CASE 1

GOLDEN OPPORTUNITY
COMMERCIAL BANK
Quantum of Solace
Antonio Errol Ybanez Jr.

President Dennis Tumbokon in his speech before the board members said:

“I would like to seek your opinion regarding a major initiative of our bank, which
is part of the implementation of Golden Opportunity Commercial Bank’s (GOCB)
renewed strategy to be the bank of choice in terms of consumer banking. To be able
to finance this new strategy and to aggressively revive our bank, GOCB is
contemplating a major move that will, in effect, recover from losses brought about
by increasing mortgage default payments, valued at P5.0 billion.

This move is designed to fully extinguish our debts, create a new and dynamic bank
and hopefully leave us with excess liquidity for the start of endowment fund. This
move I am referring to is heeding to the proposal of Ms. Joanna Cortes, Bangko
Sentral ng Pilipinas’ (BSP) Managing Director to downgrade the status from
commercial to thrift bank. Such move will change our capitalization structure.”

The meeting was called to discuss the GOCB problem and develop a plan to reinvigorate the
ailing bank and at the same time address the BSP’s findings. GOCB is requesting for P10 billion in
emergency loan with the BSP.

Historical Background

In 2008, Mr. Rey Claro, an aggressive realtor who owns Global Realty Corporation (GRC)
together with family members and friends, purchased the Silver Commercial Bank, which holds the 20 th
out of 25 commercial banks that had been languishing under poor management. Then, it was renamed
GOCB whose incorporators’ objective is "to offer its stockholders a safe and profitable vehicle for
investing and lending."

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This case was prepared by Dr. Antonio Errol B. Ybanez, Jr., Faculty of the Graduate School of Management at
the Pamantasan ng Lungsod ng Maynila, Southville International School and Adamson University. This was
developed based on readings and experiences as bank examiner, account officer of asset management and
assisting deputy receiver and liquidator. Should there be similarities with a certain company, they are purely
coincidental. All information provided in the case shall be used for academic exercise only. This case cannot be
reproduced in any form without the written permission of the copyright holder.

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 Mr. Claro sees that the financial market is developing and interest income from fee-based
service and consumer lending must not be the only main source of income, but also the bond and
stock markets which have become more liquid than last year. His management dynamism has infused
renewed vigor doubling revenues to P30 billion after the first three years of operation. A number of
branches were increased to 30 from 10, which are located in the various areas of Metro Manila, Cebu,
Davao, Naga, and Baguio City. GOCB eventually became a highly tradable publicly held company.

In his desire to further increase its revenues at approximately 300%, he sought new
opportunities. The bank teamed up with GRC and entered into a guarantee agreement with the Home
Guaranty Corporation (HGC) for the securitization of P5.8 billion worth of housing loans. The
guaranty program aimed to liquefy through the asset-backed securitization (ABS) ranging from
P10,000 to 1.0 M, with a yield of 15% per annum paid quarterly and a term of five years. This strategy
met with great success for 6-straight years of record increases in profits.

In 2016, GOCB was highly leveraged with as high as 85 percent. However, it managed to
lower the debt ratio to 60 percent to retain shareholder confidence and ensure the bank’s eligibility
for a B bond rating. Strong reputable brand name, financial strength, and a strategic fit were the three
key ingredients why the GOCB’s 10 million shares had market value of P250 each which is 10
times the net income per share. This further boosted its market position to hold the top 20 spot
with a total resource base of P35 billion as of December 2007, which comprised of 10% of the entire
banking industry’s total resources.

Events Leading to Operational and Financial Difficulty

More than half of GOCB’s P10 billion loan receivables portfolio are low-cost housing
loans through its GRC. Mr. Claro, CEO, explained that GOCB’s high exposure to mortgage loans
did not violate BSP’s 30% cap on real estate lending because the loans were for low-cost and
socialized housing. GOCB has set aside P200 M in loan loss provisioning or 2% of the total
loan receivables.

