B1: Submit
Date: August 03, 2000
Time: 22:42
log_1
I know this is not the right thing to provide you the underlying text {1} but I really need feed back from you. I am a credit analyst at an international bank. I felt that there was no {2} much time left to improve my corespondent skill till I read you brochure about the course at the same time I had to decide where I had to go for my holiday. So I have been using my holiday to improve my correspondent skills.
I will appreciate it if you could cheek it whenever you can.
Regards,
Development Bank of Philippines (100% government owned)
A. Introduction Natexis Banques Populaires Singapore branch invites us to joint for the captioned facility. We, hereby, seek the CIC's approval for a participation amount of USD 5 mn All-in-yield 105 bps. pa. The tenor of the facility is 3 years and subject to be sold during the life time. For commercial details please find CLM/ CF' proposal attached. We feel that by participating in this deal we can further increase our popularity in the region and therefore we will much appreciate a prompt decision from the CIC as this offer is subject to availability.
B. Purpose of the facility & Covenant The facility is supposed to be used to refinance the bank's maturing USD 110 mn FRN due 18 July 2000. Furthermore, the Issuer continuing to be 100% owned by the Republic of the Philippines.
C. Quantitative Analysis The following analysis is based on not- audited financial figure as per fye99 provided by Natexis.
I. Assets quality
Loans comprised 55.8% of assets as per fye99 down from 62% the year before in line with both bank's expansion in security assets and its strategy opening more branches. Through the Country's banking system, loans portfolio has been put in country vital industries to support the Government policy. Past due loan was lower than average equivalent to 5.4% while coverage ratio was 62% as per fye99. NPL ratio further climbed to 7.2% as per 1q00 compared to average 14% . Lower past due loans was attributable to its wholesale lending (trough financial institutions) which carries lower default risk. On the other hand Moody's however notes that loan classification understates the true level of loan impairment as restructured loans are excluded equalling 23.6% as per fye98 compared to the peer average of 33.3% (agriculture, mining, manufacturing, and construction). Cited from S&P' report from July 99, more than 99% of bank's lending portfolio is secured while lending highly concentrated in term large exposures, with aggregate of the top-10 lending exposures. Fcy loans was 22.2% as per fye99. Loan breakdown by industry as per fye99 was financial institution 48.8% and transportation & communication 7% while power and manufacturing was 6.4% and 6.9% respectively.
Security assets rose 30.4% to USD 537 mn representing 15.9% of total assets as per fye99. Most of the assets was government securities.
II. Solvency
Equity to total assets had been decreasing during the analysed periods standing at 10.47% as per fye99. This is because assets growth had not balanced with capital increased while high percentage dividend paid off had limited bank's core capital growth. Moreover, the Government recently rejected bank' request for an additional capital of USD 49.8 mn but instead It lowed dividend rate from 30% to 10%.
III. Profitability
Net income improved substantially from USD 13.1 mn to USD 25.6 mn as per fye99 lifted up ROAA from 0.47% to 0.81%. This was on account of both 4.4x enlargement in trading gains to USD 7.1 mn and sharp decline in non operating expenses. Fee income dropped 20% to USD 3.6 mn representing of 2.8% of total revenues.
IV. Funding has been dominated by LT borrowing accounting for 65.9% of fye99's total assets (mostly in foreign currency). In that mentioned period, LT borrowing expanded 21% to USD 2.3 bn. Deposits accounted for 16.2% of total assets compared to 14.7% the year earlier. Particularly in association with bank's wholesale lending activities, funding has been arranged through Official Development of Assistance (ODA) accessed under bilateral and multilateral funding arrangements with international institutions such us World Bank, the ADB, the OECF and KFVV of Germany. For details of borrower names we refer to page 17 of report provided by Natex. We note that most of the funds raised under ODA programs are guaranteed by the Government.
IV. Liquidity is acceptable. Liquid assets to total borrowing fell from 20.7% to 18.9% due to stronger increase in total funding. With extra funding received, the bank increased its security assets which improved its net loans total funding from 75% to 65%.
C. Peer Group Informed by Natex, the bank ranked 6th interms of loan portfolio among top ten commercial banks and 7th in term of capital as per fye99. According to a Business World Asia survey, the bank ranked 8th in the Country as per fye99.
