Fresh from its market-defining return on equity (ROE) of 26.6 percent, Security Bank Corp. (SBC) has increased its chances of further improving on its financials with the grant from the Bangko Sentral ng Pilipinas (BSP) of a license for it to deal in derivatives.  With that license, given only after a thorough scrutiny of its financial strength, SBC can now offer companies a trading window for them to limit their risks via derivatives, an exotic financial product used as a hedging facility.

SBC is the first local bank to be granted the derivatives license for Type 2 products that include FX (foreign exchange) forwards, forward-rate agreements and options on bonds, currencies, interest rates and combinations thereof. This financial-product offering for the bank would allow it to increase its trading income, since export firms can now go through the bank for their protection on wild swings in the peso-dollar rate, for instance, or in insulating them from gyrations in interest rate.

FX forwards, as a derivative product, allow an export firm to be assured of a predetermined peso-dollar rate at, say, a year from now, effectively insulating it from volatility in the exchange rate. When such a company purchases an FX forward via SBC at the strike price of, say, a peso-dollar rate of P47 to $1, on August 27, 2009, when the peso strengthens by that time to P42 to $1, it can still get payment by that transaction price of P47 to $1 because of the FX forwards done through Security Bank.

This product offering from SBC would give ample elbow room for export firms to protect their costs and their profits since they are hedged against such wild fluctuations in the exchange rate. With it, they will be able to continue their operations without the risks of currency volatility. Without the derivatives products, export firms will not be hedged against the kind of volatility that saw the peso-dollar rate strengthen from P56 to P40 that resulted in many company closures.

Aside from hedging on currency rates, SBC’s license allows it to also offer derivatives on forward-rate agreements, essentially a mechanism to allow a firm to be insulated from risks arising from gyrations in interest rate. With these offerings, SBC can now be said to be hedged from its top pole position as the No.1 bank in terms of ROE, the financial yardstick by which the world’s No.1  billionaire Warren Buffett subjects firms that he intends to fold in into Berkshire Hathaway, a conglomerate that made its money purely on trading income, not in operating a business enterprise.

The award by BSP of the Type 2 dealership to Security Bank enhances the bank’s suite of product offerings. Where before it could only offer a limited product lineup as a Type 1 dealer, now it could also offer other exotic financial instruments to enhance its trading income. This, while helping husband the resources and business models of local companies that can now hedge the risks inherent in their business operations, such as yen-dollar exchange-rate swings.

That means an exponential surge in Security Bank’s income, as companies that transact with the bank for their hedging facilities would now have to open checking accounts. These checking accounts would give the bank access to zero or almost-zero costs in deposits that they can then harness for their loans that assure the bank at least 9.75 percent in interest rate for prime clients, like San Miguel Corp.

Pre-audit of projects

Former Budget commissioner Silvestre Sarmiento has a solution to the government’s woes on losses arising from its projects. Many a time, there are big-ticket infrastructure projects where losses, wastage and even fraud have been detected. Unfortunately, by the time the findings on fraud are out, the government can no longer go after those responsible for the government losses.

Sarmiento said the Commission on Audit (COA), as “watchdog of the Treasury,” is mandated to audit and settle accounts, to ferret out fiscal anomalies, identify violators and initiate charges and safeguard government funds and property. To achieve these, the COA gives primacy to postaudit. However, it is this post-audit policy thrust that results in the government losses.

COA postaudit has failed to deter irregularities. In fact, fiscal anomalies seem to have increased in number due to contract flaws and lapses in fiscal management. Perpetrators brave risks of discovery and penalties when thinking of the munificent spoils of malfeasance. With postaudit, government transactions may be disallowed, but then services were already rendered, supplies and equipment delivered and payments made. Thus, fund recovery suffers because time-lapse officers involved may no longer be in the service.

Sarmiento, now in his 80s, cited World Bank studies that confirm there is less fraud in government operations where there is effective internal control, proper contract review, compliance with audit requirements and uncompromising commitment of top management. Thus, for him, there is a need to come up with a pre-audit scheme to lessen the incidence of fraud in government infrastructure projects.

To achieve this, Sarmiento believes COA auditors should undertake special pre-audit and focus on special programs, projects or contracts with time-phased appropriations. With the aid of legal officers, they also should review contract clauses to determine specific requirements for each contract to be used in determining allowability, allocability and reasonableness of costs billed to the government. In this way, the government can be insulated from the fraud risks instigated by unscrupulous government men. 

E-mail: hugagni@yahoo.com

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Market Files: BSP derivatives license

Fresh from its market-defining return on equity (ROE) of 26.6 percent, Security Bank Corp. (SBC) has increased its chances of further improving on its financials with the grant from the Bangko Sentral ng Pilipinas (BSP) of a license for it to deal in derivatives. 

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