United Coconut Planters Bank, the 12th largest bank by assets in the Philippines, is set to attract interest from local banks should the government put its stake in the bank up for auction.
According to Philippine media reports citing company officials earlier this year, the government is planning to auction its stake and the bank has hired Standard Chartered to conduct a feasibility study.
Banco de Oro (BDO), the biggest bank in the Philippines, could be interested.
In a recent interview with FinanceAsia in Manila, Jose Sio, chief finance officer of SM Investments, which has a 47% stake in BDO, said the bank is looking to acquire smaller banks in the Philippines, which will enable it to boost its branches in the country.
“For BDO to grow substantially, and for that matter, any bank to grow substantially is through acquisition,” said Sio. When asked if BDO was looking at United Coconut Planters Bank (UCPB) as a potential acquisition target, Sio said: “We look at every opportunity.”
Philippine banks have faced restrictions in opening new branches in Metro Manila, a key area for deposit-gathering and lending activity, as that is where most multinational companies and large companies are based. However, that restriction is expected to be lifted by July 1 this year.
Sio also noted BDO is interested in increasing its footprint in areas in which it is not present. “We are strong in Visayas and Luzon but not in the Mindanao area; this is also the area we are interested in, including areas in Visayas or even in the Luzon area,” said Sio.
Another bank that could be interested is Robinsons Bank, which is 60%-owned by JG Summit, the holding company of the Gokongwei group. In a recent interview with FinanceAsia in Manila, Lance Gokongwei, president and chief operating officer of JG Summit, said the company’s balance sheet still has the capacity to take more acquisitions after completing its purchase of a 27.1% stake in Manila Electric Company in December.
He added that the company wants to pursue transactions “that further improve the strategic position of the businesses we are already operating in.” When asked if the company would look at UCPB, Gokongwei said: “I suppose we will look at it, once the actual process starts.”
Despite the interest, a UCPB privatisation faces a number of challenges. For one, its ownership has been controversial. The Philippine government sequestered about 72% of the shares and there has been a long-running dispute over the ownership, with Philippine businessman Eduardo Cojuangco contesting the government's ownership of the shares. As a result, the bank's ability to raise capital through the usual channels has been hampered.
However, a court ruling last year decided that the government owns the shares, and that they should be used for the benefit of coconut farmers. So far, there have been no further appeals.
In addition, the pricing and valuations of any stake sale are expected to be a key hurdle. UCPB accumulated severe losses in the past, and was placed under rehabilitation in 2009. Since then, the bank has improved its profitability, supported by loan growth and steady net interest margins. However, it still has significant unamortised losses from bad loans, which, if recognised, could wipe out most of the bank’s capital base, say analysts.
“The bank estimates the net worth of UCPB to be about Ps20 billion ($444 million) and that is somewhat similar to the amount the government had invested in the bank as part of the rehab process,” said Singapore-based Moody's analyst Simon Chen in a telephone interview.
“When the bank was brought under rehabilitation, the arrangement was for the bank to slowly recognise these unamortised losses onto the bank’s balance sheet, over a 10-year period. We estimate the unamortised losses to be about Ps20 billion, so from Moody’s standpoint, the bank’s net worth might be a lot less than the accounting net worth,” he added.
Although relatively small, analysts note that UCPB is still sizeable and among the top 15 banks in the Philippines in terms of loans and deposits. At end-2012, the bank’s non-performing loan ratio improved to 5.7% from 7.5% in the previous year, mainly due to loan growth.
Standard Chartered declined to comment.