OVERVIEW OF THE CASE “Subok Na Matibay, Subok Na Matatag” (Tested Strong, Proven Stable), the slogan of once well-known and once most popular bank in the Philippines, the Banco Filipino, formerly known as Banco Filipino Savings and Mortgage Bank, but surprisingly, it was closed twice in 1985 and in 2011 in the history of banks in the Philippines. Banco Filipino started its operation in 1964, founded by Tomas Aguirre and was known as one of the thrift bank. The Aguirre family together with the founder control and manage the aforementioned bank.
And In 1965, Banco Filipino innovated and became the first all-woman bank, making it number 1 among the banks back then. Because of its continuous innovation of its services, in 1966 it became the largest savings bank in the Philippines. It also became the first bank to process online transactions in real time in 1969, giving customers the ability to deposit in any online Banco Filipino branch. In 1970, Banco Filipino started expanding into the countryside with its first provincial branch opening in Naga City.
By 1972, the bank’s customer base grew to one million customers, even in the midst of martial law. Banco Filipino continuous to grew and was voted the most preferred bank in Metro Manila in 1975. By 1981, the Banco Filipino made a record that no other bank could achieved at that time, it had 89 branches, four billion pesos worth of assets, three million customers and three thousand shareholders. But on the 23rd of July 1984, Banco Filipino declared a self-imposed bank holiday due to illiquidity.
Central Bank of the Philippines did not order it closed immediately but placed it under conservatorship a week after the declaration.
The central bank infused P3 billion pesos as a credit to help it. After six months of examination and supervision, the BSP released the supervision and examination (SES) report on the 23rd of January 1985. At the recommendation of the report, the Central Bank of the Philippines closed the bank on January 25, 1985 on the basis of illiquidity and insolvency. For most of the 1980s it remained closed until the Supreme Court declared in 991 the bank’s closure as illegal. The Court found the report was based on incomplete findings and due to illegal closure. It subsequently opened in 1994 with only 15 branches out of its original 92 branches. In reopening the Banco Filipino, it would be busy trying to reestablish itself, and it would be harder for the bank to regain its popularity back then in the 60’s until the 1980’s. Since the bank was reopened, Banco Filipino tries to enter into the banking industry again and to cope up with a lot of changes after it has been closed in 1985.
Then in 1995, Banco Filipino became a member of BancNet after launching the BF Cash Card and issued its first credit card, a VISA card, a year later. In 1996, Banco Filipino shares were re-listed on the Philippine Stock Exchange. And in 1999, the Supreme Court declared that Banco Filipino is entitled to damages payments caused by its illegal closure. Then in 2002, BSP extended P3. 5 billion worth of emergency loan to Banco Filipino, of which P2. 6 billion is still outstanding.
Banco Filipino mostly competes with other savings banks, such as Philippine Savings Bank and Centennial Savings Bank. Now that Banco and It is also known for its property developments such as BF Homes, subdivisions in Paranaque, Quezon City and Las Pinas. In regaining its popularity back then, Banco Filipino strives to be in the market and they continuously innovate and study the market. And now, they were now known for the following firsts in the banking industry, such as open teller counters instead of the then-common glass-encased counter.
Whereas today, all banks have adopted the open teller counter concept, also the plastic signs inside bank branches, acceptance of initial savings deposits that are as low as one peso, the offering of capital stock to its depositors, through that scheme, Banco Filipino depositors could in effect become bank co-owners, extended banking hours from Monday to Saturday, 8 am to 8 pm, 6 days a week, 12 hours a day, they were also known for its monthly and even daily (known as “Interest Araw-Araw”) interest payments while many commercial banks and some universal banks have since adopted the monthly interest payment scheme, advance interest payments on time deposits, the offering of negotiable orders of withdrawal but now, savings banks were prohibited from issuing government securities. Banco Filipino is well-known, for it has personalized services that are in line with its corporate philosophy, thus making it more attractive to some investors and depositors. . But then history repeats itself, on March 15, 2011 (Tuesday), Banco Filipino voluntarily closed its branches from depositors without prior notice. At that time for the second time, only the assigned guards can be found in branch premises.
Two days later, Banco Filipino was reclosed again on March 17, 2011 by the Bangko Sentral ng Pilipinas formerly known as the Central Bank of the Philippines due to illiquidity and insolvency, since its liabilities is greater than its assets which is expressly prohibited by law which states that a bank’s assets must equal or be in excess of its liabilities wherein in the case of the Banco Filipino its liabilities exceeded its asset by PHP 8,400,000. 00. The BSP placed it under the receivership of Philippine Deposit Insurance Corp. (PDIC). BSP said that it had gathered sufficient evidence showing the bank’s top officers mismanaged their depositors’ money.
