| Deogracias Vistan | ||||||
The Philippines’ banking sector escaped with nothing more than a black eye from the 1998 financial crisis. However the shenanigans of Joseph Erap Estrada proved more of a challenge. Estrada was the catalyst for bringing one bank to its knees and raising the threat of systemic risk for the whole sector.
The merged entity Equitable PCI, in existence for only two years, has rarely been out of the headlines. In 1999, George Go, president of a small family-run bank called Equitable, decided he wanted a larger piece of the action. In fact, he wanted to be at the helm of the biggest bank in the Philippines. And he was prepared to do anything to get there. Go approached his close friend, president Joseph Erap Estrada, and told him how he needed help buying PCI Bank, the country’s third largest. Estrada agreed.
A few days later Equitable launched what can only be described as a severely leveraged buy-out of its much larger counterpart. Thanks to Estrada, government money was used to ramp up Equitable’s price. And then, when two government pension funds decided to pile in on the action, Go got his bank.
The next part of the plan was to recapitalize the new bank and reduce its leverage by selling more equity. But by the time the bank was ready, the markets were heading south. By October 2000 the bank was getting into trouble. Its non-performing loans were rising and it had maturing obligations. But the biggest problem was that its unofficial patron was facing impeachment. Guilt by association with Estrada prompted small depositors to shift money out of the bank. In an attempt to stem the flow, George Go was replaced. Peter Go, a conservative older brother, was dragged out of retirement in an effort to save some of the family’s fortune that George had so readily gambled with. He wasn’t enough. But then nobody in the Go family could have prepared for what was about to hit them.
“I got home and turned on the TV to watch Estrada’s impeachment trial,” begins an Equitable PCI employee. “It was like a new soap opera. The prosecution then said that it was putting a surprise witness on the stand. I couldn’t believe who I was looking at. I had been speaking with her only a few hours before. She told no one what she was going to do.”
On December 22, Clarissa Ocampo, senior vice-president from Equitable PCI’s trust department, took the stand. She testified that she saw Erap sign a false name, Jose Velada, for an account at the bank that was stuffed with millions of dollars. It was a bombshell, not only for Estrada, whose guilt was beyond doubt in the minds of many, but also Equitable PCI. The perception was that not only was this a crony bank but that it was also associated with fake documents and helping Erap to hide his secret accounts. Funds were pulled so quickly out of “Aquittable”, as it was becoming known, that it was heading for insolvency.
Before the central bank stepped in with a Ps30 billion ($555 million) emergency liquidity loan, other discussions took place. “The bank would have gone bankrupt,” explains a former adviser to the bank. “It was looking for a strategic partner, so we held a bidding process and got it down to three guys. We left at midnight expecting some action in the morning. When we got back to the boardroom at 9am the deal was off. We were just stunned.”
A representative of Philippine social security fund SSS disagreed with selling out at such low valuations. “If anyone should have been looking for value and a way out it should have been the funds,” says the adviser. “But more worrying for him I think was that a strategic investor would do a full-blown audit and would probably have discovered too much.” The representative for the SSS was later removed from the board for being too close to the Estrada scheme.
Since June 1, Equitable PCI’s future has rested in the hands of former Citibanker Deogracias Vistan, the new chief executive officer. Vistan landed the job of putting the bank back on its feet by cleaning up not only its balance sheet but also its image. He knows he has a challenge on his hands. “We are in a state of transition,” says Vistan quietly. “We know where we are and where we want to go. But we have a highly motivated team that can get back what we lost, and we are charting a course to reclaim our spot in the top three.”
Vistan’s first action was to get rid of five of the bank’s most senior management and replace them with his own choices. The bank is, for now, maintaining its course. It has reclaimed some 55% of the 20% of depositors who deserted the bank with Ps35 billion in the first three months of this year. Foreign banks have started to restore credit lines. It has paid back Ps16 billion of central bank loans. Vistan envisages that the rest will be paid back in the next six to nine months, depending on the bank’s ability to generate the necessary inflows. It is, however, also a question of offsetting the repayments with some investments. If he tries to pay the loans back as quickly as the central bank would like, it would end up being a smaller bank, with less flexibility to compete against bigger players. It’s going to be a tough couple of years.
“The problem with this bank is to do with credibility not fundamentals,” says Rafael Buenaventura, governor of the Bangko Sentral NG Pilipinas. “It was caught in the middle of being a bank that refused to disclose and a bank that was willing to disclose too much.” The bank had little choice in opening its books and accounts to the world. Its documents were subpoenaed. The Chinese-Filippinos pulled their accounts for fear that if the president’s accounts could be examined they would have no hope of keeping their own bank accounts confidential.
At 19%, the bank’s non-performing loans stand higher than the sector average. But Vistan is tackling this problem head on. “Transparency is very important. I don’t want to hide the weaker side of my portfolio. I want to bring it into the open. Some I will sell, some will be provisioned. But let’s just say that I will throw the biggest party in town if I get 50 cents on the dollar.”
The relationship banking of the past has changed. And the importance of selectivity based on risk assessment is much greater: no more political or social lending from this bank. Vistan says: “We don’t have good risk management in place yet. A lot needs to be done but it’s taking shape.”
Vistan believes that lessons have definitely been learned and the same mistakes won’t be made. He says: “Never mix politics with business. The element of being apolitical is taking on greater relevance.” But with 35% of the bank still held by government pension funds it’s not going to be so easy keeping the two separate. He acknowledges this but it won’t stop him and his team completing their mission: “We ‘re on a fast track of institutional recovery. We will have a clean balance sheet by the end of the year, and an acceptable ROE 5% above inflation, at either 11% or 12% by the end of next year.”
If he succeeds in this, then he really will have reason to throw the biggest party in town.
