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Monday, October 23, 2017 | MANILA, PHILIPPINES
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   banking report
Date posted: Monday, November 28, 2016 | Manila, Philippines

3rd Quarter Banking Report (2016)

Consolidation clears path for rural development

"WE HAVE to come together as a group. The one bank, one town setup is no longer desirable."

These were the words of Antonio O. Pasia, president of the Rural Bankers Association of the Philippines (RBAP). He was referring to initiatives by monetary authorities to consolidate small-scale lenders so they can improve their financial positions and stem bank closures.

"Not only do we have to band together, we also have to innovate to catch up with the technology and upgrade our systems. It can’t be manual anymore, the game is changing," said Mr. Pasia, who is also president of Batangas-based Malarayat Bank.

"Gone are the days na general staff lang ang nagpapatakbo, kailangan lahat (Gone are the days when it’s just the general staff that runs the bank, it needs to be everyone)."

Malarayat Bank is not yet considering this option, he said, as management, in its recent strategic planning, decided, for the moment, to upgrade its software infrastructure as well as train the staff.

"We have strengthened training of our staff. Dun namin binuhos ang pera (that’s where we poured our money) as well as upgrading the infrastructure. Once we fix that, then we would look at other possibilities," he said.

Other rural banks, however, don’t enjoy such options.

INDEPENDENTLY RUN BANKS DWINDLE
Starting 2010, Philippine Deposit Insurance Corp. (PDIC) and the Bangko Sentral ng Pilipinas (BSP) have ordered the closure of 128 rural banks, with the state insurer forking out P22 billion in deposit insurance claims.

"From January to November, PDIC has taken over 18 banks with estimated insured deposits of P1.6 billion," Cristina Q. Orbeta, PDIC president, said.

From a peak of around 1,040 in 1981, the number of rural banks has dropped to 513 at end-June this year, according to data from the BSP. So far this year, monetary authorities have ordered the closure of 16. 

As of the middle of this year, the rural banking sector held a combined P223.4 billion in assets, representing a 1.4% share of the Philippine banking system’s total assets of around P15.96 trillion. Yet in many communities, these mostly privately owned businesses remain the residents’ only link to the formal financial system. 



Also in the last few years, the number of independently owned rural banks has dwindled, as big lenders ventured outside their comfort zone in the urban centers and gobbled up their smaller peers in the countryside on the back of incentives provided by regulators.

According to BSP Deputy Governor Nestor A. Espenilla, Jr., the usual reasons for rural bank closures are "illiquidity, insolvency and [the] inability to continue in business without causing losses to the depositors and other creditors" -- in short, the very grounds for placing a bank under receivership as provided under Section 30 of Republic Act No. 7653 or The New Central Bank Act.

"Also, when a bank declares a bank holiday, the BSP can summarily close the bank pursuant to Section 53 of RA No. 8791," Mr. Espenilla said, referring to the General Banking Law of 2000.

UNDERCAPITALIZED
RBAP’s Mr. Pasia admitted that some rural banks are undercapitalized, which is a problem after the BSP imposed higher capital requirements.

Last Oct. 9, 2014, the BSP issued Memorandum Circular No. 85, requiring rural and cooperative banks with head offices in Metro Manila to maintain between P50 million and P200 million in capital based on their branch network.

Those with head offices outside the capital and serving first to third class municipalities are required to hold between P20 million and P80 million in capital, while those headquartered in fourth to sixth class municipalities should have P10 million to P40 million.

BSP’s Mr. Espenilla, however, said bank closure and receivership is an "end game in our problem bank resolution process."

"Prior to the actual closure, banks are given ample opportunity to ’shape up’ in our enforcement framework with options ranging from internal recapitalization, to rehabilitation via strategic third party investors to actual supervisory intervention/resolution," he said.

