Landbank seeks to beef up capital

BY MARIA ELOISA I. CALDERON, Reporter/BusinessWorld Land Bank of the Philippines may float some P2.5 billion worth of Tier 2 bonds early next year to beef up its financial strength in anticipation of stricter capital rules under Basel 2. Landbank President and Chief Executive Officer Gilda E. Pico announced the plan on Tuesday night following a successful $150-million Tier 2 capital issuance offshore in October. "We can still issue P2.5 billion to complete the P10 billion [allowed by the central bank]," Ms. Pico told a press briefing. On Oct. 13, Landbank raised $150 million, or roughly P7.5 billion, from its Tier 2 issuance, which was the bank’s first subordinated debt issuance and its first offshore borrowing since 1996. Also called supplementary capital, Tier 2 equity is deemed of lower quality. It includes, subject to various conditions, general loan loss reserves, long-term subordinated debt and cumulative or redeemable preferred stock. Tier 2 notes are negotiable in the secondary market. A maximum of 50% of a bank’s capital accounts could make up Tier 2 debt. Tier 2 debt may also be converted into equity in the issuer. The issuance of the subordinated debt has raised the bank’s capital adequacy ratio (CAR) — a measure of a bank’s health — to 19.1% from 14.4%, still above the 10% regulatory minimum. Next year’s adoption of the Basel 2 accord, however, could weigh heavily on the bank’s CAR, which is expected to slide by 2% to 3%, Ms. Pico said. Raising another P2.5 billion in capital should offset that, she added. Basel 2 is a risk-based capital framework that seeks to prevent bank failures by making sure they have adequate capital against risky investments. Ms. Pico said another option would be to offer the bank’s preferred shares, which are limited to government-owned and -controlled corporations (GOCCs). The charter of Landbank, a state-owned institution that provides funds for countryside development, states that the bank must remain in government hands. "We were allowed to issue up to P5 billion [in preferred shares]. But we can ask Malacañang for additional authorized capital," Ms. Pico said. "But only GOCCs can avail [themselves] of our preferred shares," she pointed out. Landbank posted P2.7 billion in net income during the third quarter, 10% higher than the year-ago’s P2.45 billion. Earnings were also P225 million more than the third quarter target of P2.47 billion. "The increase was due largely to the improvement of the bank’s revenues from loans and investments, as well as its continuing efforts towards prudent management of expenses and automation program," Ms. Pico said. She expressed confidence that the bank would exceed its full-year net income target of P3.3 billion. Landbank assets grew 7% to P317.5 billion as of September from P296.1 billion a year ago. Deposits went up by P15.9 billion to P246 billion, with government deposits accounting for P162.3 billion. Meanwhile, loans reached P79.6 billion, or 70% of the total loan portfolio, allowing the bank to move up to the no. 3 spot from no. 4 in the banking industry in terms of loans. The bank’s bad loan ratio was better at 7.1% from 7.5%, lower than the industry average of 7.2%. Landbank senior Executive Vice-President Alfonso B. Cruz said the bank would improve its bad loan ratio to 5% to 5.2% once it gets rid of some P3.5 billion worth of bad assets by the end of the first quarter.