The Philippines’ central bank governor has urged a radical shake up of the country’s banking sector, after a series of big-ticket mergers.
Amando Tetangco, governor of Bangko Sentral Ng Pilipinas, told Emerging Markets yesterday that the sector only needs six major banks and a handful of niche players, rather than the current total of 41 commercial players.
“Consolidation is going to lead to a more dynamic bank environment, characterised by larger and more stable institutions and more effective market competition,” Tetangco said. “We’re encouraging further consolidation.”
The central bank is providing regulatory incentives to encourage more mergers, such as more favourable loan loss provisions, Tetangco said. “The major [mergers] have already taken place, but there will still be more,” he said.
Three industry-changing bank mergers were announced in 2006: Prudential Bank into Bank of the Philippine Islands; International Exchange Bank into Union Bank of the Philippines; and the biggest, the almost-completed marriage of Banco de Oro and Equitable PCI Bank. A fourth deal, a proposed purchase of Philippine Bank of Communications by Philtrust Bank, failed.
The central bank is also trying to encourage greater lending to small and medium enterprises. “The large borrowers, the multinationals, the large corporations – their requirements are well covered by the banks already,” Tetangco said.
“The liquidity that’s available has to be deployed [...] more and more to the SME sector.” Such lending will be “an engine of growth in the economy that would be broad based and therefore sustainable”.
The governor added that he wanted further improvements in the non-performing loan ratios of the Philippine banking sector. The ratio has improved from 18% in 2001 to 5.6% today, but he wants it to reach the pre-financial crisis level of 4% “if not by the end of this year, then next year.” The Philippine legislature recently passed a special purpose vehicle act which allows the offloading of non-performing assets from bank balance sheets.
Bank regulation has become tougher. Accounting standards, corporate governance and risk management guidelines have been tightened, and banks are required to adhere to the Basel II principles on capital adequacy.
The banks have “started to bolster their capital position,” Tetangco said. “Most of them are comfortably above the minimum.”
Analysts are increasingly upbeat on Philippine banks after many years of disappointing performance. They should show good loan growth this year “for the first time in recent memory”, Gilbert Lopez of Macquarie Research Equities said in Manila in a recent report. He forecasts 14% loan growth in 2007, the fastest pace since 1998.