Philippine banks on the block

The country's banking industry is expecting an influx of foreign capital following an easing of ownership restrictions but deals might be hard to come by.

The Philippines banking industry is expecting an influx of foreign capital following an easing of ownership restrictions but the reality might not be so grand.

At a time when Malaysia is scrambling to form a megabank and Indonesia is throwing roadblocks in front of would-be buyers, including Singapore’s DBS, the Philippines has left the door wide open. 

“Definitely, there will be incremental investment. The government wants to be seen as open in the eyes of foreign investors,” Eugene Acevedo, senior executive vice-president for retail and corporate banking at Union Bank of the Philippines, the country’s 8th-largest bank by assets, told FinanceAsia.

In July, the country removed restrictions on foreign entities owning stakes in domestic banks as it seeks to attract more foreign direct investment but, in truth, the shop door was already ajar. 

Up until July, foreign banks could own up to 60% of a domestic group, compared with 30% in Malaysia, 40% in Indonesia and 30% in Vietnam. Indonesia in October said it could yet make its rules retroactive and force foreign banks to sell down existing stakes. 

In spite of this there hasn’t exactly been a deluge of deals in the Philippines with the myriad of smaller banks having most to fear. 

Taiwan’s Cathay Financial Holdings bought a 20% stake in Rizal Commercial Banking for $401 million in September, while International Finance Corp, the private equity arm of the World Bank bought 5.6% of the same bank for $101 million in January 2013. 

Foreign bidders are likely to take part in the government’s planned sale of a controlling stake in United Coconut Planters Bank. 

That is pretty much the sum of foreign investment in the past two years, which might not bode well for hopes of a flurry of deals. “There will be foreigners coming in but it will be in increments rather than quantum,” Acevedo said. 

This might be surprising considering the Philippine banking industry is healthy. 

The average total capital adequacy ratio, a measure of bank health, is 16.35%, according to the central bank, well above the 10% level it sets.

The central bank has recently announced that it will also require banks to hold a tier-1 ratio of 7.5% compared with the 6% demanded by the incoming Basel III regulations. 

“Our banks have always maintained a capital structure to be predominantly in the form of Tier-1,” Johnny Noe Ravalo, assistant governor, Bangko Sentral ng Pilipinas, the Philippine central bank, told FinanceAsia. “In addition, the results of the semestral stress tests tell us that extreme shocks can be absorbed by the banks’ capital position.”

Philippine banks are broadly well-positioned to meet the new Basel III requirements, according to a recent S&P report. They maintain a sizeable amount of liquid assets, the bulk of which are in the form of cash and domestic government bonds.

Non-performing loans in the Philippines also fell to 139.8 billion pesos ($3.1 billion) at the end of June from 144.6 billion pesos a year earlier. 

Underpinning this health is a sturdy remittance industry, which accounts for about 10% of Philippine GDP, according to World Bank data. It was worth $12.7 billion in first-half of 2014.

That begs the question as to why foreign groups have not already taken advantage of the already liberal rules. 

One issue, some analysts say, is that some of the country’s banks have family shareholders, which can be off-putting due to the risk of a complicated tussle for control.

“It’s now more about the greater degree of control allowed and entering a market with growth potential,” Alun Evans, senior associate at law firm Allen & Overy, told FinanceAsia. “The lower your shareholding (even at 60%) the less overall control you will have.” 

A more prosaic reason – and one perhaps overused in the region – is that banks are adopting a wait-and-see approach ahead of the formation next year of the Asean Economic Community and the promise of more harmonized banking rules.

The Asean Banking Integration Framework is meant to liberalise capital accounts, harmonise regulation and strengthen policy coordination among member states. However, it is still being worked on and is not set to come into effect until 2020.

Nevertheless, domestic banks are lobbying hard in Asean-wide discussions against an incursion of much larger foreign banks into a market with a population 80% unbanked. 

“In the Philippines, the incumbent banks don’t want any competition,” said Jayant Menon, lead economist in the office of regional economic integration at the Asian Development Bank (ADB). 

“The country is the new frontier in banking and the incumbents don’t want to give up any of that to foreign banks,” said Menon. 

