MANILA, Philippines—Seven banks in the Philippines have exposure to bankrupt US investment banking giant Lehman Brothers worth a total of $386 million but the banking system is widely believed to be in a good position to withstand the world's worst financial meltdown.
Even assuming zero recovery of their exposure to Lehman -- the latest victim of the Wall Street-centered financial turbulence caused by the property downturn in the United States -- the fallout for these seven banks is not expected to exceed one percent of their total assets.

Based on a confidential Bangko Sentral ng Pilipinas estimate obtained by the Philippine Daily Inquirer, retail tycoon Henry Sy's Banco de Oro Unibank has the biggest exposure to Lehman at $134 million, followed by the state-owned Development Bank of the Philippines at $90 million, Metropolitan Bank and Trust Co. at $71 million, Rizal Commercial Banking Corp. at $40 million, Standard Chartered Bank (Manila branch) at $26 million, Bank of Commerce at $15 million and United Coconut Planters Bank at $10 million.

As a percentage of total assets, the exposure accounted for as low as 0.5 percent to as high as 1.7 percent on an individual basis, according to estimates which were discussed at the meeting of BSP's policy-making Monetary Board on Thursday.

As such, credit watchers and private analysts agree with the BSP's pronouncement that the exposure to Lehman was no cause for concern. The potential cost to banks in the Philippines is estimated to be much lower than in more sophisticated Asian neighbors like Japan, South Korea and Taiwan. Exposure to Lehman by financial systems in South Korea and Taiwan were estimated at $720 million and $2.5 billion, respectively.

Global credit watchdog Standard & Poor's said on Thursday that the direct exposures of banks in Asian emerging markets to Lehman Brothers were not expected to be significant enough to cause a downgrade in credit ratings.

"A few Taiwan, Philippine, and Chinese banks appear to have more direct exposure to Lehman Brothers entities," said S&P credit analyst Ritesh Maheshwari. "However, Asian banks' strengthened balance sheets, as a result of healthy profits over the vibrant economic environment during the past half a decade, can withstand the impact of likely losses from direct exposure, without rating downgrades."

In the case of Philippine banks, most exposures are in the form of credit-linked notes, corporate bonds as well as loans to the investment bank and its subsidiaries in the Philippines. However, these banks have started to put up provisions on the bulk of their exposure, banking sources said.

"We continue to believe that the risk to Asian banks is more from the impending economic slowdown and market turmoil than from direct exposure to the distressed U.S. financial institutions," S&P's Maheshwari said. He noted that Asian banks' exposure to structured finance products were similarly not material enough to do substantial damage.

The BSP has repeatedly allayed fears over the adverse impact of Lehman's collapse but nevertheless urged Philippine banks to brace themselves for continuing turbulence among large financial institutions in the US, the epicenter of the worst global financial shakeout in history. Some of the banks with exposure to Lehman – BDO, Metrobank and RCBC -- have earlier reported that they have set aside some provisions for this soured exposure.

Based on the BSP's estimates, BDO has set aside a buffer equivalent to 60 percent of its exposure while Metrobank and RCBC have provided for 70 percent and 52 percent of their exposure, respectively.

Meanwhile, central banks in the Asia-Pacific region are closely coordinating with each other to address the spillover effects of the crisis in Wall Street.

“Based on our informal discussions with EMEAP (Executives Meeting of East Asia Pacific Central Banks), so far the impact of the financial turbulence has been minimal with respect to the banks' exposure to the Lehman Brothers, Merill Lynch and even AIG but of course, what's important at this point is all of the central banks continue to monitor the developments,” BSP Deputy Governor Diwa Guinigundo said in a press briefing on the country's balance of payments position.

Guinigundo said the central banks in the region were in a resilient position to provide liquidity to the financial markets whenever needed.

New York-based think tank Global Source, in a report titled “Okay So Far” released Thursday, said the damage from the Lehman collapse was “limited.”

“This is most likely due to local banks' familiarity and access to high-yielding Philippine government papers for their dollar investemnts as well as the relative lack of sophistication of domestic financial players, which reduces the attractiveness of structured products in the local market,” said the report, written by Romeo Bernardo and Marie Christine Tang.

“It is thus not surprising that even for big banks which would presumably have more appetite for these types of instruments, the exposure is just a fraction of their assets,” the report said.

However, Global Source said global financial stress would likely be a continuing saga as far as the impact on banks' profitability was concerned.

Global Source said it would continue to monitor knock-on effects should local banks find that they have other counterparties with sizable exposures to Lehman. This includes at the global level other international financial institutions that may also suffer from collateral damage and at the local level, non-banks, especially highly liquid corporates that may have parked funds in Lehman and like securities.

The think tank said it would also monitor liquidity flow from financial institutions that are perceived to be particularly at risk to those that are seen as better shielded from Lehman’s bankruptcy. But it noted that this crisis was not likely to cause bank failures.

“As risks are better understood over time, these banks can be expected to regain public confidence. Moreover, the BSP has said that it stands ready to provide liquidity support should the need arise,” Global Source said.

“Banks today are however in a better position to withstand the shock considering that they have been able to reduce nonperforming assets over the years and raise the capital adequacy ratio to around 16 percent on a consolidated basis, comfortably above the 10 percent minimum regulatory requirement. They can also continue to rely on an economy supported by overseas workers’ remittances, which grew a robust 18 percent in the year to July,” Global Source said.