In 2010, trading and investment for most banks had remarkably reduced due to record-
high inflation, increasing interest rates and lower bond prices. Consequently, key financial indicators
of GOCB such as assets, deposit liabilities, trust assets and loans have significantly decline. Negative
news about GRC relative to its capital crippled by huge losses linked to mortgage defaults and failure to
meet the outstanding payables triggered the massive withdrawals of funds with GOCB. Several
borrowers encountered cash flow problems as a result of sudden increase in interest rates and reversal
trends in the real estate market and eroded confidence.

Further, GOCB provided 2.0 billion loans to two Philippine special purpose vehicles
(SPV). The amount was used to pay for the purchase of bad assets from Philippine banks over the past
four years. However, the bankruptcy of Lehman Brothers (LB) had negative financial impact to these
SPV companies since LB has minority interests.

The GOCB was not able to take advantage of The SPV law which was passed in December
2002 and expired after 2008. It was supposed to help GOCB to get rid of their non-performing assets
(NPA) by waiving some of the taxes and reducing fees usually collected in the sale or transfer of assets.
The law waived the documentary stamp tax, capital gains tax and expanded value-added tax and also
reduced the registration/transfer fees by half.

The GOCB bought the non-performing loans (NPL) of GRC at 100% market value. Ms. Gina
Amparo, Chief Executive could not do anything but to sign the authorization due to strong pressure
from the Chairman of the Board and other influential businessmen. More than half of GOCB’s roughly
P10 billion book of real estate loans was in home equity loans, and in adjustable-rate mortgages and
substandard mortgages that are now considered risky.

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 Mr. Tumbokon in their board meeting blamed Mr. Claro that had it not for his aggressiveness
in engaging into the risky mortgage market and financial products based on it, the bank should have
remained financially sound. Mr. Claro then proposed to the Board the selling of valuable assets at 70%
discount to pay off its withdrawals and obligations. Then, three weeks after, Claro and Ms. Amparo
resigned as officers to restore confidence in the bank and preferred to be Chairman and member of the
board instead. Mr. Dennis Tumbokon, the former Vice Chairman, replaced him as President.

In spite of the newly installed President, news has widely spread about BSP’s on-going
examination with GOCB due to questionable investments, unusually high salaries of its officers, and
payment of unusually high interest on its term deposits. The depositors got wind that the GOCB
was having difficulty servicing withdrawal because most of its funds were engaged to the NPLs. The
Bank has been experiencing decrease in its investment funds and deposit liabilities, resulting into
liquidity constraints. In the meantime, Mr. Tumbokon reassured the 2,000 employees and a number of
depositors by stressing that GOCB itself is financially sound and stable.

No amount of assurance could dispel the rumors of bank’s inability to service the withdrawals.
The GOCB pre-terminated some of its investment and used the proceeds to temper the impact of
massive withdrawals. However, this news of massive withdrawals spread in the social media caused a
heavy damage to the bank as the stock price dropped to P25 per share and its liquidity position could
further suffer if long-term depositors pre-terminated their accounts.

Foregoing considered, the board of directors of GOCB thought of a bank holiday following
heavy withdrawals to conserve its assets, protect the interest of clients as well as their creditors and
avoid more withdrawals. However, Mr. Tumbokon expressed his apprehension due to the stigma
attached to the bank that went on holiday considering the vulnerability of this type of business.

Then, it sought BSP’s intervention for P10 billion emergency loan facility on December 4,
2020. The BSP is studying the grant of the financial assistance taking into consideration the predicted
negative impact to the industry if it chooses to close the bank citing the doctrine of “Too big to fail”
amidst coronavirus pandemic. The emergency loan will keep the bank from going after toxic
mortgages that led to massive losses to stabilize the situation and avert what otherwise could be very
serious consequences for the financial markets and for the economy. The loan should carry a lower
interest rate and fees and must be repaid in 10 years.

