DBP claims bond transactions ‘legitimate’

THE STATE-OWNED Development Bank of the Philippines would have lost P10.7 billion and compromised its viability had it not sold securities to cut losses as market prices were dropping through the transactions now being questioned by the Commission on Audit (COA), the bank said.

In a statement explaining the controversial P712 million losses in securities trading, DBP said the transactions were “legitimate” and had been undertaken to limit losses and protect the bank’s financial condition as global market prices were falling.

The transactions that caught the COA’s attention were cited as “wash sales” because no real change in ownership occurred when DBP sold at a loss P14.3 billion worth of government securities to First Metro Investment Corp. and bought back these very same securities on the same day and at the same price at which they were sold. They were performed in a series of 28 trades from early January to March 2014 with the intention of taking out securities from its short-term trading portfolio and placing them in its book for long-term holdings.

But DBP pointed out that its risk oversight committee had given its approval to implement, on a timely basis, such strategy to shift a portion of the bank’s available-for-sale (AFS) portfolio to held-to-maturity and allow treasury to exert efforts to minimize losses. The bank added that these transactions were “legitimate.”

The bank cited minutes of the risk oversight committee meeting, which would show that the body had not approved any alleged “wash sale.”

“Had DBP done nothing, the bank could have lost approximately P10.7 billion by end-2014 instead of only P712 million. This was a decision to ring-fence the bank and contain the risks it faces. In so doing, it also ultimately protected the banking system,” the bank said.

“Had the bank lost P10.7 billion, its capital would have been so impaired that the bank would have fallen short of Basel 3 and Bangko Sentral metrics such as the capital adequacy ratio,” the DBP said.

Basel 3 framework required by banking regulators is a complex package of reforms designed to improve the ability of banks to absorb losses. It also extends the coverage of financial risks and requires a stronger firewall to protect banks especially during periods of stress.

Worse than falling short of Basel 3 requirements, DBP said the impaired capital would have put the bank in a “point of non-viability” (PONV) situation, putting at risk all of its debt issuances. Such a PONV status meant that it would have been barred from paying investors holding DBP notes, the bank said.

“Simply put, the bank would have defaulted and this would have affected the whole banking system, the country’s credit rating, and possibly trigger a call on the government’s sovereign guarantee covering DBP’s official development assistance loans,” the DBP said.

Furthermore, the DBP said nobody made money on the transactions. “Other than the standard mapping fees paid to the Philippine Dealing and Exchange Corp. (PDEx), no fees were paid to any party for the subject transactions,” it said. PDEx refers to the country’s fixed income trading platform.

“Also, the trading losses should not be taken in isolation as the bank took trading opportunities that offset these trading losses. In fact, the bank ended the year with net trading gains of over P420 million, which contributed to the bank’s net income of P4.6 billion in 2014,” it added.