When Lorenzo Tan was appointed president and chief executive officer of Rizal Commercial Banking Corp. (RCBC) on February 1 last year, the institution was under-capitalised and its asset quality was poor. In short, it was viewed by bank analysts as ripe for a takeover.
Just one year later, following some hefty structural, operational and capital changes, in February this year RCBC was able to report a 56% jump in unaudited net income to P3.21 billion (US$77.2 million) – the steepest profit growth among the country's top 10 banks. It marks some turnaround, one that Tan and his management team can take all the credit for instigating.
But Tan certainly seems to have a talent for reinvigorating troubled financial institutions. Before taking charge at RCBC, he was at the helm of Sun Life of Canada (Philippines) for 18 months, during which time he took the company to higher levels in insurance, the pre-need industry and mutual funds. Prior to that, he pulled off a spectacular turnaround at the formerly state-owned Philippine National Bank (PNB). Under Tan's watch, PNB reversed five straight years of losses to enter the black in 2003. It then doubled net income in 2004 and was ready for privatisation the following year, two years ahead of schedule. Plus, Tan was the president of United Coconut Planters Bank between 1998 and 2002, when he greatly increased its income and cut costs.
He tells Asiamoney what his eventful career has taught him about the Philippines' banking sector, and his plans.
Asiamoney [AM]: Before taking over RCBC last year, you interrupted a banking career to head an insurance company. What was that like?
Lorenzo Tan [LT]: Those 18 months with Sun Life were a blessing because it reinforced the value of marketing. Banking is a pull industry, whereas insurance is a push industry. In banking, you advertise and hope that customers walk in. In insurance, your agents go out and push products.
In 2005, we tried a banking strategy in the pre-need industry which was suffering from a 55% drop in sales. We offered televisions and cell phones with financial products and we couldn't believe the consumer response. We went from 3% market share to 53% in our first month of the promotion. I realised that if I can convert a housewife or a former clerk to a million peso cross-selling machine in insurance, I can do the same in banking. I also realised that my heart was still in banking and when Helen Yuchengco Dee offered me the job with RCBC, I accepted.
AM: How are you applying the lessons at RCBC?
LT: A traditional banker takes deposits and lends money. We don't operate that way. We convert a branch into a financial supermarket – we sell investments, insurance, mutual funds, credit cards, loans, or other financial products that were not sold in branches before. We ask the client, 'Why don't you buy risk management products or wealth management products or what we call opportunity products?' For opportunity, we sell you investments. If you are a businessman, we provide capital, whether debt or equity. For risk management, we sell you personal insurance, corporate insurance, derivatives. We had close to 400% growth in bank assurance last year.
AM: Do you motivate your staff like insurance salesmen?
LT: The most difficult challenge in every bank turnaround is cultural transformation. Skills transformation is easy – you bring in the experts and they teach the people. But to change the culture, teach people how to smile, how to go the extra mile, how to give customers more than what they expect, that's something else.
It's surprising how you can bring 150% performance from people. When I joined RCBC, I said "We made P2 billion in 2006, maybe we can make P2.5 billion in 2007." But by June I said, "Let's raise the target to P2.8 billion." By September, I sent balloons to all employees with the slogan "Let's go for P3 billion." By December, I sent balloons which said "Let's make history, let's go for Php3.2 billion." That's how we ended up with P3.2 billion in net income.
AM: What changes did you implement in terms of staff, capital raising and cost-cutting?
LT: I inherited a lot of good people in RCBC but I also brought in 40 to 50 people in the last 12 months, mostly Filipinos with overseas experience because I want them to have a global mindset. I brought in new executives to head or assist our information technology, corporate banking, retail banking, small- and medium-sized enterprises, credit cards. I always hire leaders so that I can multiply my followers. If I hire followers, they come to me for solutions every day. But if I bring in specialists and leaders in every field, they start running the day they come in and that's why we can deliver quick results.
After some capital raising initiatives with hybrid tier 1 and the issuance of preferred shares in 2006, RCBC had a follow-on public offering in the second quarter last year that raised P5.6 billion. Our capital adequacy ratio is now 18.7% under Basel II, up from 16% a year ago. We also focused on cutting our costs of operation. If you look at our latest numbers, P900 million of our increase in income came from a reduction in the cost of funds. If we can cut between 3% and 5% in our cost of operation, we can pay the consumer 1% more on his investment or provide him a 1% lower interest rate in home loans, and we win the game.
AM: You also bought a small thrift bank, Merchants Savings and Loan Association, for P520 million. Any more acquisitions planned?
LT: We plan to buy three-to-five small banks. If you go for a medium-sized bank today they will charge you two times book value, but a small bank will charge one to 1.2 times book value, so it's cheaper to buy five small banks for the same result. Hopefully, we can end up with 400 branches and compete with the big three on technology.
AM: How does technology fit in with your expansion?
LT: Investing in people and technology are the key factors to success. Not too many customers use electronic banking in the Philippines now, but I learned at PNB that you can change behaviour. Our lobbies were crowded with customers who were waiting 30 minutes to make a deposit or a withdrawal. We taught customers how to use technology and we steered 300,000 customers from the teller lines to ATMs.
If the top banks have four branches each along a major road, we can survive with two if we use ATMs, other electronic channels and an agent who can go to the customer. If we can give the best internet banking or the best mobile phone banking, you don't need to go to the teller. Half the Philippine population of 88 million is under 25 years old, while 10 million are under four years old. I don't think they will be going to the teller 15 years from now.
AM: Are you making RCBC more of a consumer bank?
LT: There are 1.7 million Filipinos earning more than P100,000 a month, but there are 37 million earning between P15,000 and P100,000. This is the C market where there is sustainable growth. And eventually D will move to C and C will move to B. We want to create growth in the C and D markets in banking. I see two particular opportunities here. One is the eight million overseas Filipinos – 3,400 Filipinos leave our country every day. The other is the growing middle class that are in the C market today.
AM: On the other side of the balance sheet, isn't it part of your strategy to reduce non-performing loans (NPLs) and assets aggressively?
LT: Yes, we brought RCBC's NPL ratio down from 7.6% to 5.6% and NPAs [non performing assets] from 22% to 14.3%, respectively last year. When we joined RCBC last year we told the remedial and asset management group that we have three years to take advantage of the good property market. A lot of bank owners think that by holding on to properties they are ahead, but if I can sell a property today for P100 million, I can re-lend that money right away. If I keep it, I have P100 million in assets that are not earning and I am paying money on the liability side in interest expense, insurance, property taxes, security guards, etc. By selling that property, I relieve the drag on my earnings.
AM: Banks in the Philippines are owned by families and many still tend to be traditional. Is this changing?
LT: We have a new generation of bankers in the Philippines – Gigi Montinola of BPI, Arthur Ty in Metrobank, and my brother Nestor at Banco de Oro. What's common about us is that we have all lived overseas, had a chance to study or work in the United States, so we came back with a global mindset. Traditionally, bankers were used to sitting behind a desk, waiting for customers to walk in. But banking is not a walk in the park any more, it's much faster. You have to develop new products and capture new markets. If you develop an electronic product today, your competitive advantage is good only for three-to-six months. Your competitor will launch a similar or superior product in three months.
AM: Where do you see RCBC going from here?
LT: We started as a wholesale bank and hopefully we can transform into a diversified financial services conglomerate with 60% of revenues from consumer banking. You have to know your cost component, the needs and wants of your customers and innovate to meet those needs. I want to grow RCBC's customer base from one million to five million to 10 million in five-to-10 years. That's why we are targeting our 10 million OFWs (overseas Filipino workers) and the 37 million in the C market.
AM: What does Philippine banking need to do to catch up with more advanced banking systems?
LT: The sector needs more consolidation. Cost-to-income ratios are still high and there is a need to rationalise a lot of activities. When I joined PNB, it was a bank "on fire", losing P250 million a month. So we did full costing on everything. We brought in 200 new professionals. They were like an army invading a city. They looked at break-even levels and started working out losing businesses. After four months we brought PNB to its first net income in five years.
There are CEOs out there who don't know how much it costs for an armoured truck to pick up cash from the customer and bring it to the branch, or how much it costs for information from San Francisco to land in a bank account in the Philippines. The best cost-to-income ratio in the Philippines is still north of 45%. We need to learn from Indian and Pakistani banks that have cost-to-income ratios of 25% to 35%. They use open platform technologies that are scalable and nimble.