The contributions of state-run banks to the Maharlika Investment Fund (MIF) may threaten the lenders’ financial stability, analysts said.
“We warned that the Land Bank of the Philippines (LANDBANK) and Development Bank of the Philippines’ (DBP) capital contribution to the MIF will weaken their respective balance sheets and said that the Bangko Sentral ng Pilipinas (BSP) will erode its moral standing on disciplining banks if it gives regulatory forbearance to these two government financial institutions,” Calixto V. Chikiamco, Foundation for Economic Freedom (FEF) president, said in a Viber message.
The Philippines’ first sovereign wealth fund will be managed by the Maharlika Investment Corp. (MIC), which will have an authorized capital stock of PHP 500 billion. Under the law, the LANDBANK and DBP will contribute PHP 50 billion and PHP 25 billion, respectively, for the MIC’s initial funding.
BSP Governor Eli M. Remolona, Jr. last week said both banks are still compliant with regulations even after remitting their contributions to the MIC. But the contributions put these lenders at risk of being noncompliant with their capital requirements.
“With capital charge of 100% on their investment in MIF, the two GFIs (government financial institutions) must be in need of more time to build up their capital to be able to sustain their usual volume of lending,” GlobalSource Partners Country Analyst Diwa C. Guinigundo said in a note.
DBP President and Chief Executive Officer Michael O. de Jesus earlier said the lender and LANDBANK are seeking regulatory relief from the BSP for their contributions to the sovereign wealth fund.
Under BSP regulations, all investments of banks, be it to allied or non-allied undertakings, will be fully charged against a bank’s capital. This means the investment of DBP and LANDBANK in the MIF will be deducted from the banks’ capital when they compute their capital adequacy ratio.
This ratio compares the available capital that a bank has on hand to its risk-weighted assets, which measures the risk profile of the lender’s lending and investing activities. The more risk a bank is taking, the more capital it will be required to have to protect depositors.
“The MIF implementation is also starting on the wrong foot, with contributing GFIs already asking for capital relief this early in the game. It reflects the lack of foresight of government,” Enrico P. Villanueva, senior lecturer of economics at the University of the Philippines Los Baños said in a text message.
Filomeno S. Sta. Ana III, coordinator of Action for Economic Reforms, said that the consequences of the fund are now becoming apparent.
“Sound, prudential banking practice is sacrificed. National Government spending is sacrificed. But how society will benefit from funds transferred to Maharlika remains muddled,” he said via Facebook Messenger chat.
Sonny A. Africa, executive director of think tank Ibon Foundation, said that requiring the state banks to contribute to the fund is “fundamentally problematic” since it diverts them from fulfilling their primary mandate of providing financing to rural producers and smaller enterprises.
“The promise of financial returns from the Maharlika fund is a specious justification that, moreover, raises the risk profile of these government financial institutions. It is unlikely that, before the Maharlika fund, they would have invested in similarly risky instruments. Their ability to absorb financial losses is being compromised,” Mr. Africa said in an e-mail.
In a statement on Sunday, the LANDBANK said it remains “strong, adequately capitalized, and compliant with regulatory requirements of the BSP.”
As of June, the bank’s capital adequacy ratio (CAR) stood at 16.61%. LANDBANK noted this was a “very healthy level” and above the 10% minimum requirement of the BSP.
LANDBANK also said that it will meet its CAR requirements even with its PHP 50-billion contribution to the MIC.
“Our Common Equity Tier 1 (CET 1) ratio stands at 15.73%, also compliant with the 10.25% CET 1 requirement,” it added.
Last week, President Ferdinand R. Marcos, Jr. signed an executive order slashing LANDBANK’s remittances to the National Government to 0% of its net earnings from 50% previously.
DBP’s Mr. De Jesus said that the bank is also requesting for a similar dividend relief.
“We need to reduce the mandated dividends to the National Government to 0% so we can use the funds to build up our capital position. This will allow us to book more loans and fulfill our mandate of developmental financing,” Mr. De Jesus said in a Viber message.
Finance Secretary Benjamin E. Diokno earlier said that the MIC is expected to be operational by the end of the year and will begin market activities by the first quarter of 2024. — By Luisa Maria Jacinta C. Jocson and Keisha B. Ta-asan, Reporters