The government will own the second largest bank in the country. This will come to pass when the Land Bank of the Philippines (LBP) and the Development Bank of the Philippines (DBP) merge.

The two government banks will merge as the government prepares to face the challenges of regional economic integration.

The surviving bank in the merger is the LBP, per order of President Aquino, saying there is need to provide better access and extend quality financial services and products to more unbanked and underserved areas.

That LBP was picked by the President to be the surviving entity in the merger underscore the fact that the President is grounded on the issue of what the small Filipino businessmen and farmers need.

Between the two banks, the DBP has notoriety on channeling its resources to big business close to the powers that be. The DBP management has been accused several times of favoring big ticket loans to friends of former presidents.

In the administration of President Aquino, the DBP was accused of extending a loan to a P-Noy campaign funder. The loan reportedly funded the development of dumpsite in Laguna, converting the garbage to methane gas to produce electricity sold to Meralco. The loan was in over P1 billion.

Advocacy groups had been noisy accusing this bank of being so corrupt, neglecting the mandate it was created.

The merger with LBP will erase doubts on the government sincerity to provide loans and credits in unbanked areas. Availability of capital and credit is the no. 1 deterrent of growth of small and medium enterprise in the rural areas.

Land Bank servicing the requirements of small business and farmers in the rural areas is one correct move if the government is serious in developing enterprise.

Capital in the countryside is provided by loan sharks, mostly local bombays, who charge 20% interest per month. Under the high cost of capital regime, enterprise will never grow. Then jobs will never be created.

In other developed countries, the anchor of their economic growth are small and medium industries in the countryside that creates most of jobs that feed on the economy.

In the Philippines, economic growth is almost always suspect as family economy continues to be low and family poverty incidence high. Real economic growth is one that is inclusive, meaning everybody benefits from such economic growth or that economic growth comes from growth in the family income and in the smallest community.

When merged, the surviving entity, the LBP, will have P1.6 trillion in total assets, making it the second largest bank in the country, next to BDO that has P1.88 trillion.

On its own, LBP is the country’s fourth largest bank with assets of P1.14 trillion. DBP is the seventh largest with P465 billion.

Earlier, in anticipation of tough competition, the government has called on banks to merge and become bigger to effectively compete with the giants who may enter the Philippine market.

These two financial institutions are not without record of alleged anomalies. The LBP got into trouble in its 2008 transaction with San Miguel. on Sept 24, 2012 reported complaints by Emilio Aguinaldo Suntay III before the Office of the Ombudsman regarding Land Bank’s transaction between San Miguel, allowing it to own more than 30% of Manila Electric Co.

In his petition, Suntay said he "strongly believes and is willing to prove" that the purchase agreement entered into by Land Bank "is grossly disadvantageous to the government and inimical to the interest of the state and public."

In December 2, 2008, the state-owned lender sold 46 million Meralco shares for P4 billion or at P90 apiece to Global 5000 Investments Corp., which was identified with Ongpin and businessman Inigo Zobel.

Global 5000 has been renamed San Miguel Global Power Holdings Inc. Under the special purchase agreement, SMC Global would be able to buy the Meralco shares in three installments for three years for P90 a share, with last payment due on January 31, 2012. San Miguel was able to buy the shares of state-run Government Service Insurance System for the same price prior to this deal with Land Bank.

When Philippine Long Distance Telephone Co. and San Miguel were fighting for majority ownership of Meralco in 2009, the power distribution firm's share price breached P300-a-share at some point. On Monday, Meralco closed at P261 for a market value of over P9 billion.

Suntay said he is willing to prove that the transaction did not involve payment and consideration. He cited a December 17, 2008 letter from SMC Global's treasurer, Rhogel Gandingco, to Pico, saying that no payment will be given to the state-owned lender.

Suntay also said no public bidding for the said Meralco shares was held by Land Bank and that all the government financial institutions "accepted" SMC Global's terms and price.

He also said Land Bank failed to undertake any due diligence, with other GFIs "blindly" following the lender.

In his statement to media, Suntay said Land Bank, GSIS, the Social Security System and other GFIs chaired by then finance secretary Margarito Teves were allowed to sell at least P20 billion worth of Meralco shares to a company that was "undercapitalized and had no track record, without the benefit of public bidding and due diligence at the very least."

