How can banks make money today?

As we ponder our fate in the wake of a serious economic downturn, we thought that we ought to learn some lessons from Japan. The Japanese banking system is rotten to the core and is one of the main reasons why Japan is suffering a decade long economic depression. The financial statements of the Japanese banks are in the realm of fiction. Loans that have long gone sour are still carried as if they were current. In fact, Japanese banks continue to support clients they should have cut off a long time ago.

Japanese banks came to mind when the conversation over lunch with some knowledgeable business sources turned to the topic of non performing loans (NPL) being reported by local banks. It was the consensus that they are under reporting their true NPLs. Worse, the local banks are fooling the banking industry’s own credit bureau by withholding information that could help all of them make informed decisions on who to lend to.

The flavor of the day was of course, Ramcar. There was some amount of gloating that one of the country’s largest banks made a collateral free credit grant of about P2 billion to the battery maker. If they could make a mistake like that, given how utterly conservative that bank is, things must be worse for everyone else. I wouldn’t blame that bank, however. Giving Ramcar credit would under normal conditions, be a no brainer.

I know the Ramcar owner and if I were a credit officer, I could have made the same mistake. I would have found it difficult to doubt the creditworthiness of Manolo Agustines. This is one entrepreneur who couldn’t do anything wrong. Well, almost. I guess he overextended himself. He got into the food business (Kentucky Fried Chicken), which was not bad, given its strong cash flow.

He joined the MRT consortium and that’s not bad either because government guarantees they won’t lose a centavo. They have an assured return with Juan dela Cruz carrying the commercial risk. Maybe it is his long standing investment in Philippine Airlines that is partly responsible.

The current economic situation must have also gotten into Manolo’s core business of making batteries. Not only did he suffer a sharp downturn in his export market, he also suffered rampant dumping in his home turf. The irony is, he is upgrading and expanding his battery manufacturing facilities to make him globally competitive. Maybe it is the Philacor syndrome all over again. Ronnie Concepcion, who successfully moved to become a global competitor, should probably share his secrets with his fellow Filipino industrialists.

The sour note in the Ramcar affair is the allegation that they have been less than forthright with the bankers on the extent of the company’s debt load. But there are those who say the bankers brought it upon themselves because they kept information from their own credit bureau.

No one however, is running away from any obligation. I last heard that Manolo offered to put in more equity in his businesses to trim down his huge P8-billion liability to his creditors. Maybe he will start selling from his exquisite collection of fine art to do that.

But something basic bothers me. If a normally no brainer credit grant to Ramcar is now a serious banking mistake, who can the banks lend to in these hard times? Clients who are creditworthy are postponing investments so they don’t have to borrow. Banks don’t exactly want to lend to those who need financing now.

We asked BSP Governor Paeng Buenaventura exactly how do banks make money in these troubled times? Tio Paeng smiled and said "foreign exchange" but quickly clarified that they are on to them on this one too. The BSP is not about to let the bankers speculate on the peso at the currency’s expense.

I wonder.

Malampaya

Former Pilipinas Shell top honcho Cesar Buenaventura called "to second the motion" the thoughts I expressed last Friday about giving Pat dela Paz a proper recognition for his key role in making Malampaya possible.

He adds that Camago is not a dry well (I didn’t say it was) and the reason why Occidental didn’t find it commercially attractive was because Occidental didn’t have the technology nor the financial resources to develop this complex deep water structure. It will however be a part of the Malampaya development.

I also got an e-mail from Ilocos, sent by a retired oil exploration professional who has made this country his home. Paul G Colyer wrote to say that he felt "compelled to applaud your article." Paul was a junior engineer working with Philippines Cities Service Co. in 1975 when he was sent to the Philippines to drill a well offshore Palawan. That was on a limestone reef that produced oil and led to a development called the Nido Project. You could say Paul was one of the pioneers in our oil exploration industry.

Paul eventually became the international drilling project manager with Occidental, who had purchased Cities Service Co. His next project was to drill a deep water exploration well called Camago and subsequently played a part in the Malampaya development planning process until Shell bought Occidental’s share in the area.

Paul wrote because he wanted "to echo your observation about the lack of recognition of the involvement of Velasco, De La Paz and Saldivar- Sali... The thing I remember best was the vigor, professionalism and devotion of all these people, they all really wanted a Philippine oil industry to rival Indonesia and Malaysia."

He concludes: "I am now retired and live in the Philippines and have no contact with any of the people I have referenced. I do remember them fondly, however, and feel a little recognition of their input, honesty and decency well deserved. It is an aspect of these people that I have almost never hear expressed, but I was there! As you rightly observed they laid the foundation for the Malampaya development."

Troubles ahead?

People keep on asking me what my astrologer friend is saying about how things look ahead. I didn’t have time to talk extensively with her so here is her text response to my query: "dangerous planetary energy build-up from now till the 23rd so ingat lang." She added that next month looks pretty messy.

I don’t know what to make of that but my usual paranoid mind can conjure some apocalyptic visions in a jiffy. Let’s start with why the Erap lawyers are bent on delaying the hearing when a quick one has the potential of clearing the former president if he is, as he claims, innocent. They must be waiting for a political solution, you know....

Inoculation

With bio terrorism in the air, everyone is trying to get inoculated. Dr. Ernie E. has a most interesting take on it but it has nothing to do with smallpox or anthrax.

Marcia: I’ve developed an immunity to being used by men as a sex object.

Jill: That’s not surprising, Marcia, considering the number of times you’ve been inoculated.

(Boo Chanco’s e-mail address is [email protected])