Public interest

There are 7.6 billion reasons for the government to step in, take control of Philippine Bank of Communications (PBCom) and, if necessary, sell off the entity at a public auction.

Government, through the Philippine Deposit Insurance Corporation (PDIC), infused P7.6 billion into the bank in 2004 to bail it out of trouble. By the terms of the Financial Assistance Agreement, PBCom turned over 36,194,406 of its shares to the PDIC.

Well and good. For as long as the commensurate bank shares were in government control, the public interest is protected.

However, that block of shares pledged to the PDIC in exchange for the financial bailout was “inadvertently included” in another block of 52,588,000 shares that the PBCom management pledged to another bank, Philtrust, to guarantee a loan of P1 billion to help refinance the troubled bank.

Inadvertently included?

How could a block of 36,194,406 shares be inadvertently included in an only slightly larger block of 52,588,000 shares?

We have heard of bad bookkeeping. This is obviously more than that. Shares that are supposed to guarantee P7.6 billion of PDIC money were pledged to guarantee yet another loan from a private lender.

It is like selling the same bridge twice. In common parlance, it is called a swindle.

Then, there is the matter of plain arithmetic.

Consider this: 36,194,406 shares were pledged to the PDIC to cover a loan of P7.6 billion. Yet, 52,588,000 shares were pledged to Philtrust to cover another loan of P1 billion.

Something is clearly amiss here. What is the real value of these shares?

It seems Philtrust, on the basis of their own due diligence, knows something about the true value of PBCom shares that PDIC does not. If they do, they are not telling the government financial entity.

Then again, if Philtrust is so good at performing due diligence, how could it be possible that they accepted, to cover their loan, a block of shares the major portion of which are shares already committed to PDIC?

This mess is beginning to stink.

To further complicate things, it now appears that major tycoons are maneuvering to take control of an ailing bank and probably bring it into the fold of larger and stronger banks — but at a price probably detrimental to government’s interest.

In its meeting of July 13, the PBCom board found itself deadlocked. Seven directors were allied with the Cheng/Nubla group and the other seven directors were allied with the Luy family. One government nominee to the board, Guillermo Hernandez, had resigned. He could have broken the tie — although probably to no avail since the contending factions among the shareholders in this bank are well-entrenched.

A deadlocked board is not in the interest of this bank in particular and the banking industry in general. The bank needs to undertake urgent measures to clean up its finances and regain its corporate health.

Probably, the only way to do that is for the bank to be folded in with a larger bank. Given the new conditions in global financing, banks need to be big and healthy to compete. That explains the wave of acquisitions, mergers and consolidations that have happened the last few years — the last one being the acquisition of the previously merged Equitable PCI group by the smaller but stronger Banco de Oro.

Two major names in Philippine business have emerged relating to the strange things going at PBCom: Lucio Tan and Emilio Yap.

When a capital call was issued some time ago to help bring PBCom back to its feet, the Nubla and Cheng groups, finding themselves short of financing, were reported to have borrowed P3 billion from tycoon Lucio Tan — who controls the PNB-Allied Bank group. Philtrust, which lent P1 billion to PBCom is owned by another tycoon, Emilio Yap.

It is understandable that both Tan and Yap might be interested in acquiring PBCom and folding in this bank with their existing banking assets. Well and good.

But what about PDIC’s P7.6 billion lent to PBCom? What happens to that?

If the shares pledged to PDIC (and later pledged again to Philtrust) are shown to have been incorrectly priced, the government financial entity could end up a big loser in this game.

Our financial authorities must act quickly to protect government interests in this messy situation. Some more decisiveness than what we have so far seen needs to be demonstrated.

Time is of the essence here.

If the contending tycoons are unable to quickly sort out their squabble at PBCom, the DOF and the PDIC might as well step in forcefully, take control of this ailing bank before it bleeds even more, clean up its books and, should it come to that, bid out the entity in the market while the wave of bank mergers and acquisitions are at its tide.

That will at least ensure government gets its money back.