PRIVATIZATION OF BANKS IN THE PHILIPPINES
I.
BACKGROUND ON GOVERNMENT BANKS
In the Philippine context, banks owned or controlled by the government fall
under three main categories:
1.
Those that were organized from the start as government
banks.
2.
Those where the government infused equity as part of a
program to stabilize the banking system and/or to ensure
that loans granted by the Central Bank of the Philippines
(CBP) and other government agencies may be repaid.
3.
Those where the government has infused substantial
capital for the account of parties/sector which the
government wants to protect and/or favor.
Under the first group, we have the Philippine National Bank (PNB), the
Development Bank of the Philippines (DBP), the Land Bank of the Philippines (LBP), the
Philippine Postal Savings Bank (PPSB) and the Al-Amanah Islamic Investment Bank of
the Philippines (Amanah Bank).
Philippine National Bank (PNB)
PNB is a commercial bank which was initially established with
the government owning 100% of its equity. The privatization of
this bank will be discussed later in detail.
Development Bank of the Philippines (DBP)
DBP was formerly the Rehabilitation Finance Corp. (RFC)
established after the end of World War II. Thus, its main function
was to provide credit for the rehabilitation, development and
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expansion of agriculture and industry, the reconstruction of
property damaged by war and the broadening and diversification of
the national economy. Later, the promotion of the establishment
of private development banks was included among its
responsibilities. Under its 1986 revised charter, the primary
purpose of the bank as a thrift bank shall be to provide banking
services principally to service the medium and long term needs of
agricultural and industrial enterprises particularly in the countryside
and preferably for small and medium size enterprises and the
government sector.
Presently, it also manages the various
developmental medium and long term loan programs of the
country funded by official loans/assistance from various sources
such as the World Bank and the Asian Development Bank. DBP is
100% owned by the national government.
Land Bank of the Philippines (LBP)
LBP is a commercial bank established to finance the
implementation of the country’s land reform program. It is 100%
owned by the government. Under its charter, the bank is
authorized to issue preferred shares of stocks to pay land owners
who have sold their agricultural land to LBP should the seller elect
to accept such payment. However, no such preferred shares have
been issued to private parties as the sellers preferred bonds issued
by the bank.
The Philippine Postal Savings Bank (PPSB)
The PPSB was established as a division of the Bureau of Posts
to provide facilities for the safe investment of the savings of the
people of the Philippines and for other purposes at a time when
the number of existing banking facilities for the safekeeping and
investment of small savings, especially in the rural areas was
minimal. In 1973, the phasing out of the operations of the bank
was mandated because private banks of varying types and sizes
have already increased in number and because of the declared
policy of the government to move out of areas of business where it
has pioneered whenever the same could be amply served by
private entrepreneurs. PPSB was prohibited then from establishing
additional branches in areas already served by a bank and was
required to close within a period of one year existing branches in
areas already served by other banks. Finally within 3 years, all
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operations of the bank shall completely be discontinued and its
Remaining assets and liabilities shall be transferred to the PNB or
to any other appropriate existing government bank. The PPSB was
liquidated with net assets going to the Bureau of Treasury of the
national government. However, when the responsibilities of the
Bureau of Post was transferred to a corporation, the Philippine
Postal Corporation, in 1994, it was authorized to establish the
Philippine Postal Savings Bank as a subsidiary to provide it with
other source of funding for the modernization of postal facilities
and services.
Al- Amanah Islamic Investment Bank of the Philippines
(Amanah Bank)
The Amanah Bank was established to provide credit,
commercial, development and savings banking facilities at
reasonable terms to the people of the primarily Muslim provinces
of the Philippines for the establishment, acquisition, development
and expansion of agriculture, commercial and industrial
enterprises.
The operations of the bank are mandated to be based on the
Islamic Concept of banking, following the no-interest and
partnership principles. For this purpose, the President of the bank
is a Muslim. Unfortunately, the bank has not implemented this
concept and, except for 3 branches, still operate under traditional
banking systems.
The bank incurred losses from its operations and had to be
recapitalized preparatory to the then projected coming in of funds
from the middle east countries. However, this negotiation was not
finalized. The bank is now majority owned by the National
Government with the minority being held by government agencies
– the Government Service Insurance System (GSIS), the Social
Security System (SSS), and the Privatization Management office
(representing shares originally owned by PNB) and the DBP. The
bank was previously bidded out to private parties and after a failed
bidding was offered under negotiated sales basis. The privatization
failed and the bank is still being offered for sale to other parties.
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The banks under the second group include privately-owned banks which had
encountered serious liquidity and solvency problems. To avoid their closure and the
destabilizing effects thereof on the banking system and the country as a whole, the
government deemed it best to infuse fresh equity in said banks (mainly thru conversion
of loans previously granted by CBP) and operate them until private buyers can be
found. In all cases, the former private owners have to give up all of their equity in said
banks.
In the early 1980’s, the DBP and the National Development Co. (NDC) took over
the operations of a commercial bank and its sister investment house and finance
company – both of which were the leaders of the industry then – when they
encountered liquidity and solvency problems. At that time, the Central Bank of the
Philippines (CBP) did not have authority as yet to grant loans to non-banks so the
assistance was granted thru the sister commercial bank. The investment house and the
finance company were merged with the commercial bank. The bank was then placed
under professional managers with DBP and NDC officials sitting in the Board.
