By Christopher Langner
The board of Metrobank, the largest
bank in the Philippines, tweaked a resolution authorising the
issuance of Basel III compliant capital notes last week, but
foot-dragging by the banking regulator means its efforts may
have been in vain.A deal by Metrobank is still a long way from happening. The
transaction is stalled partly because the Bangko Sentral ng
Pilipinas, which doubles as central bank and regulator, has yet
to approve the sale.
Bangko Sentral also has placed onerous regulations around
Basel III-compliant subordinated debt issuance that has stymied
investor participation in the Philippine bank capital market.
It is not just Metrobank. Other private banks are seeking
the green light to increase their capital via subordinated bonds
that meet the new bank capital guidelines, which call for
investors to share losses with issuing banks if they are
declared non-viable. Rizal Commercial Banking Corporation has
been waiting for almost a year for the central bank's go-ahead.
Metrobank's board made its move just three weeks after the
Development Bank of the Philippines printed a Basel III deal. It
was the first offering from the country that meets the new
standards, which means the bonds could be written down to zero.
From January 1, any bank-issued subordinated bonds that are not
structured this way will not count towards capital.
But DBP is the only bank so far to have issued Basel III
subordinated paper under the new system. Being fully owned by
the government, it avoided the delays private lenders face
getting approval for their Basel III-compliant offerings.
Coordinated by Standard Chartered and co-arranged by BPI,
PNB and Deutsche Bank, the deal attracted strong interest from
local investors.
Still, DBP had to find a solution to what bankers and
lawyers are calling overzealous regulation by the Bangko Sentral
ng Pilipinas.
In February, the regulator issued Circular 786, which
requires any investor intending to buy subordinated bonds with
loss-absorption clauses to sign a big boy letter - an agreement
that seeks to limit liability by restricting the right to sue
over non-disclosure of material information.
Additionally, investors may be required to undergo
suitability tests.
Nestor Espenilla, Jr., deputy governor of Bangko Sentral ng
Pilipinas, defended the regulator's stance, by saying it is
necessary to protect investors.
"As a consumer protection matter, BSP finds it appropriate
to have in place Circular 786 to complement our Basel 3
implementation framework both to ensure that retail investors in
the Philippines are adequately informed of their possible risk
exposures, and to minimize potential mis-selling of
comparatively high yield hybrid, innovative instruments in a
generally low interest rate environment," he said by email.
"As a regulator, we believe in striking an appropriate
balance between the interests of banks and their customers in
the context of market-based rules," he added.
OVERKILL
"I cannot think of any other country in the world that has
such regulation in place," said a lawyer in Hong Kong who
specializes in debt capital markets.
The circular's investor protection rules, however, are only
applicable to Basel III transactions distributed onshore,
Espenilla said.
"Those distributed offshore are covered by applicable rules
in the offshore jurisdiction - our banks now understand this,"
he explained.
But lawyers said the wording on the regulation itself leaves
it open to discussion. The February circular suggests even
buyers in the secondary market would be required to sign risk
disclosure statements.
"I am pretty sure it applies to secondary as well," said the
Hong Kong lawyer. Indeed, in a clarification issued in March,
the central bank stated that the requirements in the circular
"are applicable to all prospective investors in Additional Tier
1 and Tier 2 capital instruments." The regulator bolded the word
'all' to ensure there was no doubt over its meaning.
It is no wonder that Metrobank amended its original plans.
The bank had mandated JP Morgan and UBS and even met some
investors earlier in the year with eyes set on issuing US$500m
in Tier 2 bonds in the offshore market. Now it is considering
issuing at home.
As DBP proved, depending on how well a bank is known, it may
be easier to get investors in Manila to jump through all the
hoops required by the central bank.
Even at home, though, Metrobank still needs regulatory
approval to go ahead. And that has been a very slow process.
Ultimately, one banker in the Philippines said, the reason
for the drawn-out consent and excessive regulation is to
safeguard the Central Bank itself.
"They have a history of being sued by disgruntled investors
claiming they should have not allowed certain securities to be
sold. Given these bonds can be fully written-down, the [central
bank] wants to be absolutely sure it is not liable before
letting anyone in the Philippines invest in the bonds," said the
banker.
DBP did not face that issue because it is state owned. So,
the banker said, the government will not let it fail, especially
if it can be sued for doing so. "This really puts private banks
at a disadvantage to government banks," said the treasurer.
