The Philippines has long been one of the most receptive countries to foreign banks among the economies that make up the Association of Southeast Asian Nations, also known as the Asean region. But President Benigno Aquino III went a step further in mid-July, when he signed a law allowing foreign banks to own 100% of local lenders and to own 40% of the overall assets in the banking system.
The country was already considered welcoming to foreign banks, especially compared to some of its neighbours’ tight financial controls. But the Philippines has now made a statement of intent: not just that it wants to bring more foreign direct investment into the country, but that it is also working hard to ensure a smooth transition to a long process of Asean integration that is scheduled to kick off next year.
The new law, Republic Act No. 10641, has led to predictable speculation among bankers and analysts over which foreign players will attempt to buy banks in the country. Most expect Japanese banks and other Asean institutions will lead from the front. But not everyone agrees it is a good move — and even among its supporters there are some doubts about how much of an impact the new law will have.
ENCOURAGING COMPETITION
The move has not got much attention in the Philippines, in part because focus quickly drifted to speculation that President Aquino would implement constitutional reform to attempt a — currently prohibited — second term. But some local groups have spoken out against the bank law.
Alfred Yao, president of the Philippine Chamber of Commerce and Industry, questioned why the move was pushed through before other Asean countries implemented their own bank liberalisation laws. The new law is being seen by analysts as part of the transition to greater Asean integration in 2015, but it is true that the country’s neighbours have not rushed to liberalise their own banking systems. That said, Yao is not ruling out co-operation with foreign bank buyers. Philippine Business Bank, which he owns, could potentially be sold to a foreign institution, he told the local press.
There have also been some criticisms of the law from union leaders, who point to fears that smaller banks will be squeezed out. Mark Oliver Gonzales, president of Planters Development Bank Employees Association, told local journalists that previous foreign bank laws had already eroded competition in the local market — by reducing the number of smaller players — and that the new law would only make matters worse.
The numbers appear to be on his side. The number of banks operating in the Philippines has fallen from 899 in 2003 to 673 at the end of 2013, according to data from Bangko Sentral ng Pilipinas. But the banking sector still looks crowded to many foreign bank analysts — and to argue that a fall in the number of institutions will reduce competition ignores the type of competition that the central bank is trying to generate. In this market, it is the bigger players that really matter.
Bank of the Philippine Islands, BDO Unibank, Metrobank and Land Bank of the Philippines hold around Ps4.6tr ($106.22bn) of assets between them, which represents 45.7% of the assets in the entire banking system. These banks are the institutions that really drive lending in the country. But analysts argue they have been able to generate big profits for several years without really seeking out new lenders, including the small and medium enterprises that market participants in the country argue are under-banked.
“A lot of the motivation here is preparing for Asean integration, but besides that the central bank really wants to get local banks to reach out more,” says Jesse Ang, resident representative at International Finance Corp in Manila. “The access to finance has not improved despite excess liquidity in the country. Something needs to be done to improve lending in the country. That’s what competition should do. Perhaps we will get foreign banks in this market that can bring such an appetite to lend into the country. We’re so far from where we should be in terms of credit-to-GDP.”
The big Philippine banks have been able to prosper without drastically expanding their lending base — or, indeed, without a big increase in lending to smaller companies — in large part because they have profited from the Philippines’ ratings upgrades over the last few years. The country was upgraded by Moody’s to Baa3 last year, and by Standard & Poor’s to BBB in May, but in both cases these were only the latest in a series of ratings upgrades.
These upgrades have driven big trading gains for Philippine banks, which have been able to profit from a decade of “lazy banking”, according to analysts at CreditSights. The move of the sovereign to investment grade has effectively ended local banks’ chances at growing profits simply by holding government bonds, and they will now need to up their lending, the analysts argue.
But many local banks are eyeing consumers rather than corporations as their main source of loan growth in the years ahead. The new law is expressly aimed at generating more competition on the corporate side, in particular by helping bring more foreign direct investors into the country. This is where the central bank — and politicians — hope increased competition will really make a difference, and this type of competition cannot simply be measured by the number of banks that exist in a country.
Weighing Up The Hopefuls
The benefits of increased competition appear reasonably clear, at least to most market participants. But there are still questions over how many foreign banks will move into the country as a result of the law change.
There is certainly room for a big increase in foreign bank ownership. The current level of foreign banks’ asset holdings in the country is in “the low teens”, according to Nicholas Yap, a bank analyst at CreditSights in Singapore. Most analysts expect that foreign banks will be attracted to mid-tier institutions, holding around 3%-4% of the banking system’s assets each. Since foreign banks are being allowed to hold 40% of the assets in the Philippines banking system, that leaves room for as many as 10 foreign acquisitions.
Most analysts assume that Japanese banks are going to be among the first to acquire ownership of Philippine institutions. These banks are facing tepid loan growth at home and are now looking to the rest of Asia to fuel their growth. This idea makes sense in abstraction, but it is even more sensible when you consider that many big Japanese corporations are following exactly the same strategy. Japanese lenders need to move overseas simply to keep up with their clients.
But there have so far been no immediate announcements of deals, and the country’s top banks all either declined to comment for this story or gave no explicit details about whether they were considering an acquisition. Privately, bankers are more open about the chances of deals. But they also admit that they are spoilt for choice.
“There are definitely going to be some foreign banks looking to move into the Philippines by acquiring interests in local banks, so there should be an impact pretty quickly,” says a senior investment banker at a Japanese megabank. “It’s hard to tell which banks will move in first. We have looked at it ourselves, but there are so many options that I just don’t know what is going to happen right now.”
Some market participants hope that other Asean banks will move into the market, pointing in particular to the Singaporean and Malaysian banks that have big enough balance sheets to buy mid-tier Philippine lenders without causing a big knock to their balance sheet. But this positive — the lack of balance sheet impact — is clearly also a negative. A favourite trick of analysts looking at the Philippine banking system is to compare it to the size of DBS Bank in Singapore. The assets of the entire Philippine banking system, worth around Ps10.1tr ($230bn), are only about two-thirds that of DBS.
These qualms aside, some analysts are still sceptical that there will be a groundswell of foreign acquisitions in the country — simply because there hasn’t been one already. The move from 60% to 100% ownership of Philippine banks does not fundamentally change things from a capital perspective under Basel III, according to Ivan Tan, director of financial institutions ratings at S&P in Singapore.
Tan also notes that the foreign bank ownership cap was already high in the country compared to its neighbours. Indonesia has not let foreign financial institutions buy more than 40% of local banks since 2012, for instance. Vietnam limits foreign strategic investors to 20% ownership.
The majority view is, though, that there are likely to be a few acquisitions. A Manila-based lawyer points out that the offer of full control should be enough to entice foreign players, especially those — like the Japanese — who appear to be driven by necessity. Sonny Collantes, the congressman who introduced the bill into the House of Representatives on February 24, says he has been approached directly by foreign banks that want to take over Philippine institutions but are so far not able to do so because the rules are too restrictive.
Those foreign players have been heard. The Philippines’ bankers and politicians will be paying close attention to what noise they make next.