DBP defends T-bill sale as tack to cut losses

The Development Bank of the Philippines (DBP) defended its Treasury bill (T-bill) trading strategy, as it said it sold securities as market prices were dropping globally to limit its losses and protect the bank’s financial condition.

The bank’s Risk Oversight Committee (ROC) gave its approval to implement, on a timely basis, the legitimate strategy to shift a portion of the bank’s available-for-sale portfolio to held-to-maturity and allow Treasury to exert efforts to minimize losses.

“The minutes of the ROC meeting would show that the committee did not approve any alleged ‘wash sale’,” the state-owned bank said in a statement.

A daily broadsheet reported supposed losses in DBP’s Treasury trading. DBP said the loss was a capital management measure that banks normally undertake.

DBP implemented a strategy to preserve capital and strengthen the bank’s long-term viability, the statement said.

Due to adverse market conditions affecting all banks, mark-to-market losses in the bank’s investment securities portfolio grew from P1.69 billion in 2013 to P4.37 billion in early 2014, a loss level that would have affected its core capital and would have resulted in reduced capital ratios.

So as not to breach regulatory capital adequacy ratios, the bank had to cut losses and sold illiquid and out-of-the-money government securities and booked P700-million trading losses on said securities.

“However the bank took trading opportunities to offset these trading losses and ended 2014 with a net trading gain of over P400 million. This trading portfolio rebalancing even contributed to the bank’s net income of P4.6 billion for 2014,” DBP claimed.

Had DBP done nothing, the bank could have lost approximately P10.7 billion by end-2014, instead of only P712 million, it said.

The DBP said the measure it undertook “ring-fenced” the bank and contained the risks it faced. In so doing, it also ultimately protected the banking system.

Had the bank lost P10.7 billion, its capital would have been so impaired that the bank would have fallen short of Basel III and Bangko Sentral ng Pilipinas (BSP) metrics, such as the capital adequacy ratio.

Worse, the impaired capital would put the bank in a “point of nonviability” (PONV) situation, which would put at risk all of DBP’s debt issuances, it added.

Had DBP reached the PONV, the bank would have been barred from paying investors holding DBP notes, it said.

“Simply put, the bank would have defaulted and this would have affected the whole banking system, the country’s credit rating, and possibly trigger a call on the government’s sovereign guarantee covering DBP’s official development assistance loans,” the bank said.

Nobody made money on the transactions. Other than the standard mapping fees paid to the Philippine Dealing & Exchange Corp. (PDEX), no fees were paid to any party for the subject transactions.

Also, the trading losses should not be taken in isolation as the bank took trading opportunities that offset these trading losses.

In fact, the bank ended the year with net trading gains of over P420 million, which contributed to the bank’s net income of P4.6 billion in 2014, it said.

“Even before the news articles came out, the bank already initiated an internal fact finding process on the implementation of the strategy in accordance with the Civil Service Commission’s Revised Rules on Administrative Cases. The bank commits that it will definitely take internal corrective measures and cooperate with the regulatory bodies,” it added. Luis Leoncio