The
loans granted by the CBP were restructured with soft terms. To augment the earning
assets of the bank and provide it with additional capital, the CBP granted loans to the
DBP to buy shares of stock of the bank. Some assets (receivables and securities) of the
former majority stockholder of the bank were placed in an escrow account and the
funds from the collection/sale thereof were reinvested to assist in paying for the loans
to the CBP.The bank was eventually sold to a local bank with the government recouping
all its investment.
The LBP and the Social Security System (SSS), at one time, recapitalized a
savings bank and a finance company and converted them into a commercial bank and
placed it under professional managers.
After its rehabilitation, the equity of the
government was sold to private banks.
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In the past, PNB was mandated to absorb the operations of problem banks such
as the Republic Bank, the Philippine National Cooperative Bank (PNCB), and the
Provident Savings Bank (PSB).
The Republic Bank, a private bank, had several
branches in the provinces. It encountered solvency problems and was taken over by
another private group identified with the sugar industry. With government assistance,
it obtained offshore loans to finance sugar production. When its solvency problems
continued, PNB bought majority stocks of the bank to prevent its closure. Later it was
sold to a foreign group under a clean balance sheet basis with PNB ending holding, up
to the present, some non-performing assets.
The PNCB was organized by the
government to develop cooperatives. It became insolvent due to bad loans and was
taken over by PNB. The PSB, a private savings bank, dealt with a large number of
small depositors and borrowers. When it encountered liquidity problems and its
shareholders were not able to resolve them, it was taken over by the PNB.
In the past, the Government Service Insurance System, a provident fund for
employees of the government, bought a bank (previously closed but reopened in
accordance with a court decision) which was then having liquidity and solvency
problems. This bank was subsequently sold to a group of private investors headed by a
foreign bank. The loans granted to the bank by the CBP were restructured. To further
assist the bank, it was allowed to continue receiving deposits from the GSIS. The loans
granted by the CBP were fully paid when the bank was taken over by another private
group.
Also in the early 1980’s, the CBP granted loans to the DBP to invest in the equity
of a commercial bank which was in danger of insolvency. DBP became the majority
owner of the bank. The original private majority stockholders were granted the right of
first refusal to match any offer that maybe made for the DBP shares in case such shares
are sold. The shares of DBP were subsequently assigned to the Asset Privatization
Trust (APT), a government agency responsible for the sale of government assets to
private parties.
Unfortunately, the bank continued to incurr losses under the
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management of the DBP and the APT.
The original private majority stockholders
assigned their rights of first refusal on the sale of the stocks of the bank to a group of
private investors including a foreign group. The take-over by the private parties was
supported by a loan from the PDIC with interest at rates tied-up to 182 day treasury
bill rates, payable in 10 years subject to the following conditions:
1.
Putting up of additional capital by the new stockholders in
an amount to meet prescribed capital and to make
operations profitable.
2.
Putting up of collateral for the assistance of PDIC with value
twice the amount of the loan extended plus the pledge of
the bank’s shares.
The above arrangements were facilitated under an amendment to the Central
Bank Law in 1981 which authorized the Monetary Board (MB) to grant loans or
advances to the DBP or to any appropriate government financial institution secured by
assets defined as acceptable security by at least 5 members of the MB for the purpose
of purchasing share of stocks of a banking institution or a distressed industrial
establishment.
This authority is intended to be exercised only under special
circumstances such as the encouragement of bank mergers and consolidation, or the
rehabilitation of industries, in which the MB considers it advisable to properly and
effectively achieve its responsibilities and objectives of administering the banking
system. Moreover, the investment in the equity of banks is intended to be temporary
only and must be sold to the general public ultimately.
This authority of the CBP was subsequently withdrawn. Instead, the CBP and
the Philippine Deposit Insurance Corporation (PDIC) has been making use of the
authority of the PDIC under its charter to grant loans or to purchase the assets or make
deposits in an insured bank which is in danger of closing in order to prevent such
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closing when in the opinion of PDIC’s Board of Directors the continued operation of
such bank is essential to provide adequate banking service in the community. The CBP,
on the other hand, is authorized and directed under PDIC’s charter to lend PDIC such
funds as maybe required for insurance purposes including the grant of loans to prevent
bank closure as mentioned above.
Private banks were encouraged to look into taking over closed banks with
assistance from the CBP and the PDIC in the form of liquidity loans to meet expected
withdrawals upon reopening and the restructuring of loans that may have been granted
to said banks before closure, among others1.
Under R. A. 7721 liberalizing the entry and scope of operations of foreign banks
in the Philippines, foreign banks were allowed to own up to 60% of the voting stock of
an existing domestic bank including banks under receivership or liquidation as one
mode of owning majority equity in a local bank.
Before the effectivity of this law,
foreign-owned voting stocks in domestic banks are limited to only 30% of outstanding
voting stocks or up to 40% with prior approval of the President of the country. This
was the basis for the sale of 60% of the Republic Bank by PNB to a foreign group as
mentioned earlier. Under RA8791, foreign banks were authorized to own up to 100%
of only one domestic bank. Under this law, PNB was able to sell the remaining 40%
equity in Republic Bank to the foreign group which initially bought 60% of the bank. In
order to provide a level playing field, these authorities were also granted to local
entities meeting certain prescribed standards of strength. These revisions of existing
laws further minimized the need for government agencies to be involved in the
rehabilitation of banks as they used to be in the past.