"At each stage, banks are given the opportunity to return to normal operating conditions. For those who failed due to their chronic and precarious conditions, the existence of qualified Strategic Third Party Investors (STPIs) would have ultimately prevented their closure. Unfortunately, there were no qualified STPIs who were willing to partner with these banks at the time when conditions warrant their closure. To protect the interest of the depositors and the general public, the BSP had to close them," Mr. Espenilla said.

"The BSP cannot prevent all bank closures, failures and problems. To do so would be an exercise in futility. Instead, it is mandated to regulate banks. If the banks do not heed BSP requirements and directives and continuously fail to address significant supervisory concerns resulting in insolvency, illiquidity, or continuing losses thereby triggering grounds for closure, the BSP has the mandate to close them. It should be noted that the BSP’s primary mandate is not to preserve individual financial institutions but to protect the depositors and to minimize disruption in the financial system," Mr. Espenilla said.

REGULATORS TO THE RESCUE
The growing number of rural banks driven to bankruptcy led to initiatives such as the Countryside Financial Institutions Enhancement Program (CFIEP), which conducts dialogues with rural lenders to identify issues and concerns affecting their operations. 

Another would be the liberalized entry and scope of operations of foreign nonbank investors and foreign bank institutions, which enable foreign parties to own or acquire a stake in local intermediaries, including rural banks.

Last year, the BSP, PDIC and Land Bank of the Philippines launched the Consolidation Program for Rural Banks (CPRB), which aims to strengthen the rural banking system by way of consolidations. The initiative -- which runs from Aug. 25, 2015 to Aug. 25, 2017 -- prods groups of at least five rural banks in one area to consolidate and boost their capacity as small-scale lenders.

"CPRB continues to generate interest among rural banks. PDIC continues to receive queries and invitation for consultation meetings from interested banks," Agency President Ms. Orbeta said.

Interested rural banks, she said, may submit their letter of intent to PDIC or may request for a briefing or consultation meeting on the mechanics of the program.

According to the BSP Memorandum 2015-043, the CPRB was put up to "further strengthen and enhance the viability of rural banks given their importance in providing essential financial services to the community."

"Mergers and consolidations are still what we’re trying to ask for our single-unit banks to look at," RBAP’s Mr. Pasia said.

"So, it’s more of really trying to bring up as much capital with the smaller banks in the sense that they have the same business plans and shared services. That’s what we’re asking and that’s what we’re trying to guide our members," he said. 

Under the new rules, the small lenders may seek funding assistance from the program either by having portions of the costs incurred for financial advisory services, business process improvement services, or capacity building support in studying the consolidation scheme.

GARNERING INTEREST
The incentive scheme seems to be garnering interest as PDIC’s Ms. Orbeta noted three groups involving 14 rural banks based in Luzon and Visayas that have formalized their intention to participate in the program.

"All three groups are undergoing due diligence review by their appointed financial adviser from the top auditing firms," she said. 

"The conduct of due diligence review for each group of consolidating rural banks may take 4 to 6 months. The first batch of due diligence report is expected to be submitted in the first quarter of 2017. After the due diligence review and determination of the capital structure, the merger or consolidation transaction shall be evaluated separately by PDIC and BSP," she said.

Based on the guidelines released in December 2015, the consolidated banks must end up with a surviving entity with a risk-based capital adequacy ratio of at least 12% and a combined unimpaired capital of at least P100 million. The banks may infuse fresh capital to meet the requirement or tap Landbank’s equity investment facility for a funding support.

SUCCESSION
RBAP’s Mr. Pasia said consolidation would also solve issues of succession, noting that the younger generation of families owning banks appear less interested in taking over the business.

Rural banks began to sprout in the 1950s when the countryside lacked basic financial services, prompting the government to enact measures to incentivize the establishment of such lenders by way of lower interest and other perks.

"It’s a 60-year old institution, generations have passed. If the family running the bank no longer wants to be in the banking business, they can opt to sell it out," Mr. Pasia said, adding that rather than the bank being completely out of business, "they can join in other banks and get a professional to run it."
"In that process, we’re all part of a bigger bank and at the same time, solve any succession issues," he said. 

