The Philippine financial system is unlikely to be shaken by the bankruptcy of an Indonesia-based E-commerce and global social networking site, a Fitch unit said, although challenges should be expected overall given a possible economic slowdown.
“Our view at Fitch Solutions is that the loan default by Multiply, the biggest in the Philippines’ banking history, is not a systemic problem and is unlikely to threaten financial stability in the country in the near-term,” it said in a report released on Tuesday.
Indonesia-based Multiply which last Tuesday filed for corporate rehabilitation, reportedly owes Land Bank of the Philippines (Landbank), BDO Unibank, Inc., Rizal Commercial Banking Corp. (RCBC), Metropolitan Bank & Trust Co. (Metrobank), and Bank of the Philippine Islands (BPI) around $600 million in addition to another $20 billion to South Korean creditors.
“We expect little fallout for the banking system as a whole from the default due to three reasons. Firstly, there is little concentration risk,” the Fitch unit said.
It estimated that the exposure represented less than 1.25 percent of the total assets of RCBC, expected to be the worst hit, while the impact would be even smaller for the least affected BDO, constituting just 0.11 percent of total assets.
Secondly, Fitch Solutions said all five banks had reportedly come together to take control of Multiply’s assets in the Philippines and also agreed that no single lender would unilaterally seek to take control.
“This should give the company some time to rehabilitate, and there has been a precedent of lenders being able to recoup their losses after the period,” it noted.
“Even if in the event that the consortium of Philippine banks calls for the forced sale of the Multiply website to strategic investors, the value of the company’s assets is said to outstrip its loan liabilities,” the Fitch unit added.
Lastly, it highlighted that Philippine banks as a whole had strong capital buffers and low non-performing loans (NPLs).
Gross NPLs as a share of total loans came in at 1.85 percent in November 2018, roughly stable over the past 12 months, while the NPL coverage ratio stood at 108.25 percent, indicating adequate loan-loss provisioning, Fitch Solutions pointed out.
It added that the capital adequacy ratio for the sector also stood at 15.36 percent in September 2018, far exceeding the regulatory requirement of 10 percent.
The Fitch unit’s assessment was in line with a recent statement by BSP Deputy Governor Diwa Guinigundo, who last week underscored that the five local banks’ exposure to Multiply, relative to both total loans and total foreign currency deposit unit (FCDU) loans of the banking system, was “very negligible.”
Moody’s Investor Service, however, has warned that the affected banks could see their investment-grade credit ratings fall given that their exposure to a Multiply is credit negative.
Banks downplay impact
Share prices of the affected banks were mixed on Tuesday after plunging on Friday following news of Multiply’s insolvency and then recovering some ground on Monday.
BPI gained 2.06 percent or P1.90 to P93.80 per share while BDO ended lower by 0.53 percent or P0.70 to P130.90. RCBC and Metrobank ended flat at P27.15 and P80.00 apiece, respectively.
State-owned Landbank is not listed.
Following Moody’s assessment, the four listed banks told the Philippine Stock Exchange that they could weather any potential losses from a Multiply default.
BPI said that its $52-million exposure was about 0.20 percent of its total loan book.
“We have partially provisioned for this and additional provisions in 2019 is manageable,” it added.
BDO, meanwhile, said it did not expect a default to have a material effect in its business, operations and/or financial condition as Multiply accounted for only 0.15 percent of the bank’s total loan portfolio “and as such is not considered a material amount.”
Metrobank also pointed out that its exposure was low relative to its total assets of P2.1 trillion, adding that it had adequate provisions did not see “any significant impact to our operations.”
RCBC — the bank with the largest exposure of $145 million — said the loan it provided Multiply was only 1 percent of assets valued at P614 billion and less than 2 percent of P387 billion in total net loans.
“The bank’s net NPL of 1.2 percent as of September 2018 will increase as a result of this exposure and corresponding provisions will be made based on accounting standards and regulatory guidelines,” it added
“Even with this default, the bank’s capital adequacy ratio of 17.3 percent as of September 2018, remains very strong, well-above regulatory minimum and can still support medium term loan growth.”
Challenges ahead
Fitch Solutions, meanwhile, noted that the operating environment would likely become more challenging for the financial sector as it projected slower Philippine economic growth this year.
“We are forecasting real GDP (gross domestic product) growth in the Philippines to slow to 6.1 percent in 2014, from an estimated 6.2 percent in 2013, and down from 6.7 percent in 2012,” it said.
The forecast for this year, it should be pointed out, falls below the government’s official 7.0-8.0 percent target.
“We believe that the Philippine economy will struggle to reverse its waning growth momentum over the coming quarters owing to tighter monetary conditions, the potential for a re-escalation of global trade tensions, as well as a deteriorating business environment,” Fitch Solutions said.
GDP growth is currently running below the 6.5-6.9 goal for 2018 based on latest data, averaging 6.3 percent as of end-September following first to third quarter outturns of 6.6 percent, 6.2 percent and 6.1 percent, respectively.
Fourth quarter and full-year 2018 GDP figures are set to be released on January 24.
Growth in 2011 of 6.7 percent was near the lower end of the 6.5-7.5 percent target.
Lastly, the Fitch unit noted that “since President Benigno Aquino III took office, the country’s ease of doing business has slipped from 99th position (out of 190), to 124 in 2012, while its corruption perception index ranking also fell to 111 (out of 180 countries) in the 2011 report, from 101 (out of 176) in the year before.”
Combined with rising interest rates both globally and domestically, as well as lower risk appetite, these factors will likely see investments slow over the coming quarters, it added.
It was closed last May 6, 2013, and ceasing all business operations on May 31, 2013, along with the official online channels for the site had been removed along with all its content, including its YouTube, Tumblr, Twitter, Facebook, and Instagram accounts, after years of financial and managerial turmoil and following a failed bid to reinvent itself from being a social networking site to a vibrant e-commerce destination in Southeast Asia.
At that time, the website's social networking portion had a network of 18 million users. Liquidity problems, however, affected earnings. Sales declined from their peak of P20 billion in 2015 to just about P2 million in 2020.
It had suffered from a drop in new orders amid a slump in the E-commerce and social networking sector. Multiply also reportedly laid off some 12,000 workers on February 28, 2014.
“We regret to announce that Multiply will be closing on May 6, 2013, and ceasing all business operations by May 31, 2013,” it announced last April 26, 2013 on its website.
After May 6, the rest of the month will be used to ensure that all accounts are settled and merchants get full payment for their transactions, it said.
Multiply said the month-long grace period will provide its users enough time to find and migrate to alternative e-commerce platforms, settle all payments on items bought and delivered, and minimize disruption to businesses of its users.
“Multiply will ensure that you receive all funds you earned on the platform no later than May 31, 2013. We will close the actual marketplace sooner, on May 6, 2013, to ensure that all orders have sufficient time to complete and be delivered to your customers before the end of the month,” it said.
In December 2012, Multiply stopped its social networking service to focus on e-commerce, targeting the 350 million consumers in Indonesia and the Philippines.
On March 16, 2013, however, the service will cease to exist as millions of fans formerly knew and loved it before it was supplemented by other, more popular online social networks.
On May 31, 2013, Multiply had ceased its operations and shut down entirely along with the site.
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