Clock ticking for banks to sell bad loans

It’s been seven months since the Philippines passed a law to encourage banks to sell bad loans, but there have been few takers.

Typically, investment firms buy these loans at a steep discount but Philippine banks are not in as bad shape as institutions elsewhere in the region and are unwilling to accept the firesale prices.

The Bangko Sentral ng Pilipinas (BSP) says non-performing loans (NPLs) at Philippine banks were at about 15 percent of the total loan portfolio, or about P258 billion, at the end of June.

The comparable figure was 16.75 percent in Thailand and about eight percent in Indonesia, but the latter figure is after the government restructured billions of dollars in bad loans.

"If 50 percent of your assets was NPLs, then out of desperation you will do anything," BSP Governor Rafael Buenaventura said recently. "At 15 to 20 percent, you can still survive. But we are saying survival is not good enough."

Deputy Governor Alberto Reyes said buyers were offering 30 to 35 centavos on the peso for bad loans and banks were not biting.

"That means banks will recognize losses of up to 70 percent. They want the offer to be at least 40 or 50 centavos, or higher," he told Reuters.

But neither the banks nor the investment companies appear likely to budge. The delays, along with rising political uncertainty after a mutiny by more than 300 soldiers in July, risk turning off foreign investors completely, analysts say.

And investment firms may lose interest after April 2005, the deadline for them to enjoy tax and investment perks offered by the Special Purpose Vehicle Act signed in January.

"I’m a little disappointed at how long things are taking," Vipul Bhagat, the country manager for International Finance Corp. (IFC), told Reuters.

Fed Up

"My concern is that the foreign investors who are interested in the Philippines at the moment... will basically get fed up with the situation and turn their attention elsewhere. And we think that will happen fairly soon."

Only one local asset management company had been formed as of July. Merrill Lynch was reported to have won a bid to buy the non-performing assets of the local unit of Taiwan’s International Commercial Bank of China. The value of the assets sold was not disclosed.

Metropolitan Bank and Trust Co. (Metrobank), the country’s top lender in terms of assets, entered into an agreement with Dutch cooperative Rabo Bank to sell assets worth about P16 billion in late 2001 but the deal has not been ratified.

IFC, part of the World Bank group, has been offering cheap financing to some investment firms setting up asset management companies to buy bad loans, hoping to bridge the price gap.

It is also willing to take a stake of as much as 20 percent in the asset management companies to jumpstart the disposal of non-performing assets, most of which were left in banks’ books after the 1997-98 Asian financial crisis.

Together with the Asian Development Bank, IFC is now working with the Bank of the Philippine Islands – the country’s second-biggest lender and a unit of Singapore’s DBS Group – as the bank seeks to sell foreclosed assets worth about P10 billion at appraised value.

BPI, with a consolidated bad loan ratio of 9.47 percent of total loans as of June 19, held an auction on July 15 that attracted three bidders – Merrill Lynch, Lehman Brothers and Goldman Sachs.

The bank gave itself 30 days to decide on the right buyer, but the internal deadline has lapsed with no deal sealed.

Sources said the investment firms’ bids were below the bank’s target price, but the bank said it was continuing negotiations with an interested buyer it did not name.

"It’s really a question of price," said Leonilo Coronel, executive director of the Bankers Association of the Philippines, which groups the country’s more than 40 commercial banks.

"There are some negotiations going on. But banks have a perception that their assets are worth more than what is being offered."

Following is a summary of Philippine banks’ now in talks to sell non-performing assets. – Reuters