Third Eye on the Third World

http://businessmirror.com.ph/

Date October 8, 2008

Author: John Mangun

BUSINESS MIRROR

“Outside The Box”

Title: “Are Filipino Banks in Trouble?”

The wildfire that is burning out of control through the US and Europe necessitates that we know exactly what is going on with our financial institutions.

All monetary and financial transactions are based on trust. The only way that a person can maintain trust is with full and complete information. A major problem for the West right now is that depositors do not trust the banks or their governments and banks do not trust other banks. In that climate, people start withdrawing their funds, banks raise interest rates for their lending to other banks as evidenced by the spike in London Interbank Offered Rate (LIBOR) rates, and credit and money stops flowing.

The recent disclosure by Banco de Oro (BDO) of its exposure to Lehman Brothers is a case in point. Because of the proper, both ethically and financially, handling of that situation, BDO held the trust of its customers.

This is not the time to be optimistic nor is it the time to be pessimistic. This is the time to realistic and that requires sound and factual information.

Everyone has a critical stake in the local banking system and that requires looking far beyond the headlines and the comments to the numbers. It is interesting and favorable to note that during these times of the more ‘developed’ countries experiencing panic in the streets, the Philippines reported the following data on the local banks.

From BusinessMirror: “Bad loans held by universal and commercial banks were down to 3.98 percent in July as measured by the non-performing loans (NPL) ratio. The NPL ratio dropped from 5.18 percent a year earlier. Total bad loans shrank 1.54 percent from June and were down 9.60 percent from a year earlier. [The end-July] NPL ratio is the lowest recorded since the onset of the 1997 Asian financial crisis”.

Not every financial institution such as Lehman and other companies is run by stupid incompetents. As the West’s financial system began showing problems as early as 2007, our banks were firming up their balance sheets with careful lending and continued disposal of non-performing assets.

Further in favor of our banks and another critical point, our banks are preparing themselves even more in the very unlikely event of future loan problems, by more fully protecting their financial position against defaults. “While bad loans continued to shrink, the BSP said the big banks’ NPL coverage ratio—or provisions for bad loans—strengthened to 97.86 percent from 96.60 percent in June and from 85.29 percent in July last year”. What that means is that our big banks put into reserve another 12 percent of the amount of these bad loans just in case the value of the NPLs falls and cannot be turned into cash. At a 97.86 percent coverage, these loans have been almost totally written off, so that any money that might still be recovered is a bonus.

Are we facing a credit crunch where there just is not any loan money available, an event that would slow the economy? Not happening and not likely. “Bank lending also shrank from June, with total loans down 1.2 percent in July. On yearly basis, however, total loans grew 17.9 percent as of July 2007”. Yes, the banks have become more cautious in the last months but overall, 2008 has seen more lending than 2007, despite the economic slowdown.

Not everything is perfect but never as bad as the ill-informed headlines might lead you to believe. One daily newspaper said that residential property loan problems were rising, mis-leading you into believing that maybe the Philippines is next for a housing loan crisis. It is true that foreclosed real and other properties grew 1.15 percent in the just ended third quarter from the second quarter 2008. But, and it is a big BUT, that was down 7.71 percent from 2007. Despite the terrible financial situation during the last six months, the picture is better than in boom-year 2007.

It is true that the banks are experiencing a slight increase in problems with their real estate lending portfolio. Problematic residential loans rose to 7 percent of total lending to individual home borrowers, from 5.6 percent at the end of June 2007 and 6.3 percent from the end of the first quarter 2008. Two factors are important in order interpret the significance and to see if there is any potential problem for the future.

What is the loan-loss provision carried on the books of the individual banks for any doubtful loans? Since 1997, the banks have been very conservative and prudent in setting aside money to cover potential losses. BDO is a good illustration as they carry excess reserves that are more than adequate to handle the approximate 4 billion peso exposure with Lehman.

Is the value of the underlying collateral, the real estate, valuable enough to cover the loan? Please remember that these Western banks would still be in fair financial shape if the value of the housing assets were not, in many cases, smaller than the face value of the loan. Never will you see a bank in the Philippines loan more than 80 percent (if that) of the value of the property. The worst-case scenario is that the banks might have to take back the property, said property worth more than the loan. Our local property values are not in trouble due to excessive supply or huge amounts of potential foreclosures.

We need to know the financial facts of our banks and based on those facts, we need to maintain our trust.

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