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Monday, October 23, 2017 | MANILA, PHILIPPINES
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   banking report
Date posted: Monday, May 30, 2016 | Manila, Philippines

1st Quarter Banking Report (2016)

Leveling up: a Q&A with China Bank Capital

GOING BEYOND its retail-banking roots in the Chinese-Filipino community, Henry Sy-owned China Banking Corp. has become an active participant in the capital markets, securing deals in the past few years with big names in business, such as the Aboitizes and the Gokongweis. Giving importance to this endeavor, China Bank spun off last year its Investment Banking Group into a new subsidiary, China Bank Capital Corp., infusing P500-million in capital. For the first quarter alone, China Bank Capital helped underwrite the Ayala Land, Inc.’s P8-billion worth of retail bonds due 2026, San Miguel Corp.’s P30-billion preferred shares and Atlantic Aurum Investments Philippines Corp.’s P17-billion corporate notes. Last April, the investment bank has also been tapped by mass-housing developer 8990 Holdings, Inc. to underwrite the securitization of P5-billion worth of housing receivables. We sat down with China Bank Capital’s president, Romeo D. Uyan, Jr., to discuss the investment bank’s outlook for the capital markets and the upstart company’s prospects. Here are excerpts from the roundtable:

What is your forecast for the capital markets?
I think the market will grow simply because there’s a lot of growth in the economy. Number two, the central bank seems to be determined to leave sufficient liquidity in the market. And then if you look at it as well, I believe one of the things that’s pushing the capital market growth is that a lot of the large conglomerates are actually hitting SBL (single borrowers’ limit) -type limits with the banks already. So they might feel the need to tap the capital markets in order to diversify their funding sources.

If you look at what is happening in other Asian countries over the past years, a similar scenario has been playing out. As the banks get more regulated and need more capital, a sizeable amount of transactions will flow to the capital markets. So if you look at the models of certain countries like China or India that have registered very fast growth, you will see that there has also been a lot of growth of the securities industry. Some offshore securities companies have really grown, much bigger than China Bank or even BDO on a stand-alone basis. I firmly believe that this will be the natural progression of things especially as we grow as a country.

Why the timing for the establishment of your own investment house?
Because of the reasons I had cited before, I believe that the investment banking industry has a good chance of registering growth much faster than bank growth. Also the current Basel regime impact on bank capital is encouraging banks to continuously look for new opportunities of fee income.

We set up the investment house primarily to give particular focus to our fee income generation activities. We also did it to allow us to clearly isolate the underwriting risk from the bank. Finally, it allows us to better manage the culture and morale of our investment banking staff. This is very important in the context of an institution that currently has around 7,000 people primarily involved in branch banking activities The investment banking business is much more volume-driven, and the people are a lot more relationship-focused.

Setting up a separate investment house allows us to isolate the culture a bit more. In any case, as the rest of the bank’s other units continue to grow, there will be a lot of interaction between them and the investment house.

What’s the outlook for the business nowadays? By how much do you expect China Bank Capital to contribute to the parent bank’s net income and revenues?
I am actually very bullish with the business. In terms of revenues, we are double today than what we were less than two years ago, and we expect to double our numbers again in the next two to three years. I think at some point in time, we would ideally comprise up to 10% to maybe 15% of the bank’s net income. Ten percent initially is what I would think we’re really striving for in the next few years. We are now on our second year of full operations. This year we expect to end up at around 5% of the bank’s net income.

The other good thing about this business is that it really allows us to interact a lot with the rest of the bank’s other units. The new deals that we do actually provide new investment vehicles for our private banking clients. When we syndicate loans, we invite our corporate banking to participate with their desired lending amount. And when we do new bond deals, our treasury group eventually markets, makes and trades these bonds.

So as you can see, the overall revenue for the bank generated by our investment banking activities is actually much larger than the fees that we get from doing our deals. Aside from this, our activities allow the bank to develop a more meaningful and deeper relationship with its key customers.

How’s your deal book nowadays?
Our deal book is quite robust. This has been a very busy year so far. At present, we are busy working on a number of deals that are out in the market. We are one of the lead arrangers in the SMC Global Power bond deal. We are also one of the four lead banks in the new SM Prime 10-year bond transaction. We have also been appointed as one of the lead arrangers in the upcoming Ayala Corp.’s seven-year bond offering.

Aside from this, we have been mandated and are working on a P5-billion securitization for 8990 Holdings. We are also very busy pitching and closing on a number of other deals.

Where do you see getting more of the action -- equities or debt?
We are seeing more action in debt than equities right now. My personal view is that left on its own, peso interest rates will most probably stay low for the duration of the year. But if the Fed hikes faster than market expectations, then peso interest rates might have to move higher so that the peso does not depreciate too fast versus the dollar.

Because the domestic interest rate environment is quite benign and because of the growth being experienced in the economy, companies have started to raise large amounts of long-term debt to fund their expansion requirements. I believe at current interest rates, corporations already find it ideal for them to match term debt with their various pro-jects. This is particularly so for companies that are very infrastructure-heavy. A lot of these companies that we are talking to are seriously looking at tapping the market for up to 10-year funding right now.