Other assistance/incentives given to a bank that will take over a problem/closed bank include authority
to (1) use appraisal increment on re-appraised assets as part of capital; (2) opening or relocation of
branches; (3) book additional valuation reserves over a period of time instead of immediately and (4)
deferment of compliance with minimum capital requirements. These authorities are granted after the
CBP is convinced that the bank under new management can overcome its difficulties and normalize its
operation within a reasonable period of time.
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Under the third group, we have the Philippine Veterans Bank (PVB). The PVB
was intended to provide for the needs of war veterans of the country, their widows,
orphans or compulsory heirs. At least 51% of the bank’s capital was fully subscribed by
the government. Within 5 years from its organization, all of the government equity was
to be transferred in the names of veterans who shall thereafter vote said shares. The
bank became insolvent due to bad loans. In recognition of the services to the country
of war veterans, it was recapitalized by the government and reopened.
The total assets of the DBP, LBP, PPSB, Amanah Bank and the PVB as of Dec.
31, 2002 represented 12% of the total resources of the banking system.
This paper will concentrate on the experience of the PNB in transferring
ownership to a private group.
II.
BACKGROUND ON THE PHILIPPINE NATIONAL BANK (PNB)
PNB was established on July 22, 1916 primarily to provide credit to businessmen
at reasonable rates of interest. From the start, it has been an instrument of monetary
policies of the country with significant role in its economic development. As such, it
performed various functions including the following:
a.
Sole authority to issue legal tender up to the establishment of the
Central Bank of the Philippines (CBP) in 1949.
b.
It was a government depository bank. Before the CBP was able to
establish branches in the provinces, private banks deposited their legal
reserves in PNB provincial branches for the account of the CBP.
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c.
It acted as the main bank thru which the government implemented its
various developmental projects thru (1) lending programs designed to
provide credit to priority sectors such as agriculture (financing of rice,
export crops such as sugar and copra, fishery and dairy projects),
small and medium enterprises and small retailers or (2) extending
guarantees for borrowings of government and private parties such as
to raise funds abroad to finance large long-term infrastructure
projects.
d.
Granting of loans to government entities (national, city, provincial and
municipal governments and government corporations). In the 1930’s,
the capital required to establish the National Power Corporation, the
Government Service Insurance System, the National Rice and Corn
Corporation (the forerunner of the present National Food Authority)
and the Philippine Sugar Administration, among others, came from
loans granted by PNB.
e.
It provided the rural areas with banking facilities thru the
establishment of banking offices thereat without consideration to their
profitability.
f.
It was used as a vehicle for various activities of the government such
as (1) taking over the marketing of sugar and (2) providing air
transport facilities when the operation of a local airline entity was
briefly suspended.
g.
As mentioned earlier, it was used as a vehicle to stabilize the banking
system by absorbing problem banks.
h.
It assisted the CBP in stabilizing foreign exchange transaction.
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The bank had gone through several recapitalization programs due to losses from
operations.
Thus, at the end of World War I, due to the drop in price of the country’s export
products, particularly sugar, and a severe deflation that hit the economy, the bank
incurred large losses and the government increased its authorized capital from P20
million to P50 million. In 1924, the Philippine Legislature passed a Rehabilitation Act to
enable PNB to write-off losses incurred in 1922 and 1923. In 1954, the bank expanded
its capital base to P200 million thru flotation of government bonds to cover impairment
of capital. During the financial crisis caused by the flight abroad in 1984 of a local
businessman leaving unpaid substantial loans from the banking system 2 and the
assassination of a Senator in 1986, the bank incurred substantial losses that had to be
covered by additional capital from the government.
The currency crisis that engulfed the Asian region in 1997 caused the bank’s very
large losses in 1998 and 1999. In 1995 and 1996, the bank’s foreign currency loan
portfolio expanded to make use of offshore funds which were then available at
comparatively lower interest rates. When the peso value of these loans almost doubled
due to the depreciation of the peso, the borrowers, many of whom did not have regular
source of foreign currency, defaulted.
These loans continue to be the bank’s main
problem up to the present.
These repeated losses prodded PNB’s privatization.
III.
EFFORTS TOWARDS PRIVATIZATION OF PNB
While the shares of stocks of the bank have always been made available to the
public, up to 1989, only a very minor portion thereof had actually been sold to the
public.
This precipitated the issuance of regulations by the CBP and the Securities and Exchange Commission
(SEC) requiring registration of commercial papers sold by private entities to the general public.
2
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1.
In 1972, thru a Presidential Decree3, the authorized capital of the bank
was set at P1 billion, P500 million of which to be subscribed by the government, while
P200 million shall be offered for sale to the public thru listing in a registered stock
exchange. Private holders of LBP bonds issued in payment for the purchase of land
subject to land reform may exchange such bonds for shares of PNB offered to the
public. After 5 years from listing, any unsubscribed shares out of the shares offered to
the public shall be automatically subscribed and paid for by the government. The listing
was not made and the increase in the bank’s paid up capital of P200 million between
1974 and 1975 came mainly from stock dividends.
2.
In 1975, through another Presidential Decree, the bank’s authorized
capital stock was increased to P5 billion consisting of common shares of P4.700 billion
and preferred shares of P.300 billion to enable PNB to effectively carry out the task of
providing the necessary financing for economic development.
The preferred shares were made available to the general public.