State of Affairs under the New Management

Human Resources

When Mr. Tumbokon assumed as President, he spearheaded the conduct of personnel audit. It was
established that some are underutilized and most of the best and brightest personnel have resigned
to look for greener pasture resulting to heavy turnover of manpower. Personnel are demoralized
due to uncertainties of their employment status, lower pay / incentive compared to other banks.

Further, some officers perceive that Mr. Tumbokon exercises favoritism in favor of the new bunch
of officers in terms of higher salaries and decision-making. The old employees felt that their
loyalty and contributions to the company were not given importance. These aggravated the officers
to be half-hearted in teaching the favored officers about the company’s systems and policies.

The company then was perceived, based on the independent consumer survey agency, as to be the
most friendly and efficient in the banking service delivery. Mr. Tumbokon learned from his new
officers about the current situation and rationalizing for most of the existing employees who
remained loyal to the previous management due to the perks and privileges granted to them by
previous management. These neophytes gained the trust and confidence of Mr. Tumbokon who
came from Sapphire Rural Bank when he was then the President and of which he has currently
minority interest.

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 BSP’s Examination Findings

The following BSP findings were formally shared to Mr. Tumbokon for his appropriate action:

Overall financial condition and results of operation of GOCB during the period under review were
unsatisfactory. The Bank was critically undercapitalized, illiquid and unprofitable. It failed to
meet the minimum capital requirements for commercial banks with head offices within Metro
Manila and with FCDU license in terms of absolute amount and capital-to-risk assets ratio (CAR)
which is negative 5%, way below the BSP’s 10 percent requirement and the eight percent set under
the Basel Accord, which sets global CAR standards. CAR refers to a lender’s ability to support its
operations and absorb risks.

Based on year-to-date figures (unadjusted), it operated at an average loss of P1.2 million per
month. The bank’s going concern status is at a risk due to the following reasons:

1. Bank had incurred recurring overdrafts in its demand deposit with the BSP. It had heavily
relied on the interbank loans granted by Ruby Commercial Bank (RCB) to cover said
overdrafts. Should RCB withdraw its support, GOCB would no longer be able to pay its
liabilities as they become due.

Relatively, the Monetary Board, in its Resolution No. 1668 dated November 10, 2020,
decided to, among other things, inform RCB that BSP shall not extend any loan or allow any
overdraft to GOCB to cover clearing losses in view of its negative track record in handling its
demand deposit account with BSP.

2. It is unable to build up earning assets as funds/deposits generated have been used to finance
its operations. Should the bank continue in business without any feasible rehabilitation plan,
liabilities and losses are expected to increase while assets continue to deplete.

3. Further, unfaithfulness and abuse of confidence of the officers took advantage of their
respective positions by making it appear that certain companies and individuals obtained a
loan from the bank. These companies and individuals then allegedly got checks and used them
without the supporting loan documents and endorsements until these were channeled to Mr.
Claro et meal., bank accounts.

Local Banking Scenario

The commercial banking industry remains resilient amid the credit crisis in the international
financial markets and record high inflation rate of 13%. According to reports, the commercial banks’
total NPLs and NPAs are 16.72% and 20.10% (P160 billion), respectively. On the other hand, GOCB
posted the 6th highest growth in NPLs and NPAs at 2.56% and 3.15%, respectively.

Mr. Armando Espiritu, BSP Governor assured the public that the Philippine economy remains
sound despite an unfolding global financial crisis, and domestic liquidity is adequate, with steady
inflows of more than $1.0 billion a month from overseas Filipino workers and from foreign parent firms
of outsourcing and call center companies were keeping the peso currency supported.

Due to pandemic, the BSP instituted series of regulatory relief measures for the banking sector
such as reduced policy rate five times in 2020 by a cumulative 200 basis points (bps) to 2.00%, with the
latest cut of 25 bps; lowered the reserve requirement ratio for commercial banks by 200 bps to 12%;
and purchased government securities in the secondary market to ensure the availability of sufficient
short-term liquidity in the financial system.