The issue with equity primarily is valuation, and as you can see, our equity market here is really currently driven by overseas equity performance. As long as the Chinese market continues to be volatile, and as long as Japan and the rest of Europe continue to trade weak, IPO (initial public offering) opportunities in our market will be few and far between. If you look at the IPO business here, it’s either feast or famine. When the equity market is strong, all the issues come out. But when the equity market is market is weak or volatile, or when it continues to drift lower, very few deals come to the market.

So I take it you’re big on infrastructure?
We are trying to be active in the infrastructure space. Provided that we feel that the deal makes sense, we actually want to participate. Aside from the social angle of contributing towards the development of the country, infrastructure deals when properly structured actually make a lot of economic sense for participants most of the time.
Aside from the big infrastructure deals though, we are also trying very hard to develop a niche in the mid-cap space, capitalizing on the relationship strengths of our parent bank. We are making a concerted effort to work closely with our mid-cap clients to explore financing opportunities that would benefit them. We are continually looking at ways to enable these clients to lower their borrowing costs and improve their capital structure, and eventually use that as a platform for their business expansion. We have had a number of notable successes on this front and continue to put a lot of resources into these types of activities.

What are the entry barriers to an upstart like China Bank Capital?
While China Bank Capital as a corporate vehicle can be correctly called a startup, we would like to emphasize that we have been a significant player in the investment banking business especially in the last three years. Prior to that, we have been very active as well on the distribution side in terms of being able to absorb significant amounts of bond issuances for down-selling to our high-net worth customers.

For 2015, our very active role in deals as lead or joint lead capacity for issuances of retail bonds, preferred shares, corporate notes and project finance earned China Bank the recognition by the Philippine Dealing System as the top corporate issue manager in the bank category, besting three foreign banks.

The incorporation of China Bank Capital just improves our institutional capability to strengthen our presence in the origination side. The top three banks have much larger balance sheets and capital base, and a lot more resources than us. This allows them to have a distinct advantage to begin with.

Parent capital is very important since the capital markets business here, particularly on the debt side, involves a lot of underwriting. That is why it is very important to be attached to a strong parent. At the same time, the branch network of the parent also plays a very important role since the business is now moving towards a distribution model.

We are fortunate enough to have a strong parent which is also part of the largest business group in the country. We have tried to capitalize on these strengths to fast-track our growth expansion. At the same time, we have also explored the deep client relationships that our parent bank has developed throughout these years in order to give us a distinct advantage versus our other competitors.

From the distribution side, what are investors looking for? How are they rebalancing their portfolios?
People are really looking for yield because deposits rates are so low. Investors really want a yield on a name they somehow recognize. This is particularly so for retail investors who are not classified as QIBs (qualified institutional buyer). For us, we work hard to explain the companies to our clients, and we take pains to make sure that there is a fit between the investor and the product.

Apart from property and infrastructure, which other sectors you think could be tapping the markets for some sort of funding for their ventures?
There will be continued growth in the power and retail sectors, so expect them to tap the markets for their ventures. The large conglomerates will also expand, so they will also be frequent market issuers. Moreover, my view is that in the coming years, aside from the ASEAN (Association of Southeast Asian Nations) integration, we will continue to see more local companies that venture overseas for expansion, as well as overseas companies looking to come in and invest in the country, all of which could translate to financing opportunities in one form or another.

Can you provide us a SWOT of the industry?
Strengths -- Main positive is that we have an economy that continues to grow rapidly with the market continually staying very liquid. Another positive worth highlighting is the strength of the domestic banking industry. Balance sheets are quite clean which allows the banks to easily support the ongoing expansion that we are witnessing. Finally, because of everything that is going on, we have also started to see very good foreign interest to enter and participate in our market.

Weaknesses -- Main weakness is our lack of infrastructure, although a lot is now being done to address this. Our IT and data infrastructure can also use some improvement. We also need to develop a robust platform for information sharing. For example, if you do debt and are able to do proper credit scoring and better credit analysis, more people would be able to benefit from the process. Moreover as the economy grows and industry develops, the skill sets of the participants would also continue to improve. The necessary technology would also hopefully become more readily available.

Opportunities -- You have the PPP (public-private partnership) expansion, foreign entry, and economic growth giving rise to a lot of market opportunities. With all that happening, people will try to expand and when they expand, they will find more efficient and innovative ways to raise money through either debt or equity.

Threats -- For me, the main threats are global growth slowdown, and some major disruption in the global markets. We also need to recognize the threats to our existing ways of doing business that is brought about by technology, particularly by the Fintech (Financial Technology) companies that could morph into very formidable competitors for existing firms, particularly those that are not able to effectively adapt to ongoing technology developments and resulting changes in consumer behavioral preferences. These changes are already happening everywhere and I would not be surprised if they start affecting the local finance industry much earlier and in a more profound manner than what people have assumed.

*Send e-mail to 'Joch' at jbgonzales@bworldonline.com or follow her on Twitter @jochebedgon.

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