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  • The Near Death Experience Of Planters Development Bank 0 comments
    Jun 17, 2014 5:31 PM | about stocks: EPHE, CKGOY

    The Near Death Experience of Planters Development Bank

    On September 18, 2013, China Banking Corporation (China Bank) signed a Share Purchase Agreement (NYSE:SPA) to acquire 84.77% of the shares of Planters Development Bank (Planters), which was successfully closed on January 15, 2014. China Bank is expected to acquire the remaining 15.23% shares some time in 2014.

    The transaction valued Planters at at a Php 1.863 billion, which represents a premium of 100% over Planters' audited book value of Php 919 million (Php 3.597 billion before PFRS-related adjustments) as of December 31, 2012.

    Restatement

    On January 6, 2014, Planters' book value was reduced by Php 336.6 million to just Php 582.4 million as of December 31, 2012 as a result of a restatement of the bank's financial statements. As a result of the restatement, Planters' transaction value of Php 1.863 billion represents a 219% premium over Planters restated audited book value of Php 582.4 billion as of December 31, 2012.

    Planters Bank's audited equity of Php 3.597 billion as of December 31, 2012 was reduced by prior period adjustments totaling Php 3.015 billion to:

     

    1. recognize, in full, the provision for impairment losses on Non-Performing Assets (NPAs);
    2. reverse the deferred charges on NPAs sold; and
    3. charge the loss on litigation against current operations.

    The adjustments are detailed as follows:

      December 31, 2012
      In Php '000
    Equity  
    As previously reported 3,597,551
       
    Correction of the accounting for:  
    Deferred credit for impairment and credit losses on NPAs of Active Bank -1,051,600
    Losses on sale to:  
    SPV AMC -512,360
    SPV PAGTI -1,438,309
    Deferred Tax Assets 88,258
    PAS 19 -101,133
    Total Prior Period Adjustments -3,015,144
       
    As Restated 582,407

    Some of these losses were previously detailed in a series of previous blog posts beginning with "BSP's Ampaw Accounting System" and ending with "Overstated Capital of Philippine Banks as of December 31, 2013".

    Renewed Asset Sales

    In 2012, the board of Planters approved a program to dispose the bank's non-performing assets. The NPA disposal program involved the following:

     

    1. True Sale of NPAs to Philippine Asset Growth Two, Inc. (PAGTI);
    2. Discounted Sale of NPAs to the General Public;
    3. Planned Sale of Government Securities pledged with PDIC

    PAGTI

    On November 28, 2012, Planters entered into an Asset Sale and Purchase Agreement (ASPA) with PAGTI, an SPV Asset Management Company (SPV-AMC) that was incorporated on September 7, 2012 and financed by a consortium of investors, notably debt investors such as the International Finance Corporation (IFC) , ACP Investments Ltd., and OPIF Corporation and equity investors such as Altus Capital Partners, Inc. The PAGTI SPV was set up to invest, manage, and acquire non-performing assets of banks and other financial institutions.

    PAGTI acquired investment properties and non-performing loans with a carrying value of Php 2.542 billion from Planters for only Php 1.10 billion, resulting in a realized loss of Php 1.44 billion for Planters. Under a Monetary Board Resolution No. 2172 dated December 26, 2012, the BSP allowed Planters to defer and amortize the loss on the sale of the NPAs, beginning in 2013. So, while other banks such as PNB and PBCom were busy eliminating deferred charges during the same time period, Planters was adding even more deferred charges. However, the Monetary Board reduced the deferral period to only 5 years instead of the usual ten years.


    Planters Development Bank
    Deferred Charges of NPA Sale to PAGTI SPV
    Under M.B. 2172 (New) and R.A. 9182 (Old)
                 
                 
    M.B. 2172   R.A. 9182
      Cumulative Write Down     Cumulative Write Down
    Year In % In Php Billion   Year In % In Php Billion
    2013 7.00% 0.10   2013 5.00% 0.07
    2014 25.00% 0.36   2014 10.00% 0.14
    2015 44.00% 0.63   2015 15.00% 0.22
    2016 71.00% 1.02   2016 25.00% 0.36
    2017 100.00% 1.44   2017 35.00% 0.50
            2018 45.00% 0.65
            2019 55.00% 0.79
            2020 70.00% 1.01
            2021 85.00% 1.22
            2022 100.00% 1.44

    The reduction in the deferral period is very significant, because it would accelerate the write downs in equity significantly and, presumably, give Planters less time to make up for these losses, minimizing its usefulness. If Planters had been granted a ten-year deferral period, Planters would only have to realize a loss of Php 70 million in 2013 and another Php 70 million in 2014. Instead, it would recognize roughly Php 100 million in losses in 2013 and another Php 260 million in losses in 2014.

