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Wednesday, November 22, 2017 | MANILA, PHILIPPINES
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Date posted: Friday, December 11, 2015 | Manila, Philippines

Banking on defense of the home market

AN AD PLACED in the Asian edition of Forbes magazine says much about how the Philippines’ biggest bank plans to meet the challenge of Association of Southeast Asian Nations (ASEAN) economic integration by yearend.

The ad shows a section of a mahogany door up close, with a steel latch for a door knob, and the keyhole shaped like the map of the Philippines. The accompanying sales pitch says it all:

Headline: “Unlock new investment potential.”
Body copy: “The Philippine economy is booming, and nobody knows its pulse better than BDO. If you’re looking at investing, turn to BDO -- your guide at the heart of Philippine business.”
Tag line: “We find ways.”

At the foot of the ad, BDO enumerates the awards it has garnered as the Philippines’ “best domestic lender.”

Yes, there’s no mistaking it. The bank owned by the country’s richest man, Henry Sy, is planting its feet firmly at the gates to the Philippines, telling foreign investors that if they want to do business in the country, then they had better turn to its biggest lender.

For BDO, securing the home market is the best position to take amid the looming ASEAN Economic Community (AEC).

“In terms of ASEAN integration, the low lying fruits are at home. So between going out and staying here, I’m saying that the opportunities are here,” bank’s president, Nestor V. Tan, said.

“We really want to consolidate our position here. It’s more on the defensive because the growth is here,” he said.

The bank’s ASEAN strategy is a function of scale. It may be the biggest in the Philippines, but in the region, BDO is a David among Goliaths like DBS, CIMB and Bangkok Bank.

“Our weakness is that we don’t have regional scale… even if you combine the top three banks in this market, they would still fall below the top five in ASEAN. So even if we band together, we won’t have the scale necessary to compete in the region,” Mr. Tan said.

The absence of scale in turn makes it difficult for a Philippine bank to generate the wherewithal to launch a serious foreign venture while holding its own in its home market.

“So basically, the weakness is really our size… I don’t think we have the scale here to fund simultaneously a local growth market and an international expansion if we wanted to,” Mr. Tan said.

He cites other “structural restrictions.” These include constraints on hiring foreign talent. The government, for one, has yet to craft certification standards for foreign workers.

Then there’s the high capital ratios required of banks in line with the country’s adoption of the more stringent Basel 3 standards ahead of deadline. To raise capital, banks would have to ask their shareholders to infuse additional equity or retain a bigger portion of earnings, or both.

“My general outlook, honestly, is not so good. Because we have structural things that I don’t think we have considered,” said Mr. Tan. “We are not necessarily a competitive industry. Foreign competition as they come in, it’s like we have one of our hands tied and then competition is coming in and they pick and choose and they can afford to because they don’t have the overhead that we have.”

“But since we signed up to ASEAN, we’re opening it up,” Mr. Tan said. “ If we don’t consolidate our market position, then we stand to be under threat from foreign competition… We will be under threat, there’s no question, but we’d like to be on a more solid footing when the competition becomes intense.”

Just how intense competition will become? The AEC aims to transform the region into a single market and production hub where goods, capital, labor, and investments move freely across borders.

The group’s finance ministers and central bank governors last March signed the ASEAN Framework Agreement on Services, which would allow qualified banks to operate freely in the region.

The agreement serves as an umbrella for the ASEAN Banking Integration Framework, which central bank governors signed last year to harmonize banking rules and regulations across member nations in preparation for a single market by end-2015.

Implementation is anchored on bilateral deals, under which the two agreeing ASEAN members would allow qualified ASEAN banks from either side to operate in the other’s market on the same terms as domestic lenders.

The Bangko Sentral ng Pilipinas (BSP) is in no rush to forge a bilateral deal with another ASEAN central bank. But policy makers nonetheless have turned up the heat on local banks with a new law -- Republic Act (RA) No. 10641 -- which opened the door to more foreign lenders by allowing them to acquire 100% of the voting stock of domestic banks.

Mr. Tan said when foreign banks come in, they “will probably chip away at the more vulnerable, or captive pieces of the banking sector.”

“You will not notice it, until one day, you’ll just wake up and you’ll realize they’re here,” he said. “They’re not going to show up one day with 500 branches and announce themselves they’re here. They will slowly eat up on your credit card base, on your auto loan base. They will eat up on investments, assets under management, until you realize that they already have substantial presence and the bricks and mortars is just the icing on the cake.”

