By Abigail Marie P. Yraola, Researcher

THE PROPOSED MERGER of the Land Bank of the Philippines (LANDBANK) and Development Bank of the Philippines (DBP) has once again come to light in the first quarter of 2023 despite time running out from previous administrations and differences in mandates.

LANDBANK primarily caters to developing the Philippines’ agricultural sector and provides support for the agrarian reform program while DBP provides banking services for the medium- and long-term needs of small and medium enterprises (SMEs) in the agricultural and industrial sector.

These two banks have two very different functions, varying corporate objectives and mandates, thus, sparking debates and critics against those who oppose the merger.

As far back as 2006 during the Arroyo administration, the marriage between the two state-owned lenders have been put forward.

The plan was then revived in March this year, after President Ferdinand R. Marcos, Jr. approved the groundwork of the two largest state-owned banks’ union, after a discussion with his economic managers.

LANDBANK will be the surviving entity with larger assets, capital stock and even having more branches compared with DBP.

The Department of Finance (DoF) said in a press release that the merger can generate an amount of P975 million in savings per year through the consolidation of the banks’ branch operations.

DoF also disclosed that the consolidated bank would have an estimated asset size reaching P4.2 trillion and deposit base amounting P3.6 trillion, potentially making LANDBANK the largest bank in the country.

Finance Secretary Benjamin E. Diokno’s push for the said merger “is meant to create a bigger, stronger, and more resilient bank that can better serve the country’s development needs.”

“The current administration is pushing for the merger to allow the merged bank to better withstand economic shocks,” Mr. Diokno said in a Viber message.

He also added that the union of these banks will boost retail and wholesale banking operations compared when they function as separate banks.

The merger is expected to be finalized in November this year.

PAVING THE WAY FOR MAHARLIKA?
The country’s proposed first sovereign wealth fund (SWF), the Maharlika Investment Fund (MIF), is aimed to promote economic development by making strategic and profitable investments in key sectors, Mr. Diokno said in late February.

An SWF is a state-owned investment fund from money generated by the government, which is often sourced from a country’s surplus reserves.

The proposed SWF aims to get its seed capital partially from LANDBANK and DBP, giving P50 billion and P25 billion, respectively. The merger of these two state banks may pave the way for the MIF.

“If after the merger LANDBANK will still be asked for a contribution, then the performance of the SWF would influence the bank’s profits,” said Japhet Louis O. Tantiangco, senior research analyst at Philstocks Financial, Inc., in an e-mail.

If the bank’s contribution to the wealth fund would be a significant portion of its investable funds, it would be risky not just for the bank but for the financial system and if it posts losses then it would have a detrimental effect, he said.

“The merger itself is not important [and] uncalled for. It is basically a political move,” Pablito Malabanan Villegas, former LANDBANK vice-president and the current president of Villegas Organic and Hobby Eco-Tourism Farm Corp. and an independent director of ECCOBank (A Rural Bank), Inc., said in a phone call interview.

For him, the result of the merger will be a “further neglect and even abandonment of the respective mission as mandated by law.”

But for Mr. Diokno, it is a misnomer to say that the two banks have different mandates.

“The fact is that both are universal banks — what one bank can do, the other bank can do also.”

“The corporate action would further solidify the surviving bank’s footing in the banking industry,” said Luis A. Limlingan, head of sales at Regina Capital Development Corp., in an e-mail.

He also added that even if the two banks were merged, it would remain to be relatively smaller than some of its counterparts in the region.

Additionally, the proposal seems a bit rushed for some.

A merged LANDBANK and DBP is “not a good move,” Mr. Villegas said. And the rush for this merger will openly compete with the well-managed and profit-seeking banking sector, he added.

For Mr. Tantiangco, he said the proposed merger should further be studied, noting that while there may be benefits, there are also concerns which needs to be resolved.

“Will all sectors be given ample attention despite them being handled by one entity moving forward? Also, the merger will lead to displaced workers. Where will these workers go?” he said.

WHAT’S IN IT FOR THE BANKS?
Mr. Tantiangco said that after the merger, LANDBANK will pose as an even bigger competitor in the universal banking space.

The merger will lead to higher capitalization for LANDBANK, with the increase in its capital base, the state-led bank will have more cushion against financial shocks, added Mr. Tantiangco.

“The merger is also expected to result in higher productivity, [and] will be a sort of expansion for LANDBANK which may then result in economies of scale,” he said.

Meanwhile, the Finance chief said that the Philippines will likely benefit in the said merger, which will “eliminate redundancy and inefficiency in operations.”

But the planned merger raised concerns more as to who and how will it affect, rather than outlining its benefits. The push for the merger will likely result to layoffs and the banks involved will lose it core mandates and its areas of expertise.

For DBP, there is no clear direction or defined program for the merger at its early stages.

“But as in any merger and acquisition, an incentive will be provided to personnel in view of redundant positions. If and when, the approach may also change depending on the direction the surviving entity will take,” DBP said.

