Nestor Tan, president of Banco de Oro (BDO), a rising star among the Philippines banking sector, enters the room unannounced and unaccompanied. It is a very low-key entrance for the country's boldest and most closely watched financier, whose bank forms part of the famous Filipino conglomerate SM Investments Corp, owned by retail magnate Henry Sy, the country's wealthiest individual.
Through a succession of mergers and acquisitions, the US-educated Mr Tan has transformed BDO from a small savings outfit into a dynamic, growth-hungry universal bank in less than a decade. According to Mr Tan, who spent a chunk of his career at Barclays in the US and UK: "A healthy bank is not one that's conservative - it's one that's progressive." True to this philosophy, he has not shied from transformative deals, the most notable of which came in 2007 with the controversial purchase of Equitable PCI Bank which, as the larger of the two institutions, catapulted BDO into the number two spot by assets in the Philippines.
This purchase was followed in the first half of 2009 by a 1.3bn pesos deal to acquire GE Money Bank, the retail banking arm of General Electric with a consumer and small and medium-sized enterprise loan portfolio of about 6bn pesos. In 2008 alone, BDO's loan portfolio grew by a staggering 32% and in the first half of 2009 the bank went on to usurp its closest rival Metrobank to become the largest Filipino bank by assets.
But Mr Tan is far from finished. The board believes that the global recession presents opportunities to further consolidate BDO's position and in March 2009 it issued 3bn pesos in unsecured subordinated debt in large part, the bank said, to fund further expansion. In September it seemed the next target might be local lender Export and Industry Bank, when BDO announced it had been in exploratory discussions with the mid-sized commercial bank. Mr Tan is open to more purchases but he stresses it is the productive capacity that remains the focus of the bank's acquisition strategy: "Wherever we feel we need the productive capacity then we will go into acquiring: if [the target] has some deposits and clients, then better for us, but we believe we can build organically from that [acquisition]."
Growing pains
Mr Tan's progressive style of management is applauded by many market-watchers. Privately, however, at least one rival banker suggests that he may be expanding the institution too aggressively: they point to the latest first-half results for 2009 which show that while the bank is now number one in the Philippines in terms of assets, its profitability does not keep pace, trailing in third place. Mr Tan does not deny that his growth strategy has dented profitability but, he says, it is a short-term compromise. "Are we sacrificing profitability in the quest for growth? The answer, to a certain extent, is yes: growth requires us to invest and spend money which hits our bottom line," says Mr Tan. "In all fairness, if we were 300 years old and had a good base of income then we would probably be more profitable than somebody that's just growing," he adds.
More importantly, the bank's asset quality is holding up well, he continues. "Are we sacrificing asset quality? I believe not because our numbers show it." Like all the larger Filipino banks, BDO acquired a proportion of legacy non-performing assets in the course of its acquisition-spree which it is gradually winding down. Meanwhile, the bank's non-performing loan ratio has steadily declined from 7% in 2007 to 3.22% in 2009, according to its March 2009 balance sheet statement, bringing it below the system ratio of 4%.
Long-term vision
Pursuing growth at the cost of profitability is a luxury the CEO enjoys at the hands of a cash-rich parent company, say some bankers. But Mr Tan believes this misses the point. "It's not being part of a larger group but having a strategic majority shareholder that can share the long-term view, [that is important]", he says. This ownership model represents a fundamental difference between the Eastern and Western markets, he continues. "In our market, we have a majority shareholder who appreciates investing in the long term and in growth. In an emerging market, it's a vast frontier and you have a choice: invest in efficiency or go into a vast market where opportunity is beckoning. We try to balance it, but we believe opportunity does not wait."
Mr Tan's indirect boss, the formidable Mr Sy, is regarded as a visionary by many: when other mall developers shied away from expanding their activities into the provinces, Mr Sy forged ahead, creating markets where competitors believed none existed. The Sy ambition is audible in Mr Tan's voice: "In an emerging market, the opportunities are there to expand our market share by creating the market: that's what we are doing." Does this mean that the Filipino banking market needs BDO? "It needs banks like BDO," says Mr Tan. "The Filipino market needs people who will try to expand the market for everybody."