After the Banco Filipino had been closed, the stockholders of the said bank file a complaint and told the trial court that the bank was entitled to the P25-billion financial assistance package in line with the 1991 Supreme Court decision that ordered the reopening of the bank that was first padlocked in 1985. Banco Filipino also sued Tetangco, the current governor of the Bangko Sentral ng Pilipinas (BSP) and other Monetary Board members for violation of the Anti-Graft and Corrupt Practices. In turn, the BSP filed criminal charges against the directors and officers of Banco Filipino for numerous violations of central bank laws and unsound banking practices.
And on October 3, 2011, the Court of Appeals (CA) has nullified the October 28, 2010 order issued by the Makati City Regional Trial Court (RTC) that compelled Bangko Sentral ng Pilipinas (BSP) and the Monetary Board (MB) to release P25 billion worth of financial assistance to the now padlocked Banco Filipino Savings and Mortgage Bank. In addition to what the Supreme Court said, “This ruling sustains the position of the BSP in resolving the issues pertaining to BF. Financial assistance to a bank should not be dictated on the BSP, particularly in the absence of concurrence by the BSP and where is non-compliance with the regulatory requisites for rehabilitation,” said Juan de Zuniga Jr. , BSP Deputy Governor and General Counsel. The Court of Appeal’s decision is being objective with regards to its decision especially in the case of Banco Filipino, since BSP is handling and sets out rules and regulations that will be promulgated to all the banks in the Philippines.
The Court of Appeal also denied the petition filed by Banco Filipino’s stockholders to lift temporarily the orders of BSP and the MB placing the bank under receivership and stopping its operations and the Court of appeal is asking whether the Banco Filipino has the right to file said petition in the first place. ANALYSIS OF THE CASE Banco Filipino is a well-known bank in the Philippines, so who would have thought that it would be closed not just once but twice. It just shows that being well-known in the industry does not secure stability in the business just like what happened to Banco Filipino. History repeats itself, proven and tested by the banking industry, where flaws in the past continues to exist, which greatly shows that the reason of its downturn was also repeated for the second time.
In Banco Filipinos’ termination last March 17, 2011, Bank examiners of the Bangko Sentral ng Pilipinas found out that Banco Filipino has been posting losses averaging P2 billion a year from 2007 to 2009, which reached to about a monthly loss of P277 million last in the first nine months of 2010. As of December 2010, it incurred P12 billion in losses. BF executive vice president and corporate secretary Francisco Rivera admitted that the bank continued to lose anywhere between P800 million to P900 million a year since it reopened in 1994. This ongoing bleeding of its finances may have been the reason it stopped filing financial reports to the PSE, resulting to its recent delisting in the bourse. Aside from interest payments amounting to P1 billion a year, BF has been incurring huge expenses after it paid compensation of P500 million or 2. times its gross income and legal fees amounting to P131 million in the third quarter of 2010 alone. More than half of the bank’s outstanding loans amounting to P4. 1 billion were extended to entities of directors, officer, stockholders and related interest (DOSRI). The 900 million emergency loans from the BSP in 2002 may as well have been swallowed in this DOSRI loans. As of 10 September 2010, 91 percent of the bank’s total loans became past due, which meant their principal and interest remained unpaid 30 days after their due date. Of this uncollected overdue loans, more than half (P2. 2 billion) had been loaned to DOSRI. BSP also revealed that it paid salaries, benefits, and professional fees (SBF) more than its gross income.
Between 2007 and 2009, Banco Filipino averaged an annual gross income of P242. 5 million, but its SBF expenses amounted to P597 million a year, or 2. 5 times more than its annual gross income. Banco Filipino also owed BSP about P4. 4 billion in past-due loans as of September 2010. The BSP also pointed out in its comment to the Court of Appeals filed in April 5 that Banco Filipino was insolvent as it had P8. 4 billion more liabilities than assets. Bangko Sentral Governor Amando Tetangco Jr also reported that Banco Filipino continues to lose money in the hundreds of millions of pesos because of alleged unsafe practices. The alleged unsafe practices were discussed in detailed by Nestor Espenilla Jr. deputy governor of the Bangko Sentral ng Pilipinas (BSP), according to him, Banco Filipino engaged in high-risk, high-yield schemes to attract depositors, such as offering 14 percent interest on deposits despite the fact that other banks offer 1-2 percent only. Because of the dismal income performance, Banco Filipino lured depositors with interest rates way above prevailing market rates. While most banks pay interest of 1 – 2 percent for special savings deposits, Banco Filipino paid so much more–from 6-13. 9 percent, as a result to its interest expense higher than its interest income. Between 2007 and 2009, it averaged a negative net interest margin of P1 billion a year.
