Q&A related to the Bank’s exposure to Lehman Brothers, a global investment bank.

1. What is the Bank’s exposure to Lehman?

The Bank has direct and indirect exposure to Lehman in the form of bonds and structured products.

2. Are we going to lose our entire investment?

No, Price Waterhouse has been appointed as receiver to oversee the orderly liquidation of Lehman’s assets. This process however may take time but we believe there is value in the balance sheet of Lehman. Secondly, there is a market value for Lehman paper, so there is
an amount that can be recovered.

3. Will the provisions of P3.8B be reflected in our income statement?

No, part of the provisions are from our excess reserves, so only the additional provisions will have an impact on the income statement.

4. What is the CAR impact of this?

The impact on capital adequacy is minimal.

5. Why do we need to provide when its in AFS?

Since Lehman filed for bankruptcy, the receiver will need time to ascertain the value of its assets and liabilities. Since we don’t know how long this process will take, we deemed it prudent to set up provisions for our exposure. We decided to play it safe and protect the balance sheet by providing for it now, even if there is the possibility of eventually recovering value. As such, any recovery in the value of Lehman would translate to improvement in the Bank’s income.

6. What is the impact on our income and balance sheet?

The Bank still expects to make a reasonable profit for the year. We can afford the provisions, and our capital and balance sheet remain strong. This is just a slight setback and the Bank will continue with its growth plans.

7. Will our depositors be affected by this?

Depositors will not be affected. The provisions will temporarily lower our net income but will not affect our capital position and liquid balance sheet. Despite this, we still expect to make a reasonable net income, which will even improve our capital position.

8. How much is the capital of BDO? How will this be affected by its Lehman exposure?

BDO’s capital stood at P54.5B, based on its 2nd quarter SEC report. This is the 3rd largest capital base among Philippine banks. The provisions for its Lehman exposure will not affect BDO’s capital in a big way a the Bank has income from operations to offset these provisions.

The Bank still expects to make a reasonable income for the year, and this will further increase the capital position. BDO paid a P0.80 per share cash dividend last Sep. 11.

9. Will BDO need to raise capital?

BDO’s capital of P54.5B is comfortably above the regulatory minimum of P4.95B prescribed by the Bangko Sentral for universal banks.

BDO’s capital adequacy ratio (CAR) is at 13.2%, also comfortably above the 10% regulatory minimum.

BDO’s capital-raising activities in recent months (Tier 2 issuances of P20B) were a function of the growth in the Bank’s asset base. BDO’s loans are growing 25% annually, and the Bank plans to continue growing its loan portfolio, specially in the consumer segment. The Bank has approval to issue up to P5.0B of preferred shares. This was planned long ago, and is meant to support its future balance sheet growth.

10. Who are the major shareholders of the Bank?

The SM Group and related entities control approximately 65% of the Bank’s shares. The SM Group fully supports BDO’s growth initiatives, and sees the Bank as its main investment in the financial services industry.

The Bank also has the following institutional shareholders:
i. The International Finance Corporation (IFC), the investment arm of the World
Bank, and
ii. The United Overseas Bank Ltd. (UOBL), which is Singapore’s 2ndlargest bank

Foreign shareholders own approximately 23% of the Bank.

11. Are BDO’s unit investment trust funds (UITFs) exposed to Lehman?

The Trust Department has no exposure to Lehman Brothers, as such the net asset value (NAV) of its UITFs.is not affected.

12 How much is BDO’s exposure to Lehman Brothers?

BDO has securities issued by Lehman with an original investment value of $134M.

13. What is the current value of this investment?

Under current accounting rules, a bank must reflect the current market value of its investment, resulting in either a gain or loss compared to its original investment.

Prior to Sep. 15, the original investment has already been reduced through a gradual markdown (mark-to-market adjustments) and hedging transactions. Net position as at Sept. 15 is less than $134M

This decline in value was considered in arriving at the P3.8B in provisions.

14. BDO has set aside provisions of P3.8B for Lehman. Is this enough?

Yes, BDO has allocated provisions of P3.8B for its Lehman exposure. The Bank feels that this is enough to cover its remaining exposure to Lehman.

15. Is BDO going to lose its entire investment?

No, the receiver is in the process of validating the value of the assets and liabilities of Lehman, to ensure an orderly distribution of assets to its creditors.

The Bank may recover a higher value from the final distribution of Lehman’s assets, which should mean reversals of the provisions it has set up. A reversal of provisions will in turn improve net income and capital.

16. Can the bank afford this?

Yes, the Bank still expects to make a reasonable net income for the year. The capital of the Bank will not be affected as there is net income from which provisions can be offset. A portion of the provisions will also be reallocated from existing reserves, so this has no impact on income and capital.

17. What is the impact to the Bank’s assets and capital?

The gross exposure represents less than 1% of BDO’s assets of P676B as of

June 30, 2008. The Bank’s capital was at P54.5B as of the same period. The Bank has also previously disclosed a plan to issue P5B worth of preferred shares, which will increase BDO’s capital even further. The SM Group, BDO’s biggest shareholder, has committed to subscribe to this new preferred share issue.

After this issue, BDO’s capital will be approximately P60B.


2 Responses to “Q&A related to the Bank’s exposure to Lehman Brothers, a global investment bank.”

  1. My friend on Orkut shared this link and I’m not dissapointed at all that I came here.

  2. There’s a bunch of controversy out there about this issue, but I happen to agree with the blogger.  It’s mostly a matter of viewpoint.

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