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Asia-PacificJuly 31 2005

Philippine Banks

The Philippines did not suffer from the Asian crisis as badly as its neighbours. Ironically, the result has been a banking system that has taken longer to recover. Many banks are still dealing with non-performing loans (NPLs) – arguably the highest in the region – that are about 10% of the system. Although down from their peak of 18% in 2001, a comparison with the 5% in 1997 is a better indication of what still needs to be done.
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The legislature is set to approve an extension to the Special Purposes Vehicle (SPV) bill, a way of selling bad loans: 93bn pesos of NPLs have been transferred under it.

The central bank forecasts another 100bn pesos will be transferred, leaving the system with an average NPL ratio of 7%. The reason for the larger amount, according to central bank governor Amando Tetangco Jr, is that “banks have seen actual transactions take place. Second, there has been some improvement in property values”.

The average coverage is about 65%, with large differences between the best banks’ full provisioning and those of others.

Meanwhile, the central bank has proposed an amendment to its charter to strengthen its supervisory powers, which are comparatively weak.

Mr Tetangco will issue guidelines at the end of this year on moving to the standardised Basel II approach to improve the capital strength of the system. Consolidation would also help – 42 banks are too many – and the central bank is looking for mergers among the medium-sized ones. It hopes to give incentive for takeovers by not allowing banks to open more branches.

The larger banks, like Bank of the Philippine Islands or Banco de Oro, are part of conglomerates and it is doubtful that the shareholding families would want to lessen their control. However, Leonilo Coronel, executive director of the Bankers Association of the Philippines, believes that some families might realise that to achieve a better return on equity on their capital, a sale or merger would be better.

Rumours abound about, among others, Banco de Oro. Tessie Sy of SM Prime, which owns Banco de Oro, the seventh largest bank by assets, says she does not rule out a merger with China Banking Corp, the ninth largest, on a longer-term basis. Her family’s conglomerate has a stake in China Bank. But “we don’t know whether there will be a merger at this point. We are looking at it as an investment. We have the single biggest shareholding and it is giving us good returns,” she says.

Banco de Oro also bid for a stake that the government was selling in Equitable PCI but no agreement was reached.

Banking in the Philippines is not entirely typical of Asia. “The savings rate is about 22%, [while in] most of Asia it is over 30%. Some of our economic performance patterns look more like Latin America,” says Romy Bernardo, former undersecretary in the department of finance and co-founder of financial advisory boutique Lazaro Bernardo Tiu Associates.

Meanwhile, an estimated 60bn pesos of Philippine money is managed abroad. Much of it drained out during the scandal-ridden insecurity of Joseph Estrada’s presidency.

Another Latin American pattern is the extent of the investment in government securities: more than 50% of the balance sheet in quite a number of banks. Investing that liquidity in loans can be less profitable and riskier when the recovery of assets is difficult and credit information is limited – although both these factors may change soon. Congress is discussing a Corporate Recovery Act, which would balance the rights of borrowers and creditors, and positive credit scoring is due to be introduced by the end of the year.

It is difficult for banks to finance long-term projects using deposits because these are mostly short term. Instead, they have to access the international capital markets, where the cost of funds is high.

The development of the local capital markets has been beset with insider fighting, which looks as though it has come to an end. This will mean that the corporate sector will no longer have to turn to the banks for more than 90% of its borrowing. And the domestic bond market, which is only about 34% of GDP, will begin hosting more corporate issuers rather than being dominated by government securities.

Growth areas for the banks on the retail side are in remittances-associated services. This includes the obvious acquisition of property in the Philippines (about 25% of the money invested in housing developments comes from remittances) but also the creation of small and medium-sized enterprises (SMEs) through some of the funds transferred to family members.

“It is a SME country but one of the more difficult ones,” says Aurelio “Gigi” Montinola, president of the Bank of the Philippine Islands (BPI), in the wood-panelled visitors room of the bank’s headquarters. Already 15% of the bank’s income comes from this segment and he sees this growing on the back of a generational change.

BPI is set to be a player on the merger front. “Our history is a history of acquisitions. We would like to be a regional player so we want to keep 1bn pesos of capital. We can grow organically, acquire domestically or overseas – at any point in time we are looking at two to three possibilities,” says Mr Montinola.

The bank deals with about $2bn of formal remittances, while Equitable PCI Bank, the country’s third largest bank, deals with about $1.5bn. It sold 10bn pesos of NPLs through the SPV mechanism, lowering its NPL ratio to about 2.5% from 15%.

“It is critical for banks to realise that it is better to bite the bullet now than ignore it,” says Tony Go, the bank’s chairman. “The sooner you can move on the better.” The bank is seeking a 20% increase in profits in 2005 on the back of the credit card business, leasing and the full implementation of better technology. It is also looking at the mass market and microfinance for future opportunities.

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