Metrobank sells NPLs to raise Tier 2 capital

The Metropolitan Bank and Trust Co. (Metrobank) has aggressively undertaken capital-raising with restructuring activities in a bid to once more be considered a vanguard by its peers in the country’s banking system.

"Known for its robust capital actions, Metrobank has always been in the forefront in strengthening its capital base having seen the bank raise capital via rights issue six times since 1993 and being the first Philippine bank to raise supplementary Tier 2 capital in December 2001 at $100 million," Abacus analyst Kenneth Nerecina said in a statement issued by Metrobank.

This year, it was the first local commercial bank to sell non-performing loans (NPLs) to an asset management company (AMC) when it forged an agreement with Asia Recovery Corp., an AMC allied with Rabobank of the Netherlands.

Nerecina said boosting supplementary Tier 2 capital would help the bank achieve some of the major objectives of the Tier 2 capital support scheme which include re-capitalization and loan growth.

"It also raises Metrobank’s place in the global banking environment," the Abacus analyst said. "This pioneering move paves the way for opening up the international capital markets for other Philippine banks looking to strengthen their capital base, particularly Tier 2 capital."

The bank raised $125 million last month in the international capital markets with a 10-year lower Tier 2 bond issue. The recent bond sale was the first public subordinated debt issue in the Philippines.

The bonds have been registered in Singapore and will pay a semi-annual coupon of 8.5 percent. The issue was more than 1.5 times subscribed with over 60 percent of the demand coming from international institutional investors.

Singapore-based UBS Warburg LLC head of fixed-income syndication Mark Leahy gave high marks for the undertaking.

Philippine investors bought 40 percent of the debt, while the rest were purchased from other parts of Asia and Europe. "Investors offer to buy more than $150 million of the bonds," Leahy added.

UBS Warburg arranged the bond sale, Metrobank’s second this year. The 10-year bond issue, which is callable on the fifth year, was tightly priced 92 basis points over the Philippines‚ 2008 bond (five-year benchmark).

The issue was aggressively priced considering that lower Tier 2 usually carries up to 100 basis points in spread over senior debt because of its subordinated nature.

With a fresh $125 million in capital, Metrobank increased its capital adequacy ratio (CAR), making it one of the strongest banks in the Philippines. Proceeds will be invested in low-risk, high-yielding US dollar-denominated instruments in order to eliminate any negative carry from the issue.

According to a report of CLSA Emerging Markets analyst Lovell Sarreal said bank’s CAR will move up to about 14.3 percent from 13.1. Sarreal, however, noted that "this is still below the industry level of around 16 percent."

The Bangko Sentral ng Pilipinas (BSP) earlier adopted the standards and international market practice of the Bank for International Settlements (BIS) in its regulations prompting the Philippine banks to strengthen their capital base.

The BIS operates the Financial Stability Institute (FSI) jointly with the Basel Committee on Banking Supervision, which is designed to promote supervisory coordination of financial regulation within the Group of 10 (G10) countries (developed countries including Belgium, Canada, the United Kingdom and the United States) and promote the safety and soundness of both international and domestic banking systems.

As a matter of perspective, capital is split between Tier 1 or core elements (equity and disclosed reserves) and Tier 2 or supplementary elements (undisclosed reserves, asset revaluation reserves, general provisions, hybrid debt/equity instruments and subordinated term debt).

Some practitioners choose to distinguish between Upper Tier 2 (perpetual debt) and Lower Tier 2 (dated debt).

The inclusion of the individual Tier 2 elements is at national discretion. Deductions from capital cover goodwill, investments in unconsolidated financial subsidiaries and, at national discretion, holdings of other bank’s capital. Tier 2 elements are only eligible up to 100 percent of Tier 1; subordinated debt must not exceed 50 percent of Tier 1; and general provisions are limited to 1.25 percent of risk asset.

Last August, Metrobank finalized the sale of over P16 billion-worth of NPLs to a foreign group led by Rabobank.

"Due to this sale, Metrobank NPL ratio is now lower than industry NPL ratio," the statement said.

While the banking industry incurred an NPL ratio of 18.91 percent at the end of the third quarter this year, it had an NPL ratio of 12.55 percent.

With the exception of the Bank of the Philippine Islands (BPI), Metrobank’s closest peers (in terms of assets) incurred higher NPL ratios, Equitable PCI Bank (18.43 percent) and the Philippine National Bank (55 percent). BPI had an NPL ratio of 10.83 percent.

Nonetheless, Metrobank had a better NPL cover of 67.71 percent than BPI’s 66.63 percent. Equitable had 54.61 percent while PNB a poor 35.29 percent.

Metrobank remains the leading bank in terms of assets, capital accounts, loans and deposits. It posted a 65-percent increase in third quarter profits this year while net income rose to P791.3 million from P480 million.

Earnings helped push up nine-month profit to P2.3 billion or 66 percent of the bank’s full year goal.

The bank expects profits this year to raise two-thirds to P3.5 billion from P2.1 billion in 2001 due to proceeds from the sale of bad loans. This is well in excess of the consensus analysts‚ estimate of P2.7 billion for 2002. – TPT