Closure to Raise Banking Sector's Nonperforming Loan Ratio by 1%

Business World

Monday, September 21, 1998

By MA. SALVE I. DUPLITO

Reporter

Philippine Airlines, Inc.'s closure could raise banking sector's nonperforming loan (NPL) ratio by as much as one percentage point — assuming banks have not yet rated loans to PAL as non-performing as of June, the Bankers Association of the Philippines said last Friday.

BAP President and Solidbank Corp. President Deogracias Vistan said in a telephone interview last Friday that according to a simulation made by the BAP, the ratio could go up by one-half to one percentage point, bringing the banking system's NPL ratio to almost 11% and commercial banks' NPL ratio in particular to almost 10%. This is a scenario that has always been frowned upon by the Bangko Sentral.

Latest official Bangko Sentral figures show that the banking system's NPL ratio as of June had already improved to 9.7%, down from 10.1% in May, while commercial banks' ratio was at 8.95%, down from 9.44% in May.

The resulting scenario, however, would hardly appear alarming to analysts and bank economists who expect the system's NPL ratio to reach at most 15% this year. They said even if banks' NFL ratio reaches low double-digit levels, the industry will still be better off than other Asian countries affected by the currency turmoil.

Mr. Vistan stressed, however, that banks "are not (left) out there in the cold" by the flag carrier's closure, holding as collateral properties such as aircraft, real estate and other fixed assets.

PAL announced last Thursday that its planes will stop flying after midnight of Sept. 23 as a result of severe financial losses and a crippling labor problem. The flag carrier has about $2 billion in short- and long-term obligations to local and foreign creditors.

Even after the announcement, PAL creditors refused to budge and take steps to start the disposition of the flag carrier's assets, hoping for a "surprise development" before the scheduled Sept. 23 closure.

According to the Securities and Exchange Commission, about $91.61 million in short-term loans and about $182 million in long-term loans to the airline are unsecured.

WASTE OF SALIVA

"We are all just sitting tight. At this point, talking and talking will just be a waste of saliva," International Exchange Bank  Executive Vice-President Nilo Pacheco told Business World.

"By now everybody's documents are most likely out and there is no reason to panic because I think everybody knows what his security is," he added.

ibank's exposure to PAL amounts to about $5 million in fully secured loans.

Bankers are also still pinning their hopes on the government, which has indicated it wants PAL to keep on flying. This sentiment is strengthened by the fact that the government itself, through the Bureau of Treasury, has a P210,541-million exposure to PAL.

While PAL creditors also admit a financial bailout for the troubled airline is out of the question, they still hope President Estrada can do something to bring PAL management and labor back to the negotiating table.

"'That (government intervention) is still possible. President Estrada can continue to convince (the union)," Mr. Pacheco said.

Unionbank Assistant Vice-President Virgilio Lugtu agreed, saying everybody's waiting for the 23rd, and what the President can do, "Everything is up to the President," he said.

Mr. Lugtu noted that Mr. Estrada will have to convince the unions to accept the employee stock option plan (ESOP) proposed by PAL majority owner Lucio Tan. Without the ESOP, any rehabilitation plan, even if it is very well drawn, is bound to fail, he added.

"If this problem remains unresolved, there's no way a well-made plan will succeed," the banker said.

Mr. Vistan said PAL's labor problems and its impending closure have severe significance for the economy. Moving people and commodities will be a severe problem now because there is not much alternative to PAL, he said.

Philippine National Bank (PNB), the head of PAL's creditors committee, remained silent until late last Friday. PNB has about $66-million exposure to PAL, fully collateralized.

PAL has asked permission for debt suspension with the Securities and Exchange Commission and has presented the rehabilitation plan expected to turn the company's finances around.

Meanwhile, Banco de Oro, a universal bank owned by Chinese taipan Henry Sy, has a S10.6-million exposure to the flag carrier, portions of which are unsecured, a bank source said.

According to the Business World source, Banco do Oro has extended a $6.61-million long-term loan as part of a syndication. On the other hand, the $4.01 million in short-term loans were directly lent to PAL.

"The banks can't act yet as there has been no final decision on what to do. The discussions are always open-ended. We are still adopting the ‘wait-and-see' attitude," the source said.

The Business World source added PAL had said it will fix its labor problems first before facing its creditors.

Meanwhile, PAL owes Urban Bank $3.54 million which the airline borrowed in late 1996, bank President Teodoro Borlongan said. "It's a loan that matures in three years. Unlike most of the creditors... our loan is secured by a chopper mortgage," he said.

Mr. Borlongan said Urban Bank is the exclusive mortgagee on a Bell helicopter. "The chopper is worth $5 million to $6million. The asset can be readily (sold) compared with real estate."

Allied Banking Corp., a universal bank owned by PAL's Mr. Tan, was able to trim its exposure to the airline to $6.6 million. Long-term loans are now down to $3.1 million from an earlier reported $31.95 million while short-term loans are down to $3.5 million from $26.01 million. These were secured by aircraft, chattels and some equipment, a bank official said.

Land Bank of the Philippines has $3.7 million in unsecured, short-term loans to the flag carrier. President Florida Casucla said the bank's loan to PAL is only "2% of the total exposure." — With Reena J. Villamor