C. Qualitative Analysis
Background
The bank has been Government's economic vehicle to support and finance the Country's policy initiatives and development project such us housing finance, poverty alleviation, job creation and the agricultural sector. Much of its lending is conducted trough other banks including our clients such as Metro Bank & Trust Company, Equitable Bank PCI, Land Bank of the Philippines. The bank has 77 branches across the Country. The Government has delayed its plan to privatise the bank's non-whole sale operations.
Ratings
S&P assigned LT rating BBBpi in October 99. Currently, Moody's' LT rating is Ba2 and financial strength is D.
Business profile
Lending business is implemented trough three major business units: the Program lending sector primarily undertaking wholesale relanding operations to PFIs and other program based retail lending for specific purposes; the Corporate Banking Sector undertaking retails lending directly to large and medium-sized corporations; and the Branch Banking sector which undertakes retail lending to private clients and smaller companies. Bank's to five corporate borrowers are Manila Electric Company, Southern Philippines Power Corporation, Philippine Long Distance Telephone Company, Baurang Private Power Corporation and Bayan Telecommunications, Inc. Merchant banking activities focuses on project finance, syndications arrangements, and financially advisory, assisting hence various private and Government corporations. In the past the bank was several arranger and lead manager of several Syndicated deals. For details please see page 14 of report provided by Natex.
Internal credit process
Within the three major business units mentioned above, loans are administrated trough Windows I,II and III. The first administrates ST lending, the second medium and LT lending and the third is only for lending for science and technology. Credit approval is the responsibility of either the bank or the Funders depending on loan sized. Generally, the Funder set a credit limit, known as the Free Limit, for each lending facility{***} they grant the bank. Under the Free limit the bank has the authority to evaluate the eligibility criteria for borrowers and investment project. Above the Free limit, Funder's approval is required.
Shareholder and Management
The Republic of the Philippines has had equity stake for 100% in the bank. The Government appoints bank's directors.
National Government Guarantee
The Government provides certain guarantees with respect to certain funding facilities as described in " National Government Support". Implicitly, these are loans, particularly its bilateral and multilateral facilities, guaranteed by the Government and carry negative pledge, pari passu, and cross default provisions which could take effect in the event of a default provisions, which could take effect in the event of a default on the FRN.
Strategy
As a policy bank, the bank continues to serve the Country's society. The bank avoids competing with private sector banks by operating in sectors (technology and science) where commercial banks are not active. The bank has intended to open more branches in the coming years.
C. Conclusion and Recommendation
Development Bank of the Philippines is the 8th largest bank with 77 branches in the Philippines. The bank is owned fully by the Government and has played a significant role in the Country's economy. Through the Country's banking system, the bank has provided lending to Country's strategic sectors. The Government therefore has strong interest to support the bank if necessary. Moreover, the Government provides certain guarantees with respect to certain funding facilities as described in National Government support.
Financially, bank's performance is acceptable although we are aware its eroded assets quality as a concern following its role as a Policy bank to serve the Country's society. But with this unique position and strong ownership structure, we believe than the Government will support the bank in any events of difficulty. Solvency had been decreasing under the periods reviewed, as assets growth was not balanced by capital increased while dividend ratio was massive. But we believe the Government policy to cut dividend paid out level, which totally fell during the last two years from 50% to 10%, will strength bank's core capital's growth. We consider 10.47% in equity to total assets ratio is more than acceptable. Bank's profitability had been remarkable during the analyzed periods with NIM never below 4.2%. ROAA went up from 0.47% to 0.81% due to substantial increase in trading gains. Trough its merchant banking activities the bank is ensured for sufficient non-interest income. Liquidity was acceptable with liquid assets to total borrowing at 18.9% reflected government assets the bank held. Long term borrowing from foreign institutions is bank main funding source. However, we feel that its funding structure is adequate due to Government guarantees and improving as deposits to total assets ratio went up from 14.7% to 16.2%.
Development bank of the Philippines enjoys high LT rating BBBpi from S&P. While Moody's assigns LT rating Ba2
Based on bank's good performance described above we propose to assign RR at 5. Furthermore we recommend agree with the proposal based on:
1. Overall acceptable financial fundamental
2. Strong ownership structure and as covenant the Government will maintain its 100% interest in the bank.
3. By participating for this facility, we can build up our popularity in the region for further business purposes
4. With regard to 3 years tenor of the facility, we deem that we can sell the facility during the life time if necessary
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