Prior to CPRB, the BSP, PDIC and Landbank launched in August 2010 the Strengthening Program for Rural Banks (SPRB), a P5-billion program to encourage mergers and acquisitions (M&As) in the rural banking sector. 

Under the SPRB, rural banks in trouble could receive capital infusion with PDIC providing financial assistance equivalent to as much as 50% of the required capital to bring the eligible bank’s risk-based capital adequacy ratio to the minimum of 10%. The BSP, meanwhile, provides a package of regulatory relief incentives for rural banks that will collaborate with other rural banks. 

The SPRB was enhanced in 2012 and was renamed SPRB Plus. Where SPRB only allowed M&As among rural banks, the SPRB Plus allowed universal banks and nonbank corporations to acquire problematic rural banks. 

The program expired last year after a one-year extension with refinements approved by the BSP and PDIC. 

"The SPRB Plus and SPCB Plus attracted banks and nonbank financial institutions," PDIC’s Ms. Orbeta said, adding that applications under the programs numbered 52. 

Of the 52 applications, 20 transactions involving mergers, consolidations and acquisitions (MCAs) were approved, which involved 93 banks and nine nonbank financial institutions. Of the 20, eight have fully implemented the MCAs, of which 21 rural banks were involved. 

One of the universal banks that took up the opportunity opened by the regulatory relief measures was East West Banking Corp. when it acquired Butuan City-based Green Bank, Inc. in 2011 and Pasig City-based FinMan Rural Bank, Inc. in 2012. The two banks would later be merged to what is now EastWest Rural Bank, Inc.

"When we acquired the two rural banks, it was not really about changes in the environment or regulations. It was really more about the opportunity we saw to get into some segments of the market," said EastWest Bank President and CEO Antonio C. Moncupa, Jr. 

"We were looking into micro lending and other programs that are better suited for rural banks than in a universal bank context." 

Asked the how the acquisitions would play out in the bank’s business plan, Mr. Moncupa said rural banks could be dedicated to serving certain market segments, such as small businesses, farmers or specific communities. 

"[I]t may make sense for a rural bank to serve smaller communities than universal banks. Sometimes, it is for synergies," he said.

"In the case of EastWest, we now have presence in smaller towns and giving smaller loans because we have EastWest Rural Bank who could really focus on doing these defined activities better."

’WE KNOW THE MARKET’
RBAP’s Mr. Pasia agreed, "Every bank has a niche market, but we’re still the ones mostly in the countryside so we know the market. Once rural banks are gone, the availability of credit for farmers and fisherfolk will be gone and will be forced to go to informal lenders instead -- and that’d be very costly (for them)."

Asked if there are plans to revive the SPRB program, BSP’s Mr. Espenilla said: "At present, there is no definite plan to revive the SPRB but the BSP is coordinating with the PDIC in order to come with a joint assessment whether or not the SPRB should be revived, taking into consideration the number of rural banks and qualified strategic third party investors (STPIs) that have expressed interest in participating in the SPRB."

But it’s not all doom and gloom for the small lenders as Mr. Espenilla said the SPRB and SPRB Plus have "prevented failures of a number of rural banks."

"In this sense, the SPRB/SPRB Plus have met their objectives," he said.

"The rural banking industry maintained its overall health and stability as a result of industry consolidation and strengthening programs of the BSP since 2012. This is manifested by improved loan provisioning, higher liquidity and improved profitability ratios," Mr. Espenilla said. (See infographic.)

Ms. Orbeta agreed: "Business potential for rural banks remains robust, as shown by the number of rural banking units expanding to 2,655 in June 2016 from 2,169 in 2010. More rural banks established branches to expand their reach to other areas. Likewise 20 new rural banks started operations."

Mr. Pasia said that the rural banking sector is grateful that initiatives such as the CPRB are available.

"We’re finding out why perhaps not all are really rushing to do it," he said. "We believe that by standing together and by having the bayanihan spirit, there is still a role that rural banks play in the country." 



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