"Who is the real party behind and ultimate owner that Ongpin represents in SMC Global, Alphaland, Top Frontier, and the subfund he manages under Ashmore Funds for whom then secretary Margarito Teves, Gilda Pico and other presidents of government financial institutions sold all their Meralco shareholdings in haste and under anomalous conditions?" Suntay said.
The complainant said Land Bank lost at least P157 million annually because the bank sold its Meralco stake in tranches even though the group led by Manuel V. Pangilinan had offered P90 per share in cash back in 2007.

"Interest alone forgone by accepting SMC Global's offer robbed the government more than at least P157 million at 3.75 percent of P4.19 billion annually; 3.75 percent is the benchmark interest rate currently and the average since 2008 is 4 percent," Suntay said in his complaint to the Ombudsman.

He said SMC Global did not have the financial capacity to buy the Meralco shares since based on the January 28, 2012 Commission on Audit report, the San Miguel company had net assets of only P60 million as of January 2009. Despite this, SMC Global was allowed to buy the Meralco shares owned by the government.

In his petition, Suntay sought the cancellation of the contract between Land Bank and SMC Global and the disqualification of the company and its allies from participating in other government auctions.

The petition also seeks the cessation of all transactions with SMC Global and its allies, and the filing of plunder and economic sabotage cases against Ongpin, Ang and San Miguel legal counsel Estelito Mendoza.

The Meralco shares in question are still in the name of Josefina Lubrica, who acted in behalf of Federico Suntay. Based on Supreme Court G.R. No. 170220, Emilio is an heir of Federico, who in turn had a land valuation dispute with Land Bank and the Department of Agrarian Reform.
These shares were acquired as ill-gotten wealth by the Asset Privatization Trust and were transferred to Land Bank in 2000. In 2005 the shares were part of a block auctioned by the Regional Agrarian Reform Adjudicator when Land Bank refused to pay a valuation made in 2001 by RARAD amounting to P157 million for 943 hectares of Suntay's land that was put under the Comprehensive Agrarian Reform Program.

In December 2008, the Department of Agrarian Reform Adjudication Board ordered Meralco to cancel the transfer of shares held by Land Bank to Lubrica. The DARAB also ordered Meralco to restore the ownership to the state-owned bank and record these in the stock and transfer book of the utility, which back then was majority owned by the Lopezes.

The DARAB told the Philippine Stock Exchange, Philippine Depository and Trust Corporation, the Securities Transfer Services Inc., the Philippine Dealing System Holdings Corporation and its subsidiaries, dealers and traders that they should stop the trading of the Meralco shares until the issue is settled.

Prior to this order from DARAB, Meralco had cancelled the 42 million shares or 3.77 percent of the company held by Land Bank in the utility in favor of Lubrica, in keeping with the 2005 Supreme Court decision. Meralco said that it maintained that the cancellation of Land Bank’s shares in the company in favor of Lubrica was in order and valid.

Among the parties copy furnished with the order include San Miguel lawyers Honorato Y. Aquino, Hector B. Feliciano, Wilfredo P. Saquilayan, Ernesto B. Francisco, and Urbano Ancheta Sianghip & Lozada.

Also receiving the copy were Land Bank, the Securities and Exchange Commission, Meralco corporate secretary Emmanuel Sison, the PSE, PDS Group, PDTC, the presiding judge of Regional Trial Court of Occidental Mindoro, the Court of Appeals and Supreme Court.

At that time, SEC said it was looking into the matter "in order to assess what steps we can take to protect the investors, to assure that there is a level playing field."

What about DBP?

In June 6, 2011, Philippine Star columnist Jarius Bondoc noted in his column Gotcha that the DBP is “under close scrutiny” for alleged misuse of funds “for billion-peso behest loans and personal pay increases.”

“Among the findings supposedly was a hush-hush account in a private bank branch in Makati to pay out the old directors’ extra pay. The account apparently was opened as far back as 2006 or prior. Also in the confidential payroll were at least eight top DBP executives in loan screening, risk assessing, and finance reporting. One of its beneficiary execs closed the account in November 2010, apparently to avert detection by the new directors,” Bondoc said.

“By then, however, the COA state auditor for the DBP already had issued a “qualified opinion” on financial statements for 2008 and 2009. Such an opinion points up fraud or blatant errors in financial reports, or inapt accounting policies or projections. Creative accounting seemingly was employed to justify fat bonuses. The execs were included to get their cooperation, insiders suspect. That the adverse COA report necessarily was appended to the old board’s financial statements for 2008 and 2009 stained the DBP’s reputation.

