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Asia-PacificOctober 1 2019

Philippine banks look to home-grown growth

With its government planning major infrastructure building, the Philippines is seeking overseas investment. But a young population and a banking system undergoing modernisation are giving local lenders plenty of opportunities for expansion.
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If there is one country in south-east Asia that is not unduly concerned about the US-China trade war, it is the Philippines, where domestic consumption remains the key engine of growth. The country’s households traditionally account for two-thirds of aggregate expenditure. Exports of goods and services amount to about 30% of gross domestic product (GDP), compared with 176% in Singapore and 68% in Thailand, according to World Bank figures.

And in the Philippines, unlike rapidly greying Singapore and Thailand, demographics look good for future consumption-driven growth. The average age of the country’s 108 million population is 23. Annual per capita income recently passed the $3000 mark, deemed a tipping point for consumption booms, while household debt is low, at about 10% of GDP. Understandably, Philippine banks are looking to their own market for future expansion.

There is plenty of opportunity for growth. Only 35% of the adult Filipino population hold bank accounts, a tiny amount for a lower-middle-income economy. Admittedly, the country consists of more than 7000 islands, which hinders progress towards financial inclusion. But neighbouring Indonesia has 13,000 islands and the percentage of adult bank book holders there grew rapidly from less than 19% in 2008 to more than 50% in 2018. This success has been partly due to the government’s drive to get remote communities on the public welfare programme, which required recipients to hold bank accounts.

Identity politics

A similar boost for financial inclusion is under way in the Philippines in the form of the national ID system, to be rolled out in 2020. Currently, there are about 17 different IDs available to Filipinos, at least two of which are required for opening a bank account. Soon, one will suffice. The central bank, the Bangko Sentral ng Pilipinas (BSP), is tasked with printing the national ID cards to avoid further delays, rather than tendering the process.

“If you bid it out, the losers will challenge the winners and it will go all the way up to the Supreme Court and take two to three years, so I said we will print it,” says BSP governor Benjamin Diokno. “The ID system will be [based upon] India’s, and this will fix the know your customer requirements. There is a QR code on the back.”

For Philippine banks, the national ID system could ease their entry into consumer finance. “By March 2020, or June at the latest, the national ID system in the Philippines is going to come out, and if the statistics are accurate, about 65% of the Philippine
population will be on board,” says Wick Veloso, president and CEO of Philippine National Bank (PNB), ranked fifth in the country in terms of assets. “That means we will have a lot of potential customers.”

To prepare the bank to take advantage of the opportunity, Mr Veloso is actively seeking a strategic partner to help diversify into new areas of consumer finance and even microfinance using digital technology. “I went to Vietnam to study how they are doing it there,” he says. “With data engineers and data scientists they are getting a lot of information about customer behaviour, customer profiles, and who is going to fit into that specific category of people who pay back our loans.”

Mr Veloso acknowledges that his bank lacks experience in financing small purchases such as gadgets and appliances. “That is why we need to partner with someone and do this through a subsidiary, not through the bank, because this is a totally different animal from how we understand things,” he says.

Foreign influence

The Philippines is arguably wide open for foreign participation in the banking sector. Under 2014 legislation, foreign banks were encouraged to open full branches in the country in a bid to promote foreign direct investment and enhance financial competition. Some newcomers, such as the recently licensed Industrial and Commercial Bank of China, are interested in the Philippines because of president Rodrigo Duterte’s ambitious ‘Build, Build, Build’ scheme, which envisions attracting $150bn-worth of investments to upgrade the country’s long-neglected infrastructure.

“The [foreign banks’] entry has been motivated by our Build, Build, Build infrastructure programme,” says BSP’s Mr Diokno. “For example, under [the scheme] we have a commitment from China of up to $9bn, for railways, roads and airports, then another $9bn commitment from Japan, and $1bn from South Korea.”

Most Build, Build, Build projects will be financed by overseas development assistance from the Asian Development Bank, the Japan International Co-operation Agency and the Export-Import Bank of China. But the construction contracts will be handled by Japanese, Chinese, South Korean and multinational companies, which have their own banking needs. Newcomer banks are also likely to look for local clients, starting with the Philippines’ well-established conglomerates such as San Miquel, Ayala and Metro Pacific, which have set up infrastructure divisions and are already bidding on operation and maintenance contracts in the Build, Build, Build space.

Citibank Philippines, one of the oldest and now the largest foreign bank in the country (ranked 12th in terms of assets), is well positioned to benefit from the scheme. “The government expects to spend 7% of GDP on infrastructure, which will require it to raise funding,” says Vikram Singh, head of corporate and investment banking at Citi Philippines. “Citi has been actively involved in foreign currency bond financing for the Philippines and sees enhanced opportunities in this space,” he adds.

Citi also sees opportunities in financing private sector involvement in the scheme, much of it likely to be handled by local conglomerates. “Build, Build, Build will involve a construction phase and an operations and maintenance phase. For example, in the case of Clark Airport, construction will be done by the private sector, and post-construction will be done by a private consortium. Both stages will require bank financing (loans, guarantees, letters of credit) – all key strengths of Citi,” says Mr Singh.