Mixed consolidation outlook

Domestic consolidation has already reduced the quantity of low-hanging fruit for regional players to pick off.

UnionBank of the Philippines bought City Savings Bank in January 2013 for $140 million, while China Banking Corp bought Planters Development Bank for $43 million in September last year.

Philippine Bank of Communications also bought 90% of Banco Dipolog for $10 million in April this year. In addition, Unionbank is set to complete due diligence on Export Bank with a view to buying the bank, which has been in receivership since 2012.

“My analogy would be that consolidation is elective surgery. It might be a good idea but most banks that matter are healthy and the industry is not in dire need of [further] consolidation,” Dennis Montecillo, president of BPI Capital, the Philippine investment bank, told FinanceAsia.

However, for all the consolidation seen in recent years, S&P in a recent report still described the Philippine banking system as fragmented. So in spite of a lack of activity thus far, some within the industry expect a ramping up of deals now that the door is being flung wide open.

“We’ve had conversations with interested potential buyers who are keeping a close eye on the Philippines banking industry,” said Evans. “The FIG M&A space across Southeast Asia is busy and there are a lot of potential Japanese and Chinese buyers. Re the Philippines, we’re seeing interest from all the usual places.”

Clearer path to control 

Following the removal of ownership restrictions, foreign banks might be enticed by owning a bank 100% without having to consider minority shareholders.  Foreign institutions are looking with increased interest because now there is a clearer path to control and whatever artificial constraints there were have been removed, BPI Capital’s Montecillo said. 

The Philippines’ move is compounded by next year’s establishment of the Asean Economic Community, which will allow the greater movement of talent and business in the region.

Apart from Japanese banks, the stronger Asean banks are well-placed to take advantage of both the relaxation of domestic rules and the new Asean harmonisation. 

For example, the imminent three-way merger of CIMB, RHB and the Malaysian Building Society makes sense on a domestic level but also adds considerable weight to an already powerful regional player in CIMB.  

“CIMB and DBS are the banks most likely to look for deals in the Philippines. We are ready for them and we know we can compete with them,” Acevedo said. “ It should be fun. After all, the banking industry requires a lot of cooperation. Many things like bank technology and electronic platform have to be done together.”

Not exactly a sign of fear and panic. Furthermore, M&A bankers said CIMB was unlikely to make a move in the short term because its planned domestic merger will take up management’s time and has weighed heavily on its stock price.  

The Malaysian bank may also be more cautious after its bid to acquire 60% of San Miguel’s bank fell through last year, they said. But there is a sense that the larger banks have nothing to fear in any case; rather it is smaller banks under pressure. 

Mid- to large-sized banks in the Philippines are largely owned by cash-rich conglomerates, Chris Lee, associate director of financial institutions ratings at Standard and Poor’s, told FinanceAsia. “This strong single shareholder structure makes stake acquisition in these banks more difficult.”

Some executives and analysts said that, outside the top four – BDO Unibank, Metropolitan Bank, Bank of the Philippine Islands and Land Bank of the Philippines – the rest could be targets.

“Smaller banks with limited scale and coverage may be more vulnerable to intensified competition and are more likely to be open to mergers and consolidation,” Richard Tan, vice-president investor relations at BDO Unibank, told FinanceAsia.

The pressure on smaller banks was further increased at the end of October when the Philippine central bank increased minimum capital levels for the country’s banks.

Minimum levels for commercial banks were raised from 2.4 billion pesos to 4 billion pesos, 10 billion pesos and 15 billion pesos, depending on the number of branches. For universal banks, levels were raised from 4.95 billion pesos to 6 billion pesos, 15 billion pesos and 20 billion pesos, again depending on the number of branches. 

It is clear some banks will need to lift  capital levels significantly, which may add pressure on smaller institutions.

“It is fine for larger banks because they are handsomely above that level. However, some smaller banks may struggle to meet the requirements, therefore this could lead to consolidation,” Alex Lloyd, partner at law firm Sidley Austin, told FinanceAsia

Additional reporting by Alison Tudor-Ackroyd

 
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