Sunday lunch is traditionally a family affair in the Philippines, and when the Tan brothers Nestor and Lorenzo get together with their parents, it is no different. “Our father is like a basketball coach, he likes to tell us what to do,” says Lorenzo. “But we don’t generally talk business,” adds Nestor.
This may come as a surprise to some because the siblings have a lot to talk about – they head rival banks that, in their aggressive search for growth, are making the industry more competitive and efficient.
Nestor is president of Banco de Oro (BDO), which, over the past decade, he has helped to turn from a small savings bank into the second biggest universal bank in asset terms in the Philippines. BDO is now challenging the country’s leader, Metrobank.
In doing so, Nestor has shown banks how to develop from niche-level to being fully fledged, piece by piece – insurance, foreign exchange, investment, trust, private banking – through a mix of acquisition and organic growth.
Acquisition run
The deep pockets of BDO’s owner, shopping mall magnate Henry Sy, helped to finance BDO’s several acquisitions, especially the P70bn ($1.75bn) purchase of Equitable PCI Bank last year, which vaulted it past Bank of the Philippine Islands to its position of second place.
Yet Nestor says: “Our acquisitions before EPCI accounted for no more than 20% of our growth, and we will continue to grow, on the whole, organically.”
Lorenzo is president of Rizal Commercial Banking Corporation (RCBC), which, after its first year under his management, has turned around from being a takeover target into a bank that has acquired one small savings bank and is looking for several more.
Although still lying well behind the top three, the newly energised RCBC is signalling that it is chasing the leaders. Significantly, the Tans do not come from the oligarchy of families that dominate business in the Philippines
Overseas background
The brothers are hard-working middle class Filipinos who, encouraged by their parents, both of whom were educators, went to the US for their tertiary education and began their banking careers there. After reaching senior positions in foreign banks – Nestor with Barclays in the US and the UK, and Lorenzo with Citigroup in the US and Singapore – both came back to Philippines 10 years ago to take up top management positions.
Since then, both have assiduously applied their overseas experience – what Lorenzo calls a “global mindset” – to help push the Philippine banking system into the modern era.
Rafael Garchitorena, a senior banking analyst with Deutsche Regis in Manila, says: “The Tans are definitely among a new wave of bankers who have brought a more professional approach to local banking. In turn they have hired people with overseas experience to fill many key positions. This growing trend helps to bring efficiencies across the board.”
Only a decade or so earlier, before the 1997 Asian crisis, most Philippine banks were adjuncts of family empires, which largely serviced family business interests. The banks typically parked most of their funds in high-yielding government paper and had little inclination to lend to the public.
Landscape transformed
Since then, external and domestic imperatives have dramatically transformed the landscape. Under a vigilant and increasingly powerful central bank, the banks have been forced to comply with international standards.
Under threat of being blacklisted by the Paris-based financial action task force on money laundering, bank secrecy restrictions were lifted and banks were required to submit transactions of more than $10,000 to the scrutiny of the central bank.
After that, the banks had to comply with international accounting and financial reporting standards. They then had to raise capital and shed non-performing assets and loans to conform with Basel II, which has been in effect since last July.
Domestically, government fiscal and monetary reforms have reduced budget deficits and made inflation more manageable. Interest rates, after tumbling to historic lows of about 3% last year, remain low, forcing banks to put funds to work in the marketplace rather than in low-yielding government paper.
It has been costly to acquire the skilled staff and IT needed – and as a result, previously niche players have been either compelled to grow or have been marginalised.
By leading the way in adjusting to the new climate, in growing loans and deposits as well as cutting the costs of funding, the Tans have put the expertise that they acquired abroad to effective use.
Western education
Nestor says that his career with Mellon Bank and Bankers Trust in the US, followed by Barclays Bank in New York and London, grounded him in diverse fields, including credit, operations, underwriting and IT.
“I’ve been through the trenches,” he says. In particular as chief operating officer for financial institutions at the then Barclays de Zoete Wedd (BZW) in London, where he oversaw operations and administration for the financial institutions investment banking side of the company.
Strong influences
Nestor adds: “The organisational and strategy work influenced my way of approaching business. I try to see the bigger picture as well as all of its components – the different businesses of the bank that need to compete in their own right. I am more of an organisation person than a business development person.”
In contrast, Lorenzo is a marketing man. He acquired his marketing skills at Kellogg Graduate School of Management – one of the top marketing schools in the US – and honed them during several years with Citigroup. “Citi was a transforming experience,” he says. “I was a very timid Filipino and the Americans kept telling me that I had to be more assertive.”
He not only has a salesman’s ability to encourage staff to grow the client base, he also has a background as a certified public accountant to help cut costs relentlessly. Philippine banks greatly need to improve cost efficiencies, he says, with the best bank’s cost-to-income ratio still over 45%.
He points to Indian and Pakistani banks as a model, where they have cost-to-income ratios of 25% to 35%, largely because they use open platform technologies that are “scalable and nimble.”
Lorenzo has shown how to prune costs while building up a reputation for turning around ailing or lacklustre operations. Before joining RCBC in February 2007, he restructured two banks – United Coconut Planters Bank (UCPB) and Philippine National Bank (PNB) – and revitalised a major insurer, Sun Life of Canada.
Loss reduction
At the formerly state-owned PNB, he hired 200 professionals to stem losses of P250m a month. He steered the bank into the black after five successive years of red ink, readying PNB for privatisation two years ahead of a five-year schedule.
At RCBC, in just one year, Lorenzo slashed funding costs by P900m, which contributed to a stunning 56% rise in unaudited net income to P32.1bn in 2007.
Crisis experience
Lorenzo says that his background of real estate financing with Citi also helped to aggressively reduce RCBC’s non-performing loans and assets ratios to 5.6% and 14.3% last year, from 7.6% and 22% in 2006, respectively.
He adds that his experience of working during the US savings and loans crisis taught him how to make money through “reinventing” foreclosed properties and selling them.
Lorenzo has also caused a stir by using insurance-style techniques to market products