Local viewpoint

Big local banks seem less enthused by Build, Build, Build, which was launched in April 2017. “A lot of the banks, including the top three, have said they have not seen any impact in terms of loan demand for infrastructure projects because most of the funding is coming from China and Japan, not really from the private sector. The Duterte administration favours overseas development assistance over public-private partnerships,” says Rachelle Cruz, research analyst at AP Securities, a Philippine securities company. “For the local banking sector, most of the growth will be coming from the corporate side and the consumer side, not really the infrastructure.”

In both corporate banking and consumer banking, Philippine banks can anticipate more competition from many foreign banks, as the number of fully owned foreign banks has more than doubled from 10 in 2009 to 22 in 2019. Foreign banks are not only obtaining licences to open full branches, some have taken shares in local banks. In 2016, for example, Japan’s Mitsubishi UFJ Financial Group (MUFG) bought a 20% stake in Security Bank (ranked sixth in terms of assets), while in August 2019, MUFG-owned and Thailand-based Bank of Ayudhya bought a 50% stake in SB Finance, the consumer finance arm of Security Bank.

This foreign appetite for consumer finance provides a warning. “If I’m not able to prepare PNB to be strong in consumer finance and microfinance business, then eventually it will be too late,” says Mr Veloso. PNB’s main investor, tycoon Lucio Tan, has made it clear that the bank is willing to sell 20% to 25% of its equity to a foreign partner “who is going to help us with the consumer finance, microfinance and digital space”, according to Mr Veloso. PNB’s current loan portfolio is 50% corporate, 32% small and medium-sized enterprises and the remainder is consumer finance. Mr Veloso hopes to grow the consumer finance and microfinance portions of the bank’s loan book to 35% and 10%, respectively, within the next five years.

Remittances under threat

While Philippine banks face more competition for corporate and retail finance from foreign banks, their lucrative remittance business is threatened by new tech firms. PNB, for example, has seen its share of the remittance pie decline from a high of 30% to 18% now. “I see that slowly eroding because we are not competing with the banks, but with the [telcos] and the money service brokers,” says Mr Veloso.

Banco De Oro Unibank (BDO) has prospered off the remittance business and is situated to benefit from the 11 million overseas Filipino workers remitting salaries home. Remittances are expected to amount to about $30bn in 2019, or about 10% of GDP. “BDO continues to dominate the remittance market, with a leading share of remittances through the banking system,” says BDO CEO Nestor Tan. Mr Tan has grown the bank from 20th place in 1997, when he took the helm, to retain the number one slot for the past 11 years in remittances. In the first half of 2019, BDO’s net income was up 53%, with non-interest income amounting to 30% of the total, much of the latter from remittances.

While BDO is pursuing digitalisation, it continues to invest in brick and mortar as a key strategy to both secure remittance flows and bring in new depositors. The bank now boasts 1362 branches and offices nationwide, by far the largest network, with 53 new outlets opened in the first half of 2019. “Continued branch expansion is our main strategy for growing our deposits, which serve as a stable source of low-cost funding,” says Mr Tan.

BDO has also invested in new technologies by tapping the cloud, digital banking, cybersecurity and big data, and providing online banking 24/7. The bank’s outreach is facilitated by the SM Supermall network, which has 72 shopping malls around the country (the bank is part of the SM conglomerate owned by recently deceased tycoon Henry Sy).

Although the largest bank in the Philippines by some distance, BDO’s vision remains somewhat parochial, even in its overseas operations. Sources within the bank say BDO has no “national champion” ambitions, and its current overseas operations focus on markets where there are large Filipino communities.

Streamlining the sector

Meanwhile, the Philippine banking system is widely considered to be ripe for consolidation. As of July 2019 there were 46 universal/commercial banks with 6639 branches nationwide, 51 thrift banks and 444 rural banks. As is the case elsewhere in Asia, the Philippine banking system is dominated by a select few, and the top three – BDO, Metrobank and Bank of the Philippine Islands – control about 42% of the market, while the top 10 control 80%. Despite this plethora of banks, the average non-performing loan rate in the Philippines has stayed low – about 2.1% in 2019 – and the system is fully Basel III compliant. In fact, says BSP’s Mr Diokno, “we are more than Basel III [compliant]. The capital requirement ratio [CAR] is 8%, and the average CAR [in the Philippines] is about 15%.”

The BSP, while maintaining a strict supervisory/regulatory role, has not pursued policies to force consolidation. “My impression is that the central bank does not intervene much in the market, so if it is an area where the competition can take care of it, it lets the competition work it out,” says Isaku Endo, senior financial sector specialist at the World Bank. “I think it is a strong believer in market forces.” 

The big disruptor of this fragmented system is likely to be digitisation, which is an expensive proposition for even the largest banks. “I think we are working within a time frame of five years,” says Mr Diokno, with regards to the advent of digitisation. The Philippines’ IT infrastructure is one drawback. While the internet is widely available in Manila, it is patchy outside the capital. But once the internet is up and running nationwide and the bigger banks have got all their digital platforms in place aimed at the Philippines’ youthful, tech-savvy population, it will be time for the owners of ‘prestige’ banks to identify where their true value lies. “If you have nothing as a niche business, sooner or later you’ll wake up without any customers with you,” says PNB’s Mr Veloso. 

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