It reiterated that the function of both banks is equally important, and that the expertise of these banks are needed so that no marginalized sector will be disenfranchised.

‘SUPER MONOPOLY’
Some senators has voiced their concerns on the said merger, citing that if these state-led banks’ union is realized, it will create a large financial institution, a “too big to fail” or a “super monopoly.”

Mr. Tantiangco affirmed this, saying that due to the resulting size in its deposit base it is likely a financial giant and comes with attached risk.

“If ever the bank collapses, this would create a very significant dent on the Philippine financial sector and eventually on the overall economy, both confidence and real-wise,” he said.

The bank’s improved capital base resulting from the merger, he added, is seen to mitigate the said risk.

But he noted, that despite this, universal banks in the private sector are seen to be strong and competitive and in turn will prevent the merger from creating a super monopoly.

On DBP’s side, drawbacks of the merger entail identity crisis and mission dilution, industry limits and anti-competition environment contrary to a liberalized economy envisioned by the Philippine Competition Act.

“The merger may result in an institution with consolidated financing programs with no mastery in the administration of the same, unlike in the current set-up,” the infrastructure bank said.

They also said the merged entity is claimed to be stronger, bigger and better and while there may be truths to it, overall, these do not reduce benefits.

“Mergers may be advantageous for private banks where size is critical for scale and market dominance, but this does not hold true for [state] banks with specific mandates, where priority should be towards the effectivity in performing and delivering their respective public missions,” DBP said.

For Mr. Villegas, he sees two possible risks. One is mismanagement, which he said is currently happening in LANDBANK, and two, is the non-fulfillment or the abandonment of these banks’ mandate.

“The banks tend to continue to ignore or marginalize the sector they are mandated to serve, socially and economically, thus [the latter] continue to suffer in poverty and hopelessness,” he said.

He also added that contrary to what Mr. Diokno said, the biggest banks in some countries are owned by the private sectors and not the state.

“Having a state-owned bank as the largest bank usually spells for better performance of the banking industry… State banks can fulfill functions that private banks don’t do, as well as offer countercyclical lending,” Mr. Limlingan said.

SNAGS?
The government watchdogs are mum about the LANDBANK-DBP deal as the merger is still in the works.

“In the case of the LANDBANK-DBP merger, the transaction has not yet reached the Commission, therefore the PCC defers any comment lest it preempts future developments,” the Philippine Competition Commission (PCC) said in an e-mail.

The PCC is mandated to review proposed mergers and acquisitions and prohibit those that will substantially prevent, restrict, or lessen competition in the relevant market.

The Bangko Sentral ng Pilipinas (BSP) was not able to share its comments on the proposed merger as of press time last Friday.

The Governance Commission for GOCCs (GCG), for its part, said in a statement last April that the banks’ merger does not need a new law for them to combine as a single entity.

It conducted a study on the issues concerning the proposed union of the said banks and found that these banks can be combined even though they both received their charters from the Congress.

This was reiterated by former Senate President Franklin M. Drilon, saying that there is an existing law that empowers the president to direct the merger.

The Republic Act (RA) 10149 or the GOCC Governance Act of 2011 authorizes the President to effect the merger without waiting for Congress to file and pass related bills.

However, this is contrary to DBP and some experts.

Mr. Villegas said that the merger requires joint-congressional action, saying that the specific mandates of the respective banks cannot be amended by general law and the GOCC law is a general law.

But DBP remains firm on their position that the proposed merger requires congressional action.

It said there is no provision in Section 5 of RA 10149 and that there is no mention of the power to decide on or to approve of a merger which belongs to the Congress.

“This gave the law the appearance of unlimited power to merge and abolish GOCCs, which is highly prone to abuse and can be whimsically and capriciously exercised,” said DBP.

“This unbridled power of the GCG is dangerous, particularly if the proposed merger does not adhere to the set conditions or exclusive standards,” it added.

EFFECT
For Mr. Diokno, if the merger materializes, the local banking industry will continue to be sound and adequately capitalized and the central bank has one less bank to supervise.

The agricultural lender’s comparative advantage in its digitalization journey can be applied more widely, he added.

Mr. Tantiangco, on the other hand, said that once the merger pushes through, somehow it is expected to help the government in its saving efforts as it pursues fiscal consolidation.

“If the synergy brought by this merger is maximized, it is expected to greatly help in the economic development of the country via financing, primarily in the rural areas,” he said.

Mr. Tantiangco added that the proposed merger is seen to have a positive effect in the field of agriculture, infrastructure development, and small- and medium-scale businesses.

Once the merger is executed, Mr. Villegas said, it will be disastrous to the agricultural economy, and perhaps the economy itself.

“Merging them will not only be too risky but will result in [a] financial and socioeconomic disaster given their already miserable failure to do their mandates, much more their inability to compete with the more efficient and effective management of privately managed universal and commercial banks,” he said.