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In late July, the local affiliate of Taiwan’s International Commercial Bank of China announced an agreement with Merrill Lynch to sell the non-performing assets of thirty of its largest defaulting customers. This is the first successful sale of a bank’s non-performing assets under the Special Purpose Asset Vehicle (SPAV) law passed in January 2002. The Philippines’ second largest bank, the Bank of the Philippine Islands has also bid out up to 10 billion pesos in non-performing assets with foreign investment banks like Merrill Lynch and JP Morgan seen as front-runners. Finally, the Philippine National Bank is expected soon to bid out close to 20 billion pesos in idle property assets to help it clear its books and recapitalize its battered capital-asset ratio.
These recent moves by locally-operating banks to clear their books of non-performing assets absorbed during the 1997-1998 Asian financial crisis will hopefully re-energize bank lending and local investment. The Philippine government was the only government of the crisis-affected countries not to set up a state-funded asset management corporation during or soon after the Asian financial crisis to buy local banks’ non-performing assets and help them stay afloat and begin lending again. The Philippine government even refused to buy up the non-performing loans of state banks like Landbank, directing them instead to seek out willing private sector buyers. Rather, the Philippine government chose to pass a law offering tax incentives to local banks to sell off these non-performing assets while actively encouraging global investment banks to negotiate with local banks over such sales.
The Philippine state’s fiscal weakness and bad memories of costly government bailouts during the 1980s debt crisis lie behind the government’s choice to forego setting up a state-funded asset management corporation. Banks themselves may have been unwilling to sell their non-performing assets to such a corporation as it would have greatly aided the central bank’s crackdown on connected lending (loans to affiliated companies); the source of most of the non-performing assets. However, the choice to leave the recovery of local banks and bank lending to the market has carried a heavy cost as banks non-performing loan ratio continued to increase long after the crisis peaking at close to 20 percent of total loans. The inability of banks to lower their non-performing loan ratios has eaten into their capital and made them wary of lending to new borrowers or rolling over existing loans. This has slowed down the Philippines’ recovery from the crisis and the global slowdown.
The passing of the SPAV law itself was delayed over disputes about whether foreign banks could buy local idle property assets and evade the legal ban on foreign land ownership and whether local banks could participate in consortia bidding to buy their non-performing assets. The eventual passage of the bill and recent transactions under it suggest that Philippine banks may be able to finally clear their books at little cost to the government while offering global investment banks a new avenue to invest in the Philippines.
WATCHPOINT: International financial institutions like the World Bank have expressed interest in supporting the SPAV law by investing money in consortia bidding on local banks’ non-performing assets.
About our company:
AFG Venture Group is an Asia and Australia based corporate advisory and consulting firm with over 20 years experience in creating alliances, relationships and transactions in Australia, South East Asia and India; including a 15 year history of corporate and equities advisory in Australia, undertaking merger, acquisition, divestment, fund raising and consulting for private and public companies.
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