    Discounted Sales of NPAs to the General Public

    Under the approved NPA disposal program, the bank intended to implement a special sale of its NPAs at a 30% to 50% discount sometime in 2013. The special sale was expected to involve NPAs totaling Php 1.202 billion and generate a minimum of Php 530.39 in cash and a minimum of Php 422.01 in losses.

    Planters Development Bank
    Discounted Sale to the General Public
    Discounts of 30% to 50%
         
         
    NPAs Amount Discount
    NPAs    
    Investment Properties 456.49 37.99%
    NPLs 745.04 62.01%
    Total NPAs 1,201.53 100.00%
         
    Expected Cash Proceeds 530.39 44.14%
         
    Allowance for Impairment Losses 249.13 20.73%
    Expected Loss 422.01 35.12%

    Planters pursued the special sale of its non-performing investment properties. As of September 30, Planters disposed of Php 906.67 million of its investment properties, exceeding the planned sale of Php 456.49 million. The bank realized a loss of Php 465.38 million on these investment properties.

    The bank, however, was not able to dispose of Php 745.04 million worth of NPLs that consisted mostly of loans under litigation which will take years to resolve. As a result, the bank no longer plans to pursue its NPL disposal program.

    The bank still carries around Php 2.67 billion of net NPLs on its books as of September 30, 2013.

    Planned Sale of Government Securities Pledged with PDIC

    On December 5, 2012, the bank secured the consent of the PDIC for the early settlement of the Php 1.27 billion in Financial Assistance granted in 2002. This transaction was expected to generate trading gains of Php 0.88 billion. In 2013, the bank disposed of the government securities pledged with PDIC, realizing a gain of Php 912.36 million, which was used to offset the allowance for impairment losses on the NPA Disposal Program and the allowance for credit and impairment losses from the discounted sale to the general public.

    Financial Maneuvers minimize Losses

    As a result of all these financial maneuvers that took place in 2013, Planters realized a loss of only Php 16.443 million (Total Comprehensive Loss of Php 29.645 million) in the nine months up to September 30, 2013. Its equity base declined to Php 544.034 million as of September 30, 2013 from Php 582.407 million as of December 31, 2012.

    Further Losses Ahead

    The bank still maintains Php 745.04 million of non-performing loans that it cannot seem to sell even at a planned 30% to 50% discount. The losses the bank will realize on these NPLs are therefore much greater because the value of these loans is much closer to zero.

    Needless to say, the bank remains distressed.

    (click to enlarge)

    As can be seen from the chart above, Planters has consistently been considered distressed. In fact, it has consistently ranked as one of the Top Distressed Philippine Banks.

    Its NPL Coverage Ratio remains way below ideal.

    (click to enlarge)

    If Planters Development Bank were to adequately provision for their large NPLs, up to 50% of the bank's capital could be wiped out.

    (click to enlarge)

    It has continued to lose money.

    (click to enlarge)

    Its Capital Adequacy Ratios have fallen way below BSP's recommended minimum to very critical levels.

    (click to enlarge)

    It's Stockholder Equity net of Deferred Charges/Unbooked Losses, according to its Published Statements of Condition (which does not include all PFRS adjustments), will eventually hit zero.

    (click to enlarge)

    China Bank to the Rescue?

    Had the bank remained independent, it certainly would have failed, if not in 2013 or by 2015 at the latest. Its failure would have marked on of the biggest bank failures in recent history. Its failure would have dwarfed that of any recent bank failure by a factor of almost three times.

    (click to enlarge)

    Planters's acquisition by China Bank will bolster the bank's stability now that it is subsidiary of a much stronger bank. The acquisition will also result in a much needed infusion of at least Php 1.3 billion in additional equity in order to bring its capital adequacy ratios to a minimum of 10%.

    Whether or not the transaction was engineered by the regulatory authorities, Planters has nevertheless been rescued from the brink of death.

    Sources for all data are China Bank Financial Statements on www.pse.gov.phand Planters Development Bank's Financial Statements onwww.plantersbank.com.ph and www.bsp.gov.ph.bancofilipinofailure.blogspot.com/2014/05/the-near-death-experience-of-planters.html

    Stocks: EPHE, CKGOY
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