They were
cumulative; participating; non-voting; dividends exempt for income tax; convertible to
common stocks at the option of the holders in case the bank fails to pay dividends
thereon for 2 consecutive years; and redeemable at the option of the bank at the
prevailing book value but not less than par after 5 years from issuance. P50 million of
the common shares were made exclusively available for subscription at par by officers
and employees of the bank
The Board of Directors may at its discretion, increase the number of any of the
preferred shares as well as the shares available exclusively to its personnel by
converting common shares with the approval of the President of the Philippines as
recommended by the Secretary of Finance.
3
The country was placed under Martial Law in 1972.
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After the government had paid P2 billion, the government shall thereafter
subscribe to the balance of the common shares at the rate of at least P250 million per
annum which rate may be increased or decreased as may be approved by the President
of the country. Upon the lapse of 5 years from listing of preferred shares, but not later
than Dec. 31, 1980, preferred shares remaining unsold or un-subscribed shall
automatically be converted to common shares to be subscribed by the government.
The bank was authorized to purchase its own shares that are held privately4 to
give the private stockholders at that time the option to surrender their shares and
purchase new shares with different features.
The bank was given the authority to have its preferred shares listed in any duly
registered stock exchange.
Existing private stockholders were given the right to exercise their pre-emptive
right.
Holders of LBP bonds may under such terms and conditions as may be
prescribed by the Board of Directors exchange such as bonds, for shares of the bank
offered for sale to the public.
The intended P2 billion paid-up capital of the government did not materialize in
full. The bank’s paid-up capital amounted to only P1.306 billion by the end of 1978
compared to P1 billion in 1975. The increase came from stock dividends declared in
1997 and 1998. In 1979, the government paid up P100 million additional capital.
As an exception to the General Banking Laws prohibiting banks from purchasing its own shares of stock
except to prevent any loss upon a debt previously contracted in good faith but such share must be
disposed off within 6 months otherwise the bank maybe closed.
4
12
Again, the preferred shares were never listed and only a very small amount of
the bank’s shares were sold to the general public.
3.
In 1986, the charter of the PNB was revised. The preamble of the charter
stated that it is the policy of the state that the national interest in both the maintenance
of economic stability and the promotion of economic development is best served by a
system of financial intermediation that places primary reliance on the private sector, on
the market mechanism, and on the maintenance of condition of competition5.
As of Dec. 31, 1986, there were already 33 commercial banks with 1,833
branches and 116 thrift banks with 549 branches all over the country. In addition,
there were 875 rural banks (all privately-owned) with 208 branches operating mostly in
the provinces. Moreover, the CBP rediscounting window for papers of the agriculture
and export industries provided these priority areas credit support thru other banks.
Finally, the CBP provided funds to rural banks at preferential rates to be lent out to
small businessmen. Clearly, the need for a government bank to provide for the banking
needs in the provinces and to channel credit to priority areas - the basic rationale for
the operation of the PNB – was not as valid anymore as it used to be.
However, it was clarified that, still within the context of said general policy, there
nevertheless exist a clear role for direct government participation in the banking
system, particularly in servicing the requirements of agriculture, small and medium
scale industry, export developments, and the government sector.
In 1986, a people power revolution toppled then President F. Marcos and President C. Aquino was
designated President of the Philippines. The preamble of the revised charter of PNB echoes the
Statement of Policy enunciated by the new Government proclaiming and launching a program for the
expeditious disposition and privatization of certain government corporations. The cornerstones of the
policy includes (a) giving the private sector privacy with the government assuming a supplemental role in
entrepreneurial endeavors under a climate of fair competition and (b) the reduction of the number of
government corporations, circumscribing the areas of economic activities within which government
corporations may operate. The same preamble was also contained in a separate law amending the
charter of the DBP.
5
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This equivocation was due to the fact that other commercial banks were not
willing to grant loans to palay producers (sufficiency of rice is and has always been a
highly political issue in the Philippines) at terms that suit the needs of farmers. The
financing for the production of sugar was left practically to government banks because
its marketing was taken over by the government – thru PNB – during the martial law
years. The financing of small and medium scale industry relied mainly on government
support because many of the borrowers lack collateral and/or track record and
therefore were considered high-risk. While the export industry was supported by other
private banks because of its profitability, the government nevertheless gave it credit
support because of its importance to the development of the economy.
While the
government (national and local) can obtain loans from the CBP, there is a limit on the
amount of such loans and therefore the government has to continue relying on
government banks for loans to finance some of its operations/projects.
The preamble also clarified that there is a need to restructure government
financial institutions, particularly the PNB, to achieve a more efficient and effective use
of available scarce resources, to improve its viability, and to avoid unfair competition
with the private sector.
Earlier, it was mentioned that in 1984, the bank, along with the economy,
experienced a dismal negative growth. At least 170 firms folded and the government
had to operate a foreign exchange allocation system.
Many of PNB’s borrowers
defaulted and the bank suffered its first big loss ever of P1.1 billion. These losses
ballooned to P7.2 billion the following year but leveled down to P3.6 billion in 1986. It
was realized that the reorganization and rehabilitation of PNB into a smaller but
stronger and more operationally viable bank was of utmost importance.
The authorized capital of the bank was set at P10 billion (reduced from P25
billion) divided into 100 million common shares with a par value of P100 which are
available for subscription by the national government. The common shares may also be
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offered to private investors subject to ownership ceilings prescribed under the banking
law (30% for corporations and 20% for individuals).
The bank’s board was authorized to convert such number of unissued common
voting shares into preferred to be issued for sale or subscription, with such features,
terms and restrictions as it may determine to make them attractive to the public.
