US embassy cable - 05MANILA5519

UNCLAS SECTION 01 OF 02 MANILA 005519 
 
SIPDIS 
 
Sensitive 
 
STATE FOR EAP/EP, EB/IFD, E 
STATE ALSO PASS FED RESERVE SAN FRANCISCO 
STATE ALSO PASS EXIM, OPIC, AND USTR 
STATE ALSO PASS USAID FOR AA/ANE and AA/G 
TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: EFIN, EINV, RP 
SUBJECT:  Turning Bad Loans into Good Assets 
 
 
Sensitive but Unclassified - Protect Accordingly. 
 
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Summary 
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1.  (SBU)  The Philippine Central Bank (BSP) has cleaned 
up 19% of the non-performing assets (NPAs) in the banking 
system through the Special Purposes Vehicle (SPV) law. 
Although the BSP target was 50%, it reduced the amount of 
NPAs to 9% of total bank assets.  By forming an SPV, 
companies can buy NPAs, which consist of non-performing 
loans and acquired assets, and try to profit from them. 
Although the banks recover only 23 cents on the dollar, 
it frees up capital for new lending.  The RP Congress is 
likely to extend the SPV law for another two years by 
early 2006.  End Summary. 
 
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Selling Off Bad Debts 
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2.  (SBU)  According to Bangko Sentral ng Pilipinas (BSP) 
Deputy Governor Nestor Espenilla, the BSP has achieved 
modest success in getting rid of bad debts in the banking 
sector.  Through the Special Purpose Vehicle (SPV) law, 
the banking system sold 97 billion pesos (about $1.8 
billion) worth of the non-performing assets (NPAs).  This 
reflected about 19% of the total amount of NPAs in the 
banking system.  Although the figure fell short of the 
BSP target of 50%, it reduced the amount of NPAs from 18% 
to 9% of total banking assets.  Although SPV law expired 
in April 2005, the BSP is hoping to extend Congress will 
extend the law for another two years.  Espenilla said the 
draft bill is the exact same law but gives banks more 
time to sell off non-performing assets.  The SPV bill is 
currently in its second reading in both houses. 
 
3.  (U)  Espenilla said non-performing assets (NPAs) in 
the Philippines consist of two-thirds non-performing 
loans (NPLs) and one-third aquired assets (also known as 
ROPOA - real and other properties owned or acquired). 
Eighty percent of the NPAs addressed to date through the 
law were acquired assets, mainly real estate from 
foreclosures, because domestic banks and AMCs are more 
eager to set up SPVs and prefer concrete assets they can 
manage and sell.  Real estate prices near metro Manila, 
for example, have risen dramatically in recent years. 
There are fewer foreign investors interested in setting 
up special purpose vehicles, and they are more likely to 
buy loans (NPLs) because local property laws prevent 
foreign ownership of real estate. 
 
4.  (U)  By forming an SPV, a bank or Asset Management 
Companies (AMC) becomes a legal entity with the rights to 
acquire non-performing assets.  The SPV may then try to 
strike a deal with the borrower, sell the asset to a 
collection agency or vulture fund, or try to make a 
return on the acquired assets through use, rental, or 
resale.  The SPV law facilitates the formation of private 
and decentralized AMCs.  The government provides no 
financing but offers incentives, such as reduced transfer 
taxes and capital gains taxes for SPVs.  The government 
also eliminates the documentary stamp tax and gross 
receipts tax because these cause friction over the 
transaction.  Espenilla said the banks are writing off 
about 77% of the debt amount, so are getting only 23 
cents on the dollar.  Banks have to disclose 100% of the 
loss on the sale, but are allowed to spread the write-off 
of that loss over ten years. 
 
5.  (U)  In addition to tax incentives, the BSP is 
adopting Basel II provisions to punish banks for 
retaining bad loans.  For example, the GRP increased the 
risk weighting that banks must carry on its NPAs from 
100% to 125% in 2006 and will be increasing it to 150% by 
2007. 
 
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Comment 
 
6.  (SBU)  Even with the success of the SPV, 20-25% of 
many bank loans are classified officially as NPLs or 
acquired assets.  Changes are still needed in the 
Philippine banking system to ensure better transparency, 
oversight, and profitability.  The Philippine Stock 
Exchange, for example, requires no reporting on asset 
quality on a quarterly or biannual basis, although some 
banks provide a few summary ratios in their interim 
accounts.  Many banks reported a return on assets of less 
than 1% and a return on equity of well under 10% in the 
first half of 2005, reflecting a continued large base of 
NPLs.  Further cleaning up the bad debts and NPLs through 
an extended SPV law would create headroom for banks to 
fund better-performing loans and profitable investments. 
 
Jones