“For example, who’s dominant in credit card here? Do you see them everywhere?” Mr. Tan said. “Who’s dominant in private banking? Who’s dominant in investment management? Who’s dominant in insurance? The answer is, it’s not visible. At some point, they will just show up.”

BSP Deputy Governor Nestor A. Espenilla, Jr. agrees that foreign competition is coming whether or not local banks are prepared for it: “The likelier challenge is we’ll probably see regional ASEAN banks come in. We’re seeing that anyway.”

Since RA 10641 came into force, a handful have already entered the Philippine market. These include Japan-based Sumitomo Mitsui Banking Corp., Shinhan Bank and Industrial Bank of Korea, and Taiwan-based Cathay United Bank and Yuanta Commercial Bank Co. Ltd.

“Right now, the reaction of local banks is to focus on the domestic first. You’ll see big banks trying to cover their bases first,” Mr. Espenilla said. “Before they even go regional, let [them] secure the market first.”

This commitment to expand locally is important for the BSP, which is campaigning hard for financial inclusion in the country. In a recent survey, the central bank said more than a third of the country’s localities remain unbanked.

In fact, the Philippines’ banking system is the only one in the region that enjoys a positive outlook among international credit rating firms. This is on account of the industry’s ample capital buffer and the country’s strong macroeconomic fundamentals.

Prospects are bullish not only because of the strong economy, but also because unlike its highly leveraged ASEAN peers, bank lending in the Philippines has more room to grow. To imagine how big a room Philippine banks have, the combined assets of the country’s largest lenders are dwarfed by Southeast Asia’s largest bank alone, Singapore’s DBS.

The focus on the domestic market also explains BDO’s acquisition binge. In the last six years, the bank has acquired six other lenders, some of which are outside Metro Manila. This brought the bank’s total assets to nearly P2 trillion.

“In the immediate and medium term, no we don’t have plans to explore opportunities outside the country. But it doesn’t mean going forward, we won’t,” Mr. Tan said “At the moment, we’re just focusing on what we call our natural markets -- those that have links to the Philippines.”

He cites the overseas Filipino worker (OFW) market, especially with the deployment of highly skilled labor, making this work force more stable and boosting remittances. OFW remittances contribute 10% to Philippine gross domestic product, and help fuel consumer spending, which comprises two-thirds of the domestic economy.

“There’s also the rapid urbanization happening in the secondary cities that could drive demand for loans and financial services in the non-traditional areas,” Mr. Tan said.

The increasing geographic spread of the business process outsourcing industry in search of low-cost yet highly skilled workers has sustained the expansion of the real estate and retail sectors.

“I guess our strength is that one, we have a good scale nationally; and second, we have the infrastructure and the franchise to be successful in this market,” Mr. Tan said.

BDO is the country’s largest bank not only in terms of assets, but also in loans, deposits, capital and trust funds. It has over 1,000 branches and more than 2,700 automated teller machines nationwide. It plans to put up 160-170 more branches in secondary cities, both in restricted and non-restricted areas.

Easier access to technology by local banks is another advantage, making it a good enabler and equalizer when regional integration happens.

“With technology now, we can have access to products, so that would minimize the disadvantage that we have,” Mr. Tan said. “If a foreign bank will come in, they have access to more products than we do, but with technology, we can neutralize a portion of that which can make us hopefully, less vulnerable.”

“Technology is also an enabler, because if you use it properly, then you’ll be able to service clients more effectively,” he said.

The key to putting up a strong defense therefore is “doing what you do very well,” Mr. Tan said. “Client patronage is driven by the quality of service you give and if we do a good job -- and we have more presence, we have the track record and we’ve been here longer -- then there are less chances that they will go somewhere else.”

“We want to be a very strong player. Somebody that will not be easily dislodged because we have a strong presence, a strong, competitive product set, and a strong brand that will make people look at us as comparable to, or at least a good provider compared to the foreign banks,” Mr. Tan said.

At the end of the day, BDO, to rephrase its tag line, will find ways.

Ms. Delavin covers the banking scene for BusinessWorld.
*Send e-mail to Imee at icdelavin@bworldonline.com or follow her on Twitter @charleedelavin.

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