Should we panic? BDO, Metrobank, RCBC hit by Lehman collapse

James Ryan Jonas

At least three Philippine banks face possible loss of investments due to their exposure to bankrupt global financial services firm Lehman Brothers.

As Lehman Brothers filed for Chapter 11 bankruptcy early this week, local banks Banco de Oro (BDO), Metrobank, and Rizal Commercial Banking Corp. (RCBC) announced they have set aside provisions for possible write-downs ranging from P658 million ($14 million) to P3.8 billion ($80.7 million).

Surely the question right now on depositors’ minds: Is there a reason to panic?

First, let’s recap the total amount of exposure of Philippine banks.

Banco de Oro (BDO) is the local bank worst hit by this crisis, as it disclosed setting aside P3.8 billion ($80.7 million) to cover possible losses in its investments with Lehman Brothers.

Metropolitan Bank and Trust Co. (Metrobank) announced it is making P658 million ($14 million) in provisions for $20.4 million worth of bonds issued by Lehman. It also disclosed loan exposure to a Lehman subsidiary in the Philippines amounting to P2.4 billion. The subsidiary, however, is currently operating normally, according to Metrobank.

Rizal Commercial Banking Corp. (RCBC), on the other hand, said it is allocating P980 million ($20.8 million) to cover for possible write-downs in its investments in structured products having exposure to Lehman.

In recent disclosures submitted to the Philippine Stock Exchange (PSE), the Bank of the Philippine Islands (BPI), UnionBank of the Philippines, Philippine Savings Bank, and Security Bank announced they have no direct or indirect exposure with Lehman Brothers and are thus not making any provisions.

Security Bank, however, clarified that it has a $10-million exposure to Merrill Lynch but denied any potential adverse impact this might have.

All in all, the total exposure of Philippine banks to Lehman Brothers is actually insignificant compared to the total asset base of the banks. The total provisions amounting to around $115 million identified by BDO, Metrobank, and RCBC does not even represent 1% of the P5 trillion total assets of the local banking industry.

BDO’s loss provision of P3.8 billion, for example, is a mere 0.6% of its P617.42 billion total assets as of December 2007. Which means the bank is fully covered despite the possible asset write-down.

BDO bank depositors should thus not panic and not rush to withdraw their deposits because BDO is highly liquid and capable to service withdrawals. Actually, the Lehman exposure is not what could possibly bring BDO down. Rather, it is the sudden and simulatenous pullout of huge funds by high net worth depositors.

This goes for Metrobank and RCBC as well. These two banks appear financially sound despite the provisions for losses. At the same time, the Bangko Sentral ng Pilipinas (BSP) said it is ready to support any bank that may face difficulty owing to possible exposure with Lehman. At this point, though, no bank is in this dangerous territory yet, so BSP’s reassurance should only strengthen one’s trust in local banks.

There is a group of people, though, who has a reason to panic while all these is happening. Stockholders of BDO, Metrobank, and RCBC are currently incurring huge losses as the prices of these stocks plummet. Even banks with no direct exposure to Lehman have seen their stock prices decline.

The table below summarizes the closing prices of major local banks during the past 3 days and the price declines brought about by the crisis. Look how much value was lost in just 3 trading days after the announcement of Lehman’s bankruptcy on September 15.

Table 1. Declines in Stock Prices of Philippine Banks, days after announcement of Lehman’s Bankruptcy

In just 3 days, BDO’s stock price suffered a steep decline of 24.1%. Metrobank, on the other hand, has seen its stock price plummet by as much as 16% in the same 3-day period. Interestingly, investors seem to be dumping PNB stocks despite the fact that it has not yet stated any loss exposure to Lehman. Its value lost 8.3%, even higher than the 7.2% price loss in RCBC stock.

In the end, bank depositors right now have no reason to panic despite the potential losses their banks might have due to the bankruptcy of Lehman Brothers. But investors and stockholders have a reason to be afraid, because if the outlook of pessimism continues in the market, the declining stock prices as we have seen above may just keep on dropping.

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James Ryan Jonas teaches business management, investments, and entrepreneurship at the University of the Philippines (UP). He is also the Executive Director of UP Provident Fund Inc., managing and investing P3.2 Billion ($56.4 Million) worth of retirement funds on behalf of thousands of UP employees.