“Among the behest loans was P500 million to an unknown entity, to trade mining shares in late 2009. This is one of several reasons why the BSP supposedly placed the DBP under Prompt Corrective Action. A PCA alert lights up when a bank engages in unsafe, unsound activities that imperil its depositors and creditors. Or due to repeated flouting of banking laws and Monetary Board directives. Or, significant reporting errors and misrepresentation.

“As pieced together in a recent ABS-CBN News special report, the old DBP board lent P510 million to Delta Venture Resources Inc. DVRI is a unit of Golden Media, led by Marcos ex-trade minister Roberto Ongpin and diversifying at the time into mining. DVRI used the loan to buy half of DBP’s 109 million shares in Philex, the country’s biggest listed miner, but assigned these to Golden Media. Since the DBP acquired the shares at P5.50 apiece, it earned from the sale at P12.75. But suspicions of insider trading and favoritism arose when, four weeks later, Golden Media unloaded its shares for a heftier P21 apiece. Since the DBP had a man in the Philex board, it presumably knew of forthcoming events and prices.

“Under the law, no bank may lend a single cent to a borrower with no collateral or track record. The old DBP board allegedly committed a parallel malpractice in its $1-billion purchase of Metro Rail Transit bonds worth only $760 million. This illusorily benefited the government, and is muddling the “privatization” of the already private MRT.

“The NEDA, for its part, noted seeming mismanagement of official development assistance, or concessional credit from rich lands. The DBP is the principal disburser of the ODA, but its releases declined markedly under the old board. Allegedly this was due to diversions of the ODA into behest loans and bond purchases, which again tainted the DBP’s reputation. Because the President chairs the NEDA, the new DBP board is being urged to compile the findings for Aquino’s full awareness.”

Then there’s the case of DBP’s brush with the Securities and Exchange Commission (SEC) over the bank’s allegedly illegal transactions, called “wash sales,” which took place from early January to March 2014.

DBP allegedly sold P14.3 billion worth of government securities to First Metro Investment Corp. and bought back the very same securities on the same day and at the same price at which they were sold. In effect, no real change in ownership took place, the Philippine Daily Inquirer said on June 3, 2015.

The Philippine Securities Regulation Code prohibits wash sales, defined as “engaging in transactions in which there is no genuine change in actual ownership of a security, taking into consideration internal control systems adopted by the firm to prevent manipulative practices.”

According to SEC chair Teresita Herbosa, the regulator is now gathering facts, requesting documents, and inviting persons” for questioning.

The SEC action was prompted by a COA audit observation memorandum (AOM), citing the 28 trades undertaken by DBP.

In explaining away these transactions, DBP said it just implemented a strategy to “preserve capital and strengthen the bank’s long-term viability.”

“Due to adverse market conditions affecting all banks, mark-to-market losses in the bank’s investment securities portfolio in early 2014 grew to levels that would have affected its core capital and would have resulted in reduced capital ratios,” the bank said.
Securities classified as “available for sale” or those lodged in the short-term trading portfolio are subject to mark-to-market valuation while those classified as held-to-maturity can be reported at amortized cost less impairment.

“In order not to breach regulatory capital adequacy ratios, the bank had to cut losses and sold illiquid and out-of-the-money government securities and booked trading losses on said securities,” the DBP said.

“These trading losses should not be taken in isolation as the bank took trading opportunities to offset the trading losses, and ended the year with net trading gains of over P400 million, which contributed to the bank’s net income of P4.6 billion for 2014.”

DBP has denied such allegations, claiming that the particular transaction only served as precautionary measure against dropping market prices.

“The DBP sold securities as market prices were dropping globally to limit its losses and protect the bank’s financial condition,” DBP said in a statement, the Manila Bulletin reported on June 7.

DBP explained that the company’s Bank’s Risk Oversight Committee (ROC) gave its approval to implement, on a timely basis, the legitimate strategy to shift a portion of the bank’s Available-for-Sale portfolio to Held-to-Maturity and allow Treasury to exert efforts to minimize losses.

“The minutes of the ROC meeting would show that the Committee did not approve any alleged ‘wash sale’,” the bank said.

“Had DBP done nothing, the bank could have lost approximately P10.7 billion by end 2014 instead of only P712 million. This was a decision to ring-fence the bank and contain the risks it faces. In so doing, it also ultimately protected the banking system,” DBP said.

“Had the bank lost P10.7 billion, its capital would have been so impaired that the bank would have fallen short of Basel III and Bangko Sentral metrics such as the capital adequacy ratio,” it added.

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Friday, 13 December 2019
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