Minimal risk seen from Hanjin crisis

Five creditor banks stable despite $412-M default, Bangko Sentral says

Financial regulators stressed the stability of the Philippine banking system amid uncertainty over how the bankruptcy of a Korean shipbuilder—the biggest loan default in the country’s history—will affect the public.

In a statement, the Bangko Sentral ng Pilipinas (BSP) expressed confidence that the creditor banks of Hanjin Heavy Industries and Construction Corp. Philippines would be able to handle the upcoming negotiations “while remaining compliant with prudential regulations.”

The five banks that have a combined $412-million loan exposure to the Subic-based firm are Rizal Commercial Banking Corp., Land Bank of the Philippines, Metropolitan Bank and Trust Co., Bank of the Philippine Islands and Banco de Oro Universal Bank.

The presidents of these financial institutions met last week to discuss common moves in the wake of the default and have entered into a “gentleman’s agreement” to refrain from acting unilaterally to seize the borrower’s assets—amove that would trigger a free-for-all among creditors and imperil any restructuring plan.

In separate interviews with the Inquirer, the heads of the creditor banks said the provisional agreement among members of their loose consortium might eventually call for the forced sale of the shipyard to a strategic investor as a way for them to recover their exposure.

As this developed, the BSP said strategic reforms implemented over the past two decades had strengthened the industry’s risk management capabilities and improved capitalization.

“The latest data show that the local banking industry is well-capitalized with a capital adequacy ratio of 15.35 percent as of June 2018, well above international standards of 8 percent and the Philippines’ 10 percent,” the central bank said in a statement disseminated to the press late on Friday.

It pointed out that total assets of the banking system continued to grow with an 11-percent year-on-year rise in 2018, while nonperforming loans remained low at 1.83 percent of its total loans as of October 2018.

Domestic banks’ loan-loss reserves also represented 109.9 percent of their bad loans during the same period.

“The industry, furthermore, remains very liquid and profitable,” the BSP said.

The central bank explained that, with its robust capitaliza- tion, the Philippine banking system was well-positioned to manage the loan exposure, which represented 0.24 percent of total loans of the banking system and 2.49 percent of the foreign currency loans of Foreign Currency Deposit Units.

The head of the Duterte administration’s economic team also expressed confidence that the five local banks that had loan exposure to the Philippine shipbuilding arm of Hanjin could weather the Korean’s financial woes.

“It’s going to hurt, but it’s not going to end up hampering” the domestic banking sector, Finance Secretary Carlos Dominguez III said on Friday.

He said the five exposed banks “will continue to work together and see how [they] can move forward.”

Dominguez, who chairs the state-run Landbank, said they wanted to know the prospects of the global shipping industry to determine what they could do with Hanjin’s assets in Subic Bay.

A veteran stock analyst also noted that there was no systemic risk to the Philippine banking system arising from the recent bankruptcy of Korean shipbuilder Hanjin, which owed five local lenders an estimated $412 million.

Alfred Dy, head of research at CLSA Philippines, said the Philippine banking system should be able to hurdle what recently happened to Hanjin, whose corporate bankruptcy was the biggest to hit Philippine banks.

“Total exposure is at $412 million. Converted to pesos at an exchange rate of P52.3 per $1, [this] translates to total amount of P21.55 billion. Given total Philippine banking system loan book of P9.76 trillion, the concerned amount is only equivalent to 0.22 percent of total Philippine banking system loan book,” Dy said in an e-mail to the Inquirer.

“As such, there is no systemic risk on this one,” Dy said. CLSA recently issued a research note dated Dec. 20 titled “Forget us not!” which gave a favorable view on local banks after a challenging year in 2018. Dy said on Friday that this house view had not changed despite the recent development on Hanjin.

As of October 2018, Philippine banking loan growth hit 18.1 percent compared to 17.6 percent in the previous month.