(Business World (Philippines) Via Thomson Dialog NewsEdge)Equitable PCI Bank, the country's third largest lender, remains at the center of controversy after mall magnate Henry Sy attempted to merge the bank with Banco de Oro Universal Bank, the banking arm of Mr. Sy's SM Group.

The Jan. 6 merger of equals offer has sparked renewed fighting among stockholders with Banco de Oro and Government Service Insurance System (GSIS) taking center stage.

Amid bank directors squabble, Equitable PCI's need to raise capital seems to have taken a back seat.

Although the bank has already hired ING as its financial adviser, no concrete steps have been taken towards augmenting its capital.

For months, banks have been scrambling to raise capital in order to cope with new regulations such as the International Accounting Standards (IAS) and Basel 2.

Both IAS and Basel 2 are feared to weigh down on the capital of financial institutions.

Under the IAS, banks must now book their assets using market value instead of book value while with Basel 2, which will be implemented in 2007, banks are required to quantify their risks.

Sources within Equitable PCI said the directors could not agree on how to raise capital. A capital call was first considered but because some of the shareholders have already reached the limit of allowable investment in the bank, the idea was shelved.

Under a capital call, all existing shareholders are given the option to purchase shares equivalent to the shares they currently hold so they will not be diluted or their bank stake will not go down.

In a previous interview, bank Chairman and SSS President Corazon S. dela Paz said a merger could also raise the bank's capital.

However, GSIS is adamantly blocking the merger saying the offer price of P56 per Equitable PCI share is way too low.

Equitable PCI shares are currently trading over P70 per share and at some point were even priced at P83 apiece.

Trans Middle Equities board nominee Ferdinand Martin Romualdez has also joined Mr. Garcia in blocking the merger.

The last option is a tier 2 offering. A tier 2 offering, though, would be an expensive way of raising capital since this would be a secondary bank capital that includes items such as undisclosed reserves, general loss reserves, subordinated term debt, among others.

Another bank official who requested anonymity said the subsidiaries of the bank had already contributed P1 billion. However, in spite of this, the official said the bank is still looking at how it could cope with the changes brought about by the shift in financial reporting due to the implementation of new accounting standards.

The latest in the Equitable PCI story is the effort put in by GSIS President and General Manager Winston F. Garcia in disposing the pension fund's 12.15% bank stake.

There were no takers for GSIS' 12.15% ownership in Equitable PCI Bank which was auctioned off on May 8.

"Unfortunately nobody submitted at P92 (the pension fund's asking price)," Omelita J. Tiangco, GSIS executive vice-president for finance told BusinessWorld in a telephone interview.

According to Ms. Tiangco, the potential buyers would like a "clear path to control." This means that the interested parties would like to get control of the bank should they buy the pension fund's stake.

Because the GSIS will only accept a minimum cash offer of P92 per share for its 90,078,333 Equitable PCI shares, the entire stake is worth about P8.29 billion.

Ms. Tiangco said there is no schedule for another auction.

According to her, in order for GSIS to meet the requirement of its buyers, it must lump together its stake with either Banco de Oro Universal Bank or SSS.

In an interview, Mr. Garcia said the pension fund would not sell its stake unless Banco de Oro or SSS sell their respective shares.

Mr. Garcia said GSIS would first like to see who would gain control of Equitable PCI before disposing its stake, therefore the sale will be dependent on the decision of Banco de Oro to sell their over 34% bank stake.

BusinessWorld sought Banco de Oro President Nestor V. Tan's reaction on the statements of Mr. Garcia but he opted not to comment on the issue.

SSS, meanwhile, cannot sell its 25.6% bank ownership as the shares are subject to litigation after several lawmakers questioned before the Supreme Court the pension fund's 2003 decision to sell the shares to Banco de Oro. The case is still pending before the high court.

Last Friday, Ms. Tiangco said there are three groups, two foreign and one local, that have expressed interest in joining the auction.

Originally, the auction had been scheduled for March 6, but three days before the sale, GSIS announced it was delaying the offer for another 30 days or until April 6.

The April 6 auction, likewise, did not materialize and GSIS then announced a May 8 auction.

According to GSIS, the auction was postponed twice in order to maximize the price of its Equitable PCI holdings.

Ms. Tiangco said interested parties asked for more time to finalize their arrangements with shareholders and other investment consortia given the amount involved in the deal.

When BusinessWorld spoke with Mr. Garcia about the first delay, he admitted the sale had to be deferred because it was waiting for "favorable market conditions."

For months, Mr. Garcia has been fighting speculation that there really is no buyer for the GSIS shareholdings at the price the pension fund is asking for. He has also been working on selling the GSIS shares together with those owned by the SSS.

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