Another look at trust corporations

SUITS THE C-SUITE By Miguel U. Ballelos, Jr.

Business World (07/20/2015 – p.S1/4)

(Part 1 of 2)

In June, the Monetary Board approved the new guidelines on the establishment and operations of stand-alone trust corporations in the Philippines. While a new circular containing the said guidelines has not yet been released by the Bangko Sentral ng Pilipinas (BSP), the guidelines are not entirely new as the BSP published rules and regulations governing trust corporations in January 2011 through BSP Circular No. 710. The issuance is part of the BSP’s initiatives towards liberalization and capital market reform.

The previous guidelines define a trust corporation as an entity which basically performs the same functions of a trust department of a bank (or of a nonbank financial institution with a trust license). It can engage in trust or other fiduciary business, investment management activities, act as trustee or administer any trust or hold property in trust or on deposit for the use and benefit of others, and/or act as a financial consultant, investment adviser or portfolio manager.

However, a trust corporation is a separately incorporated entity. Accordingly, a nonbank entity, such as an insurance firm or mutual fund company, can now establish and operate a trust entity, subject to the approval of the Monetary Board and in compliance with the requirements of BSP Circular No. 710.

Banks and nonbank financial institutions may continue to conduct their trust business through their existing trust departments or they may spin-off their trust operations into a stand-alone trust corporation, which can be their subsidiary or affiliate. The rules reiterate, however that an investing financial institution cannot engage in a trust business using both channels, to prevent any potential abuse.

Certainly, there are potential incentives for banks or nonbank financial institutions (quasi-banks) to establish trust corporations that are separate entities. Here are some of these incentives.

For one, the assets of the trust corporation do not form part of the relevant exposures of the bank or quasi-bank for purposes of calculating the Single Borrower’s Limit (SBL) as well as the ceilings for accommodations to directors, officers, stockholders and their related interests (DOSRI). This is because, as a separate entity, the credit-related risks related to the SBL and DOSRI limits are no longer carried by the bank/quasi-bank, but are borne by the investors who placed their investments in the trust corporation.

In addition, trust corporations are subject to lower supervision fees. Currently, all banks (except for rural and cooperative banks) and quasi-banks are assessed an annual supervision fee of 1/28 of 1% on the average assessable assets of the preceding year, which includes their respective trust department accounts. Meanwhile, a trust corporation is subject to an annual supervision fee of 1/32 of 1% on the average monthly balance of its assets under management. The potential cost savings may entice banks with particularly large trust business portfolios to consider a spin-off of its trust operations to a stand-alone trust entity.

To further spur interest in the establishment of trust corporations, the Monetary Board adjusted the minimum capitalization requirements. Previously, a trust corporation was required to put up a minimum paid-in capital of P300 million at inception. The new guidelines have reduced this to P100 million at inception, but is coupled with a five-year transition period within which the trust corporation should eventually increase its capital to P300 million. The lowering of the minimum capital requirements is not only intended for banks, but also for other market entrants who desire to engage in the trust business but find the previous P300-million requirement too restrictive.

The new guidelines also provide that the existing Trust Rating System, which is used by the BSP to comprehensively and consistently evaluate the performance and administration of the fiduciary activities of trust entities, will be revised to include “capital adequacy” in assessing trust corporations. The key factors that are currently taken into consideration by the Trust Rating System pertain to managerial capability, operational capacity, compliance, asset management practices, and earnings performance. Since a trust corporation has a capital structure which is separate from its parent bank/quasi-bank, maintaining an adequate capital base is critical to sustaining its operations.

All in all, the BSP expects that these new guidelines will attract more players to the market, which may result in more innovative trust products and services being made available to the investing public.

Banks and quasi-banks are thereby encouraged to take a closer look at the potential impact of the new set of guidelines to their existing trust businesses, as it can present both an opportunity and a challenge in the current business environment. There is an opportunity for banks and quasi-banks to revisit their current organizational structure and decide whether maintaining their trust activities in a trust department or through a stand-alone trust corporation is more efficient in achieving its goals. The new challenge, however, is to figure out how banks can cope with the perceived increase in competition, especially from nonbanks, as these entities may present different perspectives and strategies on how to tap into institutional assets in the local capital market.

In our next installment we will look into other considerations relating to the establishment of trust corporations, such as certain aspects of regulatory reporting and compliance. We will also explore further on the potential implications of these regulations to the investing public.

Miguel U. Ballelos, Jr. is a Partner of SGV & Co.