However, the issue and offering for sale of additional shares to private investors which
will result in more than 1/3 of the common voting shares being eligible for acquisition
by such investors shall require prior approval of the President of the Philippines.
When the ownership of the majority of the issued common voting shares passes
to private investors, the stockholders shall cause the adoption and registration with the
SEC of the appropriate Articles of Incorporation and revised by-laws within 3 months
from such transfer of ownership. Upon the issuance of the certificate of incorporation
under the provision of the Corporation Code, the bank’s charter as a government bank
shall cease to have force and effect and shall be deemed repealed.
Any special
privileges granted to the bank such as the authority to act as official government
depository, or restrictions imposed upon the bank, such as audit coverage by the
Commission on Audit and Civil Service Commission, shall be withdrawn, and the bank
shall thereafter be considered a privately organized bank subject to the laws and
regulations generally applicable to private banks.
The national government shall subscribe to 25 million common shares of stocks
worth P2.500 billion which shall be deemed paid for by the government with the net
asset value of the bank remaining after the transfer of assets and liabilities to the
national government.
All shares of stock held by the government were deemed cancelled and
exchanged for P2.5 billion common stock subscribed and paid-in by the government.
The ratio of shareholdings of the government to the stockholdings of the private
15
shareholders before the effectivity of the revised charter shall be maintained. Private
shareholders of the bank including holders of Common A shares (sold to personnel)
shall exchange their shares for such number of shares of the bank computed on the
basis of the ratio of the common shares held by the government immediately prior to
the effectivity of this new charter to the new shares subscribed and paid-in by the
government.
In order to rehabilitate the bank, the National Government acquired some P47
billion in non-performing assets and assumed P55 billion in liabilities. This resulted in
the decrease in assets from P76 billion as of end of 1985 to P35 billion as of Dec. 31,
19866. In addition P16.7 billion in contingent liabilities were also transferred to the
government. The bank’s capital account, after writing off losses of about P5.2 billion,
amounted to P2.5 billion, which amount was then sufficient to meet the prescribed
capital requirements.
Another important component of the bank’s rehabilitation plan under its 1986
charter was the reorganization of the bank to effect, among others, a reduction in, but
maximized utilization of, personnel. The bank adopted an Early Retirement Incentive
Plan which enabled it to reduce personnel by 1,800 people. The resultant size of the
reorganized PNB personnel complement then compared favorably with the personnel
size of its peer banks in the private sector in relation to their assets, loans and deposits.
The expected savings were then estimated at P100 million per annum.
During 1987 to 1989, the bank operated profitably. Net profit went up to P2.0
billion in 1989 or a 37% return on equity. Total resources climbed to P77.5 billion and
deposits surged to P37 billion.
6
A similar rehabilitation package with different amounts was also given to the DBP.
16
In 1989, PNB met the conditions and targets agreed upon with the World Bank in
connection with the Economic Recovery Loan assistance it extended to the country.
PNB was declared completely rehabilitated and ready for partial privatization.
Privatization started when PNB’s stocks were listed on June 21, 1989 at the
Philippine Stock Exchange (PSE).
The bank offered for subscription by the general
public 10.8 million shares (30% of outstanding shares) worth about P1.8 billion out of
the holdings of the government. The offer was oversubscribed many days before
actual listing by 25,976 private stockholders (compared to 2,565 only prior to the stock
offering). Share prices reached its peak of P642.50 in Oct. 13, 1989.
In 1991, the bank became the largest bank in the Philippines in terms of deposits
and total resources.
In March 1992, PNB approved its second public offering of 8,083,140 shares.
Again, the offering was oversubscribed by old and new shareholders. The equity of the
private sector went up from 30% to 43% while that of the government was reduced
from 70% to 57%.
In December 20, 1995, PNB implemented its 3rd tranche of the privatization
schedule. This involved the listing and sale of 7.2 million government held shares and
2.4 million warrants (one warrant for every 3 shares). The PNB warrant enable the
holder to buy one share of PNB share for P260 from June 19, 1996 to Dec. 20, 1997.
This sale resulted to 52.6% ownership of PNB by private shareholders.
The
government’s equity was reduced to a minority of 47.4%.
The amendment to the Articles of Incorporation and by-laws of PNB to convert it
to a private entity was approved by the SEC on May 27, 1996.
However, only 4
representatives of the private sector was elected to its 11–member Board. Thus, the
government continued to control the bank although its equity had been reduced to
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minority. Also, the Department of Finance and the Monetary Board of CBP granted it
authority to continue as government depository7.
In Oct. 23, 1996, the bank increased its authorized capital from P10 to P25
billion representing 250 million common shares at par value of P100 a share. A stock
dividend of 37.5% equivalent to 37.5 million common shares was declared to cover the
25% minimum subscription requirement for the P15 billion increase in the authorized
capital. Issued shares rose from P10 billion in 1995 and 1996 to P13.5 billion by 1997.
4.
In November 1998, the bank thought of raising capital thru the issuance
of preferred share but this was not approved by its stockholders. By this time, the bank
started to incurr losses from its operations thus eroding its capital position. The bank
then appointed ING Barings & Lehman Bros. as financial advisers in privatization.
