing.net/ CloudCompUlap

    Can banks absorb significant write-downs according to BSP?
    Ultimately yes, because the gov’t can always bail out banks or infuse new capital if the magnitude of the problem is too big to fail. Indirectly, the gov’t will be bailing out SMC. The fact that SMC was allowed to grow, to overleverage and to become too big to fail raises many questions about gov’t regulatory oversight. Another thing to take note is that taxpayers’ money will be used for the write-downs and bail-outs.

    Has BSP conducted a stress test or an impact analysis of the extent of the write-downs should SMC implode?
    None whatsoever. In the absence of that, BSP Governor Tetangco’s reassurance is a little premature.

    Are taxpayers willing to absorb this significant write-down?
    No. But taxpayers don’t really a choice on the matter, do they? Let’s also not forget that Danding was President Aquino’s election donor last 2010 and their families have patched up many years ago.

    Here’s some analysis done on SMC, judge for yourself.
    SMC is all over the place. They’re overleveraged. They rely heavily on loans for expansion. Their cash position is weak. When QE tapers off,patay ang liquidity nila. The banks that extended loans heavily to SMC will also be brought down together with SMC. Then a credit crunch. Some numbers from SMC’s FS:

    pinoymoneytalk,com/forum/index.php?topic=44794.0

    • regd

      You mean this is not accurate and never conducted? “Even our stress tests show that even with significant write-downs, the banks would still be able to absorb it and remain well above the minimum (capital adequacy ratio) requirement.”

      • carlcid

        Government has been known to fudge facts in the face of a predicament. It’s a continuing scenario, and a tiger will not be able to change its stripes.

      • Guest

        it’s inaccurate and rarely conducted. i don’t remember one being conducted in recent months. not from here where i sit and where manila bay sparkles. but you are free to place your money on A.T.’s words. i’ll let you know when the storm’s finally here. do you always comment in biz section, so i can find you?

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