The Urban Bank blues - Urban Bank Corp - Brief Article

Business Asia, Oct, 2000 by Rene A. Mallari

In an era of turmoil in Asia's banking sector, RENE A. MALLARI reports from Manila on the demise of a once-proud financial institution

ARSENIO BARTOLOME III choked back his words as he told swarming media earlier this year that Urban Bank Corp -- one of the Philippines' more reputable banks and of which he was the chairman and founder -- had declared a bank holiday because of relentless withdrawals.

In less than four weeks, the 20-year-old commercial bank had been bled of US$114 million to service withdrawals -- more than half its deposit base. The government-run Philippine Deposit Insurance Corp (PDIC) could insure only US$13.5 million of the total run.

Analysts believe Urban Bank's financial condition might have been worsened by problems faced by its investment house subsidiary, Urbancorp Investments Inc, as early as last year.

The Philippines' central bank has reportedly been investigating the possibility that Urbancorp was engaged in securities deals and was caught grappling for liquidity when investors suddenly terminated their holdings.

A central bank official suggests the Urban Bank itself was financially sound but had been infected by the liquidity problems of Urbancorp.

The fact remains that Urban Bank is a victim of the Asian economic crisis. It went into big property developments such as the Urban Plaza and the Fort Bonifacio Development Corp just before the crisis when the real estate and construction industries were already in decline.

Analysts argue that the bank's investment in real estate came too late. To this day, Urban Plaza remains poorly tenanted.

Urban Bank's demise shook the banking system in the Philippines. Following Urban's closure, two medium-sized banks in the provinces, International Exchange Bank (iBank) and the Philippine Bank of Communications (PBCom) in Davao City were also hit by bank runs.

Central bank governor Rafael Buenaventura notes that the Urban Bank case had caused unnecessary angst for some banks. The worsening situation stirred the Bankers Association of the Philippines to hold an emergency meeting to discuss measures to provide additional liquidity to its 52 commercial bank members.

Consequently, Philippine stocks posted an 18-month closing Low by end-April this year as investor sentiment deteriorated. Analysts note that some major players were in a state of panic, and rumours of heavy bank withdrawals -- whether true or not -- influenced investors to unload their stock portfolio.

Philippine banks have learned a hard lesson. In light of this incident and coupled with the central bank's encouragement, banks have been joining the merger and acquisition bandwagon in their efforts to withstand similar shocks.

The Urban Bank's collapse served as a wake-up call to other banks that failed to meet the higher capital requirements of the central bank.

"There is now a stigma attached to downgrading of bank licences. I think mergers with other smaller banks or with bigger banks would be a better option," an analyst from a local stockbrokerage said.

The banking sector has been abuzz with merger talks. At a recent breakfast forum, Buenaventura said he was expecting more applications for mergers, although he declined to name names. It is believed six commercial banks, five thrift banks, 20 rural banks, and a financing company could be involved.

The central bank offers incentives for alliances. Under the scheme, merged banks are allowed to revalue their assets and implement a staggered booking of valuation reserves.

There are about 1000 banks operating in the Philippines, of which 52 are commercial banks.

What of the Urban Bank?

A day after it declared the bank holiday, the BSP declared that it would reopen in 30 days. The following month, Urban Bank's majority shareholders signed a memorandum of agreement with the Bank of Commerce for the rehabilitation of the beleaguered bank. The central bank approved the rehabilitation plan, while Finance Secretary Jose Pardo announced that it would reopen in September this year.

Unfortunately, the bank's reopening has been postponed a number of times; the last word is that it has been put off "indefinitely."

In a recent meeting, Urban Bank shareholders were told that the approved merger would be postponed because of an "additional-but unknown and very late-condition" imposed by the central bank before the merger. No further explanation was given.

Depositors are the losers. Funds have been left idle, not earning any interest, while the deposits' purchasing power is being eaten up by inflation. People also fear that the Bank of Commerce may pull out of the merger and a garage sale may ensue involving the liquidation of Urban Bank. Speculation even suggests some presidential cronies want to seize Urban Bank assets, and depositors would get back only a meagre portion of their money.

Urban Bank's top brass have been charged with economic sabotage and barred from leaving the country, including Bartolome and Teodoro Borlongan, the bank's president and chief executive officer.