Terms of NTB deal kept secret

September 7, 1999 -- BANKING authorities have failed to disclose to the public the terms of the guarantee given to Standard Chartered Bank for any potential losses arising from its takeover of Nakornthon Bank's bad debts.

''The key that you need to watch are the terms of the guarantee that the government is offering to the UK bank,'' said an investment banker, who asked not to be named. ''For only then will you know how attractive the deal is.''

On Friday, Kiatchai Sophastienphong, director of the Bank of Thailand's Financial Institutions Supervision and Development Department, and Salinee Wangtal, NTB chief executive, announced that Standard Chartered had won the bidding for NTB.

The bank's name will be changed to Standard Chartered Nakornthon Bank.

They did not name the other bidders for the Thai bank, but said that under the deal the UK bank would pay Bt12.38 billion to the Financial Institutions Development Fund (FIDF) in return for a 70 per cent stake in NTB. At the same time, the FIDF will reduce its stake in the bank from 99 per cent to 24.99 per cent.

The deal is expected to be completed by Sept 10, and Standard Chartered -- which will have five of its people sitting on the nine-member board -- will start to run the bank on Sept 13.

On July 12 this year, the authorities decided to intervene in NTB after its shareholders' equity had fallen below zero per cent due to the damage from its non-performing loans (NPLs). Banks are required to maintain 8.5 per cent in equity as a cushion against risk assets at all times.

The intervention saw a write-down of NTB's capital of more than Bt2 billion to about Bt2 million as a punishment against the shareholders. The FIDF then stepped in to inject Bt7 billion into the bank, to bring its capital-adequacy ratio into positive territory so that it could continue to operate legally.

This implies that the initial damage at NTB is about Bt9 billion. The bank is presently saddled with Bt35 billion in NPLs from its total assets of about Bt58 billion.

The Bt12.38 billion injected by Standard Chartered will go directly into the pocket of the FIDF, in return for it giving the UK bank the right to run the ailing institution with a controlling stake of 70 per cent. On the surface, the FIDF makes a quick profit of Bt5 billion from this deal -- the difference between Bt12.38 billion and Bt7 billion.

But this does not take into account a complicated yield maintenance and loss-and-gain sharing scheme. Under yield maintenance, the FIDF is obliged to compensate the UK bank for the loss of interest revenue as a result of NTB's NPLs. This part is not, however, disclosed.

Neither are the terms of the loss-and-gain sharing scheme. It is reported that the FIDF will at most compensate Standard Chartered for 85 per cent of the damage from the irrecoverable NPLs over the next five years, but will also stand to gain 85 per cent from any recovery of the NPLs over the same period.

In this sense, the FIDF burden from NTB is difficult to quantify, but Salinee has previously said that the overall damage from the authorities' side is likely to be Bt13.8 billion -- slightly higher than under the old deal.

Under that arrangement, announced in the middle of the year by the Wanglee management and Standard Chartered, the FIDF would limit its losses in NTB to Bt13.3 billion in return for a 20 per cent stake. Standard Chartered would pitch in Bt6.2 billion for a 68.4 per cent stake, while the old shareholders, including the Wanglees, would contribute Bt800 million for a 11 per cent stake.

The FIDF also stood to make other gains from bonus stocks and warrants, depending on NTB's recovery performance.

However, this deal was shot down by Finance Minister Tarrin Nimmanahaeminda and the banking authorities as it gave the impression that the Wanglees were passing the entire NPL burden to the authorities, while they stood to make a comeback at the bank.

''Politically, we could not accept the deal because it gave the impression that the old shareholders were passing all the burden to the public, while they stood to benefit from the official bail-out,'' said a Finance Ministry source.

The authorities, therefore, waited until after June 30, when NTB's equity fell below zero, and then intervened. After that, they had to wait for two months to give other bidders a chance to bid for NTB. Standard Chartered, keen to enter the Thai retail banking market in a fully-fledged way, revised its takeover package and won the day in remarkable circumstances.