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 According to the BSP, the lessons of financial crises in 2008 and 1997 prompted domestic
banks to prepare for the kind of meltdown. As a result of these initiatives, local lenders remained
strong, posting a CAR of 15.5 percent on a consolidated basis.

Further, the BSP has tightened its watch on the heavy loan exposures of conglomerate-owned
banks to sister companies in the property sector on concerns that this could threaten the stability of the
banking industry. This is in view of the previous crunches which were aggravated by a property bubble
that led to huge losses for banks especially in the US, as triggered by the sub-prime mortgage crisis
which had contagion effects around the world.

Some bank analysts forecast that market liquidity has been a major concern because people
have not worked for a long period of time and that the all-important holiday shopping season is
expected to be low on cheers this year for retailers, who can generate up to 40 percent of their annual
revenues in the months leading up to Christmas. It is expected that the continued projection of high
OFW remittances support the consumption, educational and medical needs of families of migrant
workers will provide buffer from burgeoning the crunch.

On one hand, Filipinos showed an inclination to save through banks which reflect increased
depositor confidence in the banking system despite the adversities posed by the pandemic.

They also expressed that breaking the vicious circle of shrinking demand and supply in the
domestic economy under the grip of the global economic crisis can be done by accelerating the
administration’s “Build, Build, Build” infrastructure program, which will create jobs and businesses,
and, in turn, stimulate growth and boost domestic consumption.

The newly passed Socialized and Low Cost Housing Loan Restructuring Law, will cover all
socialized and low-cost housing loans from government financing institutions and agencies with at least
three months of unpaid monthly amortizations, and of which the original principal amount does not
exceed P2.5 million. However, bank analysts perceived that while the new law could save some
368,535 delinquent borrowers from losing their homes through foreclosure, most banks are still in
quandary whether this can have positive effects to the growing numbers of unpaid mortgages,
considering all penalties and surcharges will also be condoned upon approval of the restructuring
application and the restructured original principal loan will only be charged an interest not higher than
the original loan or not more than 12 percent, whichever is lower .

Further, banks can anchor on the legal framework being proposed in the congress i.e. the FIST
Law (Republic Act 11523). This Act will open doors for credit-granting institutions to clean their
balance sheets by selling their NPAs to asset management companies called FIST corporations
(FISTCs) that are registered with the Securities and Exchange Commission (SEC).

In politics, several analysts forecast the country’s political scene in 2022 presidential elections
as less disruptive governance because President Rodrigo Duterte and his allies further strengthen their
grip on the country as well as stability of the financial system.

The Global Ripple Effects of the Crisis

The virus shock has caused temporary and permanent business closures, reduced capacity
utilization, delayed investment expenditures, reduced household earnings and consumption, increased
unemployment by 5.3 million to 24.7 million from a base level of 188 million in 2019, resulting in
overall losses in labor income of US$860 billion to US$3.44 trillion and cumulative output loss of
around US$12.5 trillion in 2020 and 2021 due to the Great Lockdown (IMF estimation). If at all,
resumption of economic activities is more of asynchronous.

Concomitantly, several banks in Europe and Asia already streamlined their organization, a step
necessary in the light of the current global business and economic environment and having cautious

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outlook for 2020. Labor market remains seriously impaired, with adverse impacts on poverty and
income inequality.

Developing countries like the Philippines has eventually sent financial markets reeling and
deepened concerns about a slowdown in global economic activity, such as exports. Accordingly, the
impact of credit crunch affects income on banks’ corporate borrowings, which is related to productive
capacity for the export market.

In closing, Mr. Tumbokon, along with all the stakeholders agreed that they need to work
together closely, exhausting all reasonable alternatives and undertake the appropriate steps to address
the ongoing pressures.

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