Bullish Philippines has the potential for a strong year ahead. Once compared unfavourably with Indonesia and other Asian countries, the Philippines appears to have moved ahead in the region with firmer growth prospects and underlying economic strength in 2007.
Confidence has been helped significantly by a more stable government that has weathered two attempted coups and an attempted impeachment. The country’s national debt is high although recovery is on the way. According to the central bank, the projected deficit for 2006 was 130bn pesos ($2.7bn), but the actual deficit was 63bn pesos, something that central bank governor Amando Tetangco attributes to the reform of value-added tax. “We have enlarged the coverage to include power and oil – important areas. The second change was to increase the rates [of VAT] from 10% to 12%.
“This has improved market sentiment and enhanced investor confidence. As a result of that, we had an increase in capital inflows that helped us to improve our balance of payments to the tune of $3.8bn,” he says.
The current account also improved, primarily due to continued growth in remittances, which increased almost 20% in 2006 to $12.8bn. Government reserves have improved thanks to a 14% increase in exports setting gross international reserves (GIR) at an all-time high of $23.7bn by January this year.
Profits warning
Despite the strengthening economy, Fitch Ratings sounded a warning that a decrease in margins for the banks may be expected “[along with] the improved fiscal situation and a dramatic lowering of rates on bank deposits with the central bank in November 2006, there has also been a steady decline in 91-day treasury bill rates [to just 3.1% currently versus 7.8% at end-2004]. This in turn is leading to lower lending rates. Deposit rates are also falling, but not by as much, as they are already quite low”. With regard to higher net worth individuals, Fitch expects that the local banks will face strong competition from the foreign banks with attention focused on HSBC and Citigroup.
To make the most of the potential that the economy offers, Metro Bank has been concentrating on improving its front office’s efficiency, particularly targeting the middle market. It launched a strategy called the Branch Effectiveness Sales-force Transformation last year to increase the branch network’s value. It found that 557 branch managers spent only 20%-25% of their time selling due to responsibilities in the back office, such as clearing and cash servicing for ATMs.
The bank centralised many of these functions to regional hubs, freeing up the branch staff for more front-office activity. Its main niche is the small and medium-sized enterprises (SME) market. Senior vice-president Bernard Lapuz says this area makes up 30% of its business and that the bank is focusing on it to ensure that its customer base is tied into the full range of products.
“That middle market is composed mostly of Filipino-Chinese entrepreneurs, largely in manufacturing and trade businesses. We started out in that market, we’ve grown with that market while we do still have our fair share of the large corporates, which comprise about 55% of our business,” he says.
“The renewed focus on that middle market is the reason for setting up that branch lending group, arising out of our objectives to tap into it more. In the past year, we realised that branch managers have not really had that much time to dedicate to customer work.”
This, in turn, means the bank has been unable to exploit its customer base to its full potential. “We found that clients in that middle-market segment have many unused credit lines, approved but unused. That’s what the branch lending group hopes to counter,” says Mr Lapuz.
Loss of business
Gil Buenaventura, executive vice-president at Bank of the Philippine Islands (BPI), says that the migration of business overseas is hitting the banking sector’s corporate clients, leading to a shift in the bank’s strategy. “Unfortunately, many of the big manufacturing firms are moving to China, and these are being replaced by business from the business process outsourcers [BPOs] and lending to the real estate sector.”
Therefore it is the consumer market that is attractive to his organisation this year, he says. “We are positioning ourselves in the corporate and consumer markets but more so in the latter. We are expecting double-digit growth in that sector for 2007. Last year we saw growth of 5% to 6% and housing grew by around 14% so we hope that we can grow equally well in 2007.”
The bank has developed new products that leverage existing customer relationships, for example, motorcycle loans that are specifically targeted at employees of business customers. Bank economist Cecilia Tanchoco points to BPI WorldPerks MasterCard, a co-branded chip-based credit card that the bank launched in 2006 with Northwest Airlines, although she notes that new products will not be the main driver of business. “The main target for the bank is to improve penetration with customers we already have – we [should] have enough products to cross-sell,” she says.
As the bank’s major selling platform is the branch, this channel is being rationalised and streamlined to maximise efficiency. Ms Tanchoco says: “We are starting to rationalise some of the [ex-Prudential Bank] branches and convert them into mini-branches, what we call BPI Express, and these are a cross between a kiosk – such as you find in the shopping malls – and a regular branch.
“It has the entire compliment of alternative banking channels, such as an ATM, an internet platform, mobile banking and around three staff servicing customer needs.”
The strategy began last year and will continue throughout 2007. It is primarily designed to drive down costs without loss of service quality. “We call this the design-to-cost branch, targeted to the mass market customers who are individually not very profitable,” says Ms Tanchoco. “We have to have an appropriate level of efficiency in spending on our customers and, by using smaller branches, automated service and fewer staff, we can really improve our impact on the mass market.”
Strategy change
Security Bank kicked off its new strategy midway through 2006, setting out a five-year plan. The bank has a “reasonably sized” portfolio of large and middle tier corporates, with a niche in the middle market of Chinese-Filipino accounts, and about half of the bank’s retail customers are considered mass affluent, hence a large distribution network was not deemed necessary.
The bank also decided it would not need to add any capital to its balance sheets as long as existing capital was well managed. Its target would be to increase its share of consumer and SME lending – a target for many banks because economic indicators point to it as a growth area.
Chief financial officer at Security Bank Carlos Borromeo believes that an influx of business into the country will keep growth secure. “At the moment, our country is almost becoming like India with BPOs and call centres coming in, overseas Filipino worker money has been driving real estate and firming it up – all of this is giving greater personal wealth to the younger generations. A new graduate can earn around 24,000 pesos a month for receiving inbound calls at a centre,” he says.
The bank reduced non-performing loans from 12% in 2000 to 4.2% by the end of 2006, and is now building on the business. “We decided to ramp up our treasury capability to give us a bigger flow of revenue, and then our challenge was to build a recurring revenue stream,” says Mr Borromeo. “There will come a time when volatility disappears [as will] the ability to make good profits but the idea was to use our treasury to address two things: [first to] put to rest asset quality issues and then build the consumer bank.”
Cross-selling tactics
The SME focus had led to the branch network having a business orientation, hence the bank had to create products to build the liability side of the retail bank and then cross-sell to SME customers. Mr Borromeo says: “We had 49bn pesos in deposits in 2003 and closed 2006 with about 89bn pesos, so it’s been growing faster than the industry average. That’s then been managed with a cross-sell approach.”
Although the bank is not operating on a massive scale yet, Mr Borromeo believes that its agility will be an advantage in some situations – particularly when products will need to be tailored for the Filipino market. “Large foreign-owned banks, for example, are unlikely to customise a product for a particular country because they have to roll it out across several countries,” he says. “The compliance costs and the risk management required for a product launched in a single country may not [make it worthwhile].”
