MetroBank launches first Philippine hybrid debt deal

Philippine domestic bank to issue hybrid tier 1 deal to bolster capital under new accounting standards.
MetroBank, the Philippines largest lender in terms of assets, kicked off roadshows in Hong Kong for its debut $125 million hybrid tier 1 offering yesterday (February 6). Under the lead of UBS, management will meet with investors in Singapore today before wrapping up with a final investor presentation in Manila on Wednesday.

The deal has a perpetual non-call ten-year structure, with a step-up coupon.

Bankers expect the deal to price at a premium to similar structured offerings from comparably rated countries such as Brazil, where transactions price around the 10% range. Unlike most perpetuals, this deal is not expected to carry a private banking distribution rebate, which is somewhat standard on this type of deal.

However, most bankers believe the private bank bid is not necessary to sell this deal and that it is likely to find domestic demand strong enough to cover the book.

MetroBank became the first domestic bank to gain approval from the Banco Sentral ng Pilipinas (BSP) to issue a hybrid capital offering. It will be used as a benchmark for other Philippine banks as their balance sheets try to meet the central bank's minimum capital ratio of 10% under International Accounting Standard 39 (IAS39). IAS 39 establishes new principles of classifying, measuring and disclosing financial assets and liabilities. This encompasses a total recalculation of an entity's entire balance sheet to market, including investment securities and trade securities.

In the past, local banks were able to sell their default loans through an SPV and book the loss over a span of ten years. Under IAS 39, this is no longer allowed. All losses must now be recognized in the year that they are incurred.

ôFor MetroBank and other institutions that have sold down their defaulted loans via SPVÆs, there will now be an instant hit to their capital,ö says one analyst. ôThose banks that chose to interpret the SPV sale using the central bank standard that allowed for the deferred booking over ten-years, will receive a qualified audit.ö

The Development Bank of the Philippines, Land Bank of the Philippines, Asia Trust, International Exchange Bank and possibly Equitable PCI are also likely to issue deals to address the potential hit to their capital ratios.

At the end of December, Metrobank had a total CAR of around 18.3% of which tier 1 equity accounted for 11.7%. However, the bank's Ps63 billion of property-related NPAs (Non Performing Assets) are larger than its Ps58.9 billion capital base and stand at roughly 113.5% of its shareholders' equity.

Asset quality concerns have been one of the biggest drags on the banking sector's stock market performance in the Philippines, with practically all of the larger banks still trading below book value. Attempts to clear out NPA's in recent years have not proved that successful against the backdrop of a sluggish property market. In 2004, for example, Metrobank sold just Ps2 billion of NPA's.

Analysts calculate that five of the country's top 10 banks by assets are in a similar position to Metrobank, with NPAs (mostly in the form of foreclosed property assets) accounting for more than 10% of total assets.