Bankthai gets rid of non-performing loans
and subprime assets to survive
By Jon Fernquest |
BankThai is having problems meeting the legal capital-adequacy ratios necessary to continue operation as a bank.
Today's Bangkok Post business section reports on the problems.
Today's article has a rich finance vocabulary to study. The vocabulary is organised by meaning today, so that related words go together.
Here is the article in full:
BT plans fast sale of bad loans
'Cutting off our skin is only way to survive'DARANA CHUDASRI
Friday June 13, 2008
BankThai will sell off 29.71 billion baht worth of non-performing loans this month to two state-owned asset management companies in a bid to raise funds to keep its capital funds over minimum legal requirements.
Executives told shareholders yesterday that the debt sale was necessary for the bank's survival.
"Cutting off our own skin is the only way we can survive," said BankThai president Phirasilp Suphapolsiri.
"If we don't do this, we may die or be close to death. We need to maintain our capital adequacy ratio and turn our loan loss reserves into capital."
BT's financial statements verify that its capital reserves are already well below the 8.5% required by the Bank of Thailand.
At the end of 2007, capital funds stood at just 1.48% of risk assets, compared with 5.95% at the end of 2006 and 8.56% in 2005. The bank's capital funds fell sharply due to higher provisioning requirements needed to cover potential losses on its offshore investments in sub-prime mortgage assets.
BankThai in January raised 1.9 billion baht in a private placement to its two major shareholders, the Financial Institutions Development Fund and US private equity firm TPG Newbridge.
But Mr Phirasilp said the bank would not be able to raise additional equity at the moment given that the FIDF, which holds 42% of BankThai, was in the process of possibly selling its stake.
As a result, the bank would sell off its distressed asset portfolio by the end of the month to help keep its capital over regulatory minimums.
BankThai will sell off its portfolio held by its wholly owned subsidiary Sathorn Asset Management. The assets involve loan principal and accrued interest of 29.71 billion baht but a book value of 3.31 billion baht as of Feb 29.
Two FIDF-controlled asset management companies - Bangkok Commercial Asset Management and Sukhumvit Asset Management - will purchase the loan portfolio for 3.88 billion baht.
Mr Phirasilp said the bank was struggling to raise funds due to regulations requiring the bank to set aside provisions for investment losses.
The Bank of Thailand now requires financial institutions to mark-to-market the value of securities such as collateralised debt obligations and book provisions to cover any losses, even if the securities have yet to be sold.
Mr Phirasilp said the bank's BIS ratio would increase to near 9% after the distressed asset sale, and over 9% if it reversed its provisions for its CDOs.
But failure to sell the non-performing loans means its capital adequacy ratio would remain under the legal 8.5% minimum, forcing the bank to cut new operations. The capital adequacy ratio acts as a limit on asset growth relative to a bank's capital funds.
BankThai officials said that its capital adequacy ratio was now over minimum requirements, due to a capital increase in January and a sale of $159 million in sub-prime CDOs.
The bank currently holds $260 million worth of CDOs, representing assets which the bank plans to hold to maturity. The bank recently set aside additional reserves of 2.48 billion baht to cover potential investment losses, on top of 7.315 billion reserved in 2007.
Non-performing loans at the bank stood at 15.7 billion baht or 16% of total loans at the end of March, up from 15% at the end of 2007 and 8% at the end of 2006.
BankThai's troubles come even as the FIDF expects to receive final bids for its 42% stake today. Among the reported bidders are HSBC, Standard Chartered and Tisco Bank.
Shares of BankThai closed yesterday on the Stock Exchange of Thailand at 1.22 baht, down two satang, in trade worth 0.72 million baht.
Vocabulary:
finance - the study of money management (by banks, companies, or investment firms (private finance) or by the government (public finance); See Wikipedia)
non-performing loans (NPLs) - a loan that a borrower has not made a payment on for a long time
a distressed asset - an asset legally taken from someone who can not longer pay back the loan they received for the asset
a portfolio of assets - the set of investments owned by an organisation or individual
a distressed asset sale - a sale of distressed assets, selling cheaply to raise money quickly, right now, rather than wait
state-owned asset management companies - government companies to deal with distressed assets
capital - money invested in a business (See glossary)
capital adequacy ratio - the capital/asset ratio of a bank, bank assets (money, shares, bonds) easily changed into money (liquid assets) as a percentage loans
maintain our capital adequacy ratio - keep the ratio above the required level
keep its capital over regulatory minimums - keep capital high enough so the capital-adequacy ration does not fall below the required level
turn our loan loss reserves into capital -
capital funds - money invested in a business for use in conducting the operations of the business
capital reserves - money kept for an expected future cost
BIS (Bank for International Settlements) - an international organization of central banks, helps to create international monetary and financial cooperation, serves as a bank for central banks, the BIS's main function is to set capital adequacy requirements (See Wikipedia)
a bank's BIS ratio - the capital/asset ratio that the BIS requires all banks to maintain
book Y - to record and show Y in a company's accounting records
book value, the book value of an asset - the value that a business gives to an asset in its accounting records
cover Y - enough money to pay for Y
cover costs - enough money to pay costs
cover losses - enough money to pay for losses
cover potential losses - enough money to pay for possible future losses
provisions - money (funds) kept for a special purpose and future possible problems
book provisions - record provisions in accounting records
provisions to cover any losses - money kept to pay for future possible losses
provisioning requirements - provisions that must be made by law, money that must be set aside by law to cover problems
offshore - outside of the country (in this case the US)
sub-prime lending - home loans in the US made to risky borrowers, many of whom could not make payments after a while, thus causing problems for the banks (See Wikipedia on subprime lending and subprime mortgage crisis)
sub-prime mortgage assets - some lenders lent money to low income borrowers with difficult loan features like increasing payments that eventually exceeded the borrower’s ability to make the payments, these loans were not held by the borrowing, but bundled into securities and sold to the public (See Wikipedia on Ssubprime securities)
Collateralised Debt Obligations (CDOs) - an security backed by assets such as home mortgages, some experts blame the 2007 subprime crisis "on the complexity of CDO products, and the failure of risk and recovery models used by credit rating agencies to value these products. Some institutions buying CDOs lacked the competency to monitor credit performance and/or estimate expected cash flows." (See Wikipedia)
provisions for CDO (losses) - money kept for future losses on CDOS
in a bid to - in an attempt to
verify - make sure that something is true
a private placement - selling shares directly to investors rather than through a stock exchange
Financial Institutions Development Fund (FIDF) - guarantees payment to people who keep their money in bank accounts, helps rehabilitate banks, works to create long-term confidence in Thailand's financial system
a private equity firm - a company that buys other companies, taking companies from public to private, reorganises the companies, and then makes them public again, deriving a profit from the act of making the company more profitable in the long run (See The Economist glossary and Wikipedia)
raise additional equity - issue more stock to get more money for business operations
a stake - the part of a business that a person owns (See glossary)
selling its stake - selling the part of the business that you own
principal - an amount of money lent or invested to earn interest
loan principal - the amount of money lent in a loan and earning interest
accrued - accumulated and increasing over time
accrued interest - accumulated unpaid interest charges
a charge - a cost that a company has to pay
loan portfolio - the set of loans owned by the bank
set aside - keep for a special future use (See glossary)
set aside provisions for investment losses - keep money for possible losses on investments in the future
mark-to-market - using the current market price for an asset, rather than past purchase price or some earlier price
maturity - the time when the principal of a loan or bond must be repaid to the lender or investor
assets which the bank plans to hold to maturity - keep the asset for the life of the asset, instead of selling it off ahead of time