In May 13, 1999, the Board of Directors of the bank approved the right offering
of 68,740,086 new common shares with a par value of P100 to eligible stockholders as
of Aug. 18, 1999. The proceeds were to be used partially to fund loan portfolio
expansion, capital expenditure for branch improvements and technology upgrade and
to meet prescribed minimum capital requirement of the CBP. The listing of the new
shares was approved by the PSE on July 28, 1999. The rights were offered on the basis
of one right for every two common shares held at a subscription price of P137.80 per
right share, payable in full upon subscription. After the rights offering, the bank had a
total of 206,220,257 issued and outstanding common shares.
The government did not participate in this stock offering due to lack of funds and
its policy of privatization. It decided instead to assign its rights to a group of private
investors headed by Mr. Lucio C. Tan for a consideration.
After the stock rights
offering, the government’s equity holding dropped to 45%.
The authority of PNB as government depository was one of the privileges that had to be withdrawn after
the government’s equity in PNB had been reduced to a minority.
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18
As early as 1989, private equity of the bank already constituted 30% of the
bank’s total outstanding shares.
In 1992, this went up to 43%.
In 1995, the
government’s equity was reduced to a minority of 47.4%. Despite these developments,
since there was no sufficiently large private stockholder who wanted to assert his
ownership and was ready to assume the responsibilities as such, the Board members
and the top management of the bank were still nominees of the government. Thus, the
bank remained under the control of the government despite its minority position
because its was the largest single stockholder.
During the last quarter of 1999, arrangements were made in order to allow the
Lucio Tan Group (LTG) representation in the bank’s Board of Directors. On Jan. 2000,
the LTG took over the management of the bank. One of the foreign group of investors
was given a seat in the Board.
5.
As stated earlier, during 1998 and 1999, PNB incurred losses. In order to
strengthen the capital position of the bank, a new round of public offering of the bank’s
shares was approved. To ensure success of this flotation, a quasi-reorganization of the
bank was effected on July 2000 to write-off losses. The par value of the bank’s shares
was reduced from P100 to P60 without increasing the number of shares outstanding
thereby decreasing the bank’s authorized capital from P25 billion divided into
250,000,000 common shares to P15 billion divided into same number of common
shares.
At the same time, the bank’s authorized capital was increased from P15 billion
to P50 billion divided into 833,333,334 common shares with a par value of P60.00
On Sept. 2000, the bank offered for subscription, thru a pre-emptive rights
offering, 171,850,215 common shares at an offer price of P60.00 per rights share with
171,850,215 warrants.
The warrants gave the holders the right to subscribe to
19
additional shares of the bank in the proportion of 1 warrant for every one right share
subscribed.
Again, the government did not participate in this rights offering in view of its
avowed privatization policy and due to lack of funds. Except for a minor portion of the
offering, the rights and the warrants were purchased by the LTG. The equity of the
LTG rose to 68% while that of the government went down to 16%. This action by the
government was roundly criticized and was interpreted by some sectors as special favor
to the LTG.
Mr. Lucio C. Tan, the head of the LTG, is a Filipino-Chinese who, from a humble
beginning, was able to build a vast business empire with investments in banking,
education, cigarette-making, beer brewing, piggery and real estate (hotels, consumer
malls, condominium buildings) and ranching, among others, not only in the Philippines
but in other countries as well such as the United States of America, China, Hongkong
and New Zealand. He became a highly controversial political personality because of his
perceived closeness and support to two of the past Presidents of the country.
His
acquisition of control of the PNB and the country’s air carrier, the Philippine Air Lines,
have been viewed as political concessions despite the fact that he injected very
substantial capital in these entities to stave off serious insolvency problems and at a
time when nobody was interested in investing in these entities under the same terms
and conditions under which the LTG made the investments.
Initially, the LTG committed to buy-off the remaining 16% equity of the
government in the bank and made a downpayment. The sale was not finalized and the
downpayment was forfeited. Thereafter, the LTG was convinced by the government to
have a joint sale of their shares to give the investor the option to acquire majority
control of the bank.
Two private groups initially indicated interest and they were
authorized to conduct diligence audit on the bank under a confidentiality agreement.
Both parties eventually decided to withdraw from the proposed sale.
20
Thus, since the first Initial Public Offering (IPO) of PNB shares in 1989, it went
through a series of changes in ownership structure culminating in a reduction of
government shareholdings to 45.6% in 1997.
The proportion of government
shareholdings was further reduced to 30.4% in Sept. 1999 during the stock rights
offering when the government decided not to exercise its pre-emptive rights. This was
further reduced to 16% after the rights offering in Sept. 2000.
IV.
THE “REVERSE PRIVATIZATION” OF PNB
On January, 2000, the LTG, the new majority stockholders of PNB, took over its
administration. During the entire year, the Bank experienced large deposit withdrawals
(including those by government agencies) due to various factors, major among which
were as follows:
1.
Disclosure of the P13 billion loss incurred by the bank in 1999.
2.
The closure of a medium-sized commercial bank and its related
investment house which affected the whole banking system.
3.
Negative publicity arising from the failure of two efforts to dispose
off the remaining 16% government equity in the bank.
4.
Negative
publicity
from
recriminations
among
the
previous
government management groups on losses incurred by the bank.
5.
Failure to put in place a rehabilitation program to arrest continuous
losses and liquidity problems.
6.
Liquidation of its remaining FCDU deposits. The bank deemed it
21
better to pay for these deposits instead of negotiating for their
renewal in view of the continuing depreciation of the peso.
Moreover, the deposits were made with the condition that they
were withdrawable once PNB is privatized.
7.
Baseless fears fomented by critics of the LTG that it will “raid or
abuse” the bank.
8.
Government agencies thought the authority of PNB as government
depository bank was terminated.
The BSP and the PDIC granted the bank emergency loans of P15 billion and P10
billion, respectively, to meet these withdrawals subject to the following conditions
among others:
1.
Putting up of fresh capital of P 10 billion by the LTG;
2.
Putting up of good collateral with value twice the amount lent.
These loans were granted strictly in accordance with existing laws and the rules and
regulations of the BSP and PDIC and at prevailing market rates.
The withdrawals reached their peak after the grant of the emergency loans was
reported in the newspapers. In the past, the BSP and the PDIC had granted similar
loans to other banks even at less stringent terms imposed on PNB without public
resistance. However, in the case of the loans granted to PNB, perhaps in view of the
fact that the amount thereof was the largest so far granted to a bank and the
personalities involved, the loans were subjected to extreme criticisms. It was only after
a joint press release from the BSP, the PDIC, the Department of Finance and the PNB
(to the effect that repayment of these loans will be made part of a rehabilitation plan
22
for the bank under consideration and reiteration that PNB continues to be a government
depository bank) was issued that withdrawals tapered off.
The decision to rehabilitate PNB was premised on the following, among others:
1.
The basic immediate problem of the bank was liquidity not
solvency.
2.
It is too large to fail. The insured deposits of the bank are bigger
than the reserve funds of PDIC. Total assets of the bank in 2000
represented 6% of the total resources of the banking system.
3.
The private stockholders have put in P 20 billion fresh capital and
are capable of putting additional capital.
4.
The loans granted by BSP and PDIC are fully secured by very
good collaterals.
5.
The most serious problem of the Bank is its large non-performing
loans, including loans to government entities, all of which were
granted when the bank was under management appointed by the
government.
The rehabilitation program eventually approved provided for the payment of the
P 25 billion emergency loans from BSP and PDIC as follows:
a.
P10 billion will be repaid by turning over to PDIC past due loans
to
government
agencies
and
government
securities
all
granted/acquired by the bank while it was under government
management.
23
b.
P7 billion to be converted to preferred, non-voting shares after
par value had been reduced from P 60.00 to P 40.00. The LTG
and the other private shareholders were not allowed to
subscribe to new shares.
c.
The balance to be restructured over a ten-year period at market
rates and with good collaterals.
The P15 billion emergency loan granted by BSP, together with its collaterals, was
assigned to PDIC. Thus, the additional equity of P7 billion in the form of preferred nonvoting shares was placed in the name of PDIC. Since under its charter PDIC is not
authorized to hold common shares of any bank, the shares issued to it were preferred
and non-voting.
However, the term sheet on the rehabilitation program of PNB
contained provisions under which the LTG assigned voting rights to the national
government as will maintain a voting parity of 45% of the outstanding capital stock of
PNB for each of the government and the LTG.
The preferred shares of PDIC are
immediately convertible to common voting stocks upon its sale to a third party other
than a government agency.
The conversion of P7 billion advances from the government to equity increased
the government’s equity from 16% to 45% thus, the term reverse privatization. On the
other hand, the equity of the LTG was reduced from 68% to 45% also8. Justifications
for the decision to acquire additional equity in PNB include the following, among others:
1.
It is part of the rehabilitation program of PNB.
2.
The rehabilitation program of the bank is expected to improve its
financial condition thus increasing the value of its shares. The
8
The balance of 10% is held by other private stockholders.
24
additional equity acquired at a par value of P40.00 will give the
government bigger participation in this anticipated increase in the
value of the bank’s shares.
3.
To ensure successful implementation of the bank’s rehabilitation
program. Under the arrangements, the Chairman of the Board,
the President and the Chairman of the Executive Committee will
be nominees of the government. All are required to have
extensive experience in private banks. The government and the
LTG will have five (5) representatives each in the Board with the
President as the 11th member. The reorganization of the bank was
placed under a Special Committee of five with the Chairman of the
Board as Chairman and two representatives from each groups.
The various Board Committees are headed by a government
director with members coming from each group.
4.
The government is at liberty to sell its shares at any time it wishes
to do so. To facilitate the said sale, the LTG is required to sell also
its equity such that the buyer will have the option to acquire a
majority interest in the bank.
The proposal to reduce the par value of the bank’s shares from P60.00 to P40.00
was vigorously objected to by the LTG. A diligence audit conducted by an international
accounting firm for the government showed that the book value of the bank’s share,
after providing for losses on its assets and other adjustments was only P40.00 per
share. However, the said audit did not include additional values that it found among
the bank’s assets acquired in payment for loans which values would raise the book
value of the bank’s share beyond P40.00. The audit also did not provide for goodwill
values contrary to precedents set in several earlier cases of bank takeover.
Nevertheless, the LTG finally agreed to the said reduction as it was a non-negotiable
25
condition for the approval of the rehabilitation plan for the bank. Moreover, the LTG
was given the following protections:
1.
On certain specific issues, such as the grant of loans and sale of
assets, a 75% majority- instead of the usual simple majority – vote
was agreed upon. This effectively gave the LTG veto powers over said
issues.
This also ensured further that political considerations in
decision-making will be eliminated.
2.
A right of first refusal on government sale of its equity was given to
the LTG. Moreover, the participation of the LTG in any bid to be
conducted by the government for the sale of said equity was also
provided for regardless of whether or not the LTG has exercised its
right of first offer. However, the LTG shall not have the right to match
the highest bidder if the LTG did not exercise its right of first offer. In
consideration for the grant to the LTG of the right of first offer and
right to match, the LTG granted the government a put option at a
specified price to require the LTG to purchase and acquire any PNB
shares of the government remaining after the acquisition by the LTG
of a portion of the government shares under its right of first offer
and/or right to match.
After protracted negotiations, the term sheet on the rehabilitation plan of PNB
was finally signed on Dec. 2001 with the effectivity of its components being made
retroactive to October 1, 2001.
At present, the majority of the members of the Board of the bank are
professional bankers with extensive experience in private banks with a mix of foreign
and domestic orientations. Their primary loyalties are to the bank itself not necessarily
to the sector which appointed them. The Chairman, the President, the heads of the
26
various Board Committees and the heads of the bank’s operating units are likewise all
professional bankers with long experience in private entities. In view of the positive
effects of the bank’s rehabilitation program and various innovative thrusts made by the
new management, its losses was cut by more that 60% in 2002 and during the last 3
months of the year, operations had shown modest net profits.
Presently PNB is the 4th largest commercial bank in the Philippines. It has 324
domestic branches distributed strategically all over the archipelago and 79 branches/
offices in different parts of the world (United States, Canada, England, Spain, France,
Netherlands, Germany, Austria, Italy, Japan, China, Taiwan, Singapore and Hongkong)
authorized to engage in commercial banking and/or remittance business. It has
domestic subsidiaries engaged in non-life insurance, leasing, investment banking and
securities trading. It has an affiliate engaged in life insurance.
V.
LESSONS IN PRIVATIZATION OF BANKS
1.
Privatization is based on the arguments, (a) that “privately owned
companies have greater incentives to produce goods and services in
the quantity and variety which consumers prefer”; they are “less
willing to provide uneconomic services” and (b) that resources tend
to be used by private entities more productively and as “consumers
dictate, rather than according to the wishes of government which
must necessarily reflect short-term political pressures and problems
of managing the public sector’s overall demands for capital.”
Moreover “privatization changes management motivation towards
profit-making. A privatized company “will be less willing to provide
uneconomic services” and therefore “resources tend to be used more
productively”.
This is because access to additional resources will
27
depend on demonstrated ability instead of public influence.9 Those
concepts should be the general principle that should guide decisions
in the privatization of banks.
2.
The basic ingredient of a successful privatization is to place the bank
under
a
competent,
independent–minded
and
professional
management, even while the government cannot fully divest its
equity interest as yet. Efficient operation may be expected to raise
the value of the bank’s equity and thus enable the government to get
the best price for its shares at a shorter period of time.
3.
There must be a definite program to privatize complete with time
frames within which government control will be relinquished. This
should, however, consider setting up of “safety network” so as not to
waste benefits gained thru the operation of government banks.
4.
To facilitate privatization, the government may extend assistance as
provided under existing laws, rules and regulations. However, there
should be definite arrangements when and how these assistance shall
be terminated. This is especially true in cases where the bank
incurred serious operational problems while in the hands of
management appointed by the government.
5.
The private stockholders who will take over the bank must meet
certain basic criteria on integrity, competence and financial capability
to ensure that the bank will be operated efficiently and will do away
with the need for further assistance from the government.
9
Privatization: Principles, problems and priorities by M. E. Beesley and S. C. Littlechild.
28
6.
Where in the process of privatization, the government remain as
substantial stockholder although not majority anymore, instead of a
very wide dispersion of ownership, it is desirable that the process
ensure that there should be one or two dominant private stockholder
who can act as the countervailing influence and as true owners and
thus prevent the government from continuing control of the bank
thru its being still the single largest stockholder although a minority
already.
7.
The privatization scheme should include provisions for the protection
of the rights of personnel of the bank to be privatized. Moreover, the
positive aspect of the privatization must be explained so that it will be
acceptable to them. Acceptance by the personnel will enhance the
success of the transition from public to private ownership.
8.
It is best to hire independent legal and financial experts specialized in
valuation of assets, documentation and government processes to
advise the government in its privatization scheme. This will ensure
that the pricing of the shares is the best both on the part of the
government and the private buyers and that the implementation
period will be shortened. Moreover, it will avoid future challenges to
the fairness and legality of the privatization program from the point of
view of the government.
“The criteria of aggregate net benefit to the public is the appropriate starting point
for the privatization of a bank. Unless these benefits promises to be considerable, the
political costs of change will scarcely be worth incurring" and “that privatization in
29
certain industries (or parts thereof) could be ruled out as simply not beneficial to
consumers.”
10
Such is the case, for example, of the LBP. This bank was established to finance the
implementation of the land reform program of the government thru the purchase of
large tracts of agricultural land and distributing them to their tenants or to qualified
parties and providing credit support to these beneficiaries. By the nature of this
enterprise, a large amount of long-term capital is needed to finance a sector which may
not be viable initially. The private sector, understandably, may not be willing to invest
funds in this undertaking. Since this program is considered basic to the economic
development of the country, the government has to implement it. However, to minimize
continuing demand for appropriations for the project which the government may not be
able to afford, the LBP has been allowed to engage in commercial banking to provide
funding for the program. Until the program has been completed and/or the beneficiaries
thereof have become acceptable risks to private interest, it will be unrealistic to
consider privatizing LBP.
10
Ibid.
30