Local banks open to foreigners, but await offers they can’t refuse

FOREIGN PARTIES wanting a piece of the action in one of Asia’s best growth stories have found the Philippines’ banking sector a tough nut to crack.

Penetrating the Philippine banking system remains a challenge for foreign entities despite the liberalization of the banking system, first under Republic Act No. (RA) 7721 in 1994 and later RA 10641 in 2014.

So far, foreigners have been settling for partnerships given the high cost of doing business here or securing minority interest, given entrenched family ownership of local banks that require a hefty premium for their shares.

“Marami laging tumitingin. Ang daming nagtatanong (Many parties are checking us out and many are asking about opportunities). It’s a question of price. The Sys are not interested unless it’s an offer you can’t refuse,” BDO Capital and Investment Corp. President Eduardo V. Francisco said.

“In theory, we could partner, but nobody has come up with a really compelling story for us to partner. We’re doing well. We don’t need the money because we’re well-capitalized.”

Still, Mary Jade Roxas-Divinagracia, managing partner for deals and corporate finance at PwC Philippines, sees “several” inbound mergers and acquisitions (M&A) happening in financial services — particularly banks and financing companies — driven by growth aspirations and the regional integration.

“Compared to banks in other ASEAN countries, Philippine banks are still very small. To compete, they need to grow bigger so they are open to inviting equity/financial investors,” Ms. Divinagracia said.

The three biggest Philippine banks — the Sys’ BDO Unibank, Inc., the Tys’ Metropolitan Bank & Trust Co., and the Ayalas’ Bank of the Philippine Islands — combined are still smaller than many commercial banks in Southeast Asia.

For now, local lenders have been working to tighten their grip on the domestic market instead of venturing into unknown territory.

Rumors were rife in the market that Yuchengco-led Rizal Commercial Banking Corp. (RCBC) is up for sale and that Gotianun-led East West Banking Corp. is taking in a South Korean bank as a strategic investor. Both lenders have downplayed such speculations.

Appetite has been building up since foreigners were allowed to own 100% of Philippine domestic banks. In July 2014, then President Benigno S.C. Aquino III signed RA 10641, allowing the full entry of foreign lenders in the local banking industry.

“We’re looking at valuation, but it’s more than the money. We are looking at what they can bring to the table,” said former Ambassador Alfredo M. Yao, a key shareholder of Philippine Business Bank.

As the Philippine economy sustains its above-trend economic growth momentum, demand for new services and financial products will also increase, analysts said.

Forging strategic ties with foreign banks has started to make sense for local lenders looking to diversify their revenue stream.

“One of the more efficient ways of growing profit is through fee-based income. Foreign banks have greater expertise outside lending and we can take advantage of that experience,” said April Lynn L. Tan, vice-president and head of research at COL Financial Group, Inc.

Security Bank Corp., the country’s sixth largest lender in terms of assets, was the latest bank to take in a foreign investor after Taiwan’s Cathay Financial Holdings Co. secured a 20% interest in RCBC in 2014. Cathay has since increased its stake to 22.71%.

Since completing the sale of a 20% stake to Bank of Tokyo-Mitsubishi UFJ Ltd. (BTMU) at a huge premium in April last year, Security Bank has received accounts from clients of the Japanese bank and has engaged in a business-matching event for them.

With the capital partnership, Security Bank President and Chief Executive Officer Alfonso L. Salcedo, Jr. said it can leverage BTMU’s global network spanning close to 50 countries.

BTMU said on its Web site that the partnership will allow Security Bank to serve the cross-border requirements of customers through the Japanese bank’s global franchise and expertise. The local lender can also capitalize on its strength in project finance as the government ramps up infrastructure development.

“Economies are evolving, growth is broadening. There are new sectors and new geographical areas that require technological expertise, knowledge of more affluent client base,” BDO Nomura Senior Vice-President and Head of Research Dante R. Tinga said.

Global banks searching for new markets see the Philippines as a viable business site, given its strong economic growth, huge consumer market, and the government’s aggressive infrastructure drive that provide opportunities to expand their loan portfolios.

In May, Bangko Sentral ng Pilipinas Governor Nestor A. Espenilla, Jr. said there were eight Asian banks looking to enter the Philippines, which would add to nine others that set up in the country over the last two years.

“The market is changing for financial services. We need to shift with the market,” said Justino Juan R. Ocampo, executive vice-president and Investment Banking Group head at First Metro Investment Corp.