BSP also disclosed that a huge portion of Banco Filipino assets were actually losses that had been capitalized. In its 170-page comment filed with the Court of Appeals on April 5, BSP said that Banco Filipino operated a Ponzi scheme. Instead of investing the deposits, the savings bank used these to pay the interest of old deposits and for the daily operations. Named after its originator Charles Ponzi who made it notorious in early 1920, a Ponzi scheme is “a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned but from their own money or money paid by subsequent investors,” The Philippine Star reported. This resulted into a dismal performance of P242. million in average gross income that cannot serve its average interest expense of P1. 1 billion. Today Banco Filipino is blaming BSP for shutting down its operations, according to them it was the BSP who makes decisions for them, so how can they be mismanaged, according to Banco Filipino, and it was the BSP who mismanaged them. Since they were closed back then in 1985, they weren’t able to recover, and they were having difficulty in gaining competitive advantage over the long-established banks. But as you can see from the evidences shown by the BSP it is clearly shown that Banco Filipino is at its worst and they were given more than ample time to revived its operation. RECOMMENDATIONS
Banco Filipino back then in the 1960’s up to 1980’s were the largest and the most preferred bank in the Philippines, and what happened to them is something that should be studied and needs to be remembered in all business endeavours especially in the banking industry. Banco Filipino did not learn its lesson for the first time, so the thing in the past continues to exist. They were closed in 1985 due to insolvency, and were reclosed again in 2011. They became too confident to return in the banking industry since the Supreme Court had a decision that the closure made by the BSP was illegal. And after being re-opened in 1994, they became too focused in terms of studying its competitors in the market to the point that they give higher interest than the prevailing market interest, they also overlooked the chance to conduct a study why the BSP decided to close it in 1985, which is the most vital thing to do.
They also became too occupied in filing a suit to the BSP, that they overlooked the chance that it would be better for them to ask for the things that they should do so that the thing in the past will not repeat itself, they should have ask for a strategy and for some advices to prevent insolvency and illiquidity to BSP or maybe ask for assistance to experts in the banking industry if it’s not possible for them to communicate in BSP. Instead of focusing on the market and on gaining competitive advantage, they should think long term especially on establishing interest rates on the savings and deposits made by their clients. Since giving higher interest rate to depositors and investors will yield to higher interest expense, it would be hard on their part to give higher interest on loans, because clients will be discouraged to apply for loans thus resulting to lower interest income than the interest expense.
They also give interest to its client on a daily basis, in this case the bank will yield higher interest expense, for them to be in its comfort zone, they should give interest on a monthly basis and on case to case basis. It clearly shows that businesses should conduct a more in-depth study of what they will adopt in their business, especially on the banking industry where a huge amount of money is at risk. Banco Filipino mismanaged also the receipts of investments from its client, instead of investing the deposits to a higher interest rate to yield higher income, the said bank used these to pay the interest of old deposits and for the daily operations.
The Banco Filipino should have established a more strict banking practices instead of personalizing it to gain more depositors, they should have adopted the prevailing interest rates and also the established and well-known banking practices to be safe since they are at a higher risk of insolvency since they were closed for a long time. They should not come up with offers to the public that will make their business collapse. Since Banco Filipino was closed due to bankruptcy and due to excessive liabilities, they should have first look for investor that will be willing to take over and manage its operations, just like what happened to Banco De Oro now known as BDO.
In that case the bank will be restored and will be prevented from being terminated. Sources: http://phildevfinance. blogspot. com/2011/03/banco-filipino-waits-for-rescue-loan. html http://xicowner. jefmart. com/index. php/2011/04/02/repeating-a-history-of-bankruptcy/ http://www. absoluteastronomy. com/topics/Banco_Filipino http://www. malaya. com. ph/jan13/edmacasaet. html http://noypistuff. blogspot. com/2011/03/banco-filipino-suffering-from. html http://z-morningland. blogspot. com/2011/03/banco-filipino-debacle. html http://www. abs-cbnnews. com/business/04/01/11/banco-filipino-filed-cases-vs-most-bsp-governors http://www. mb. com. ph/articles/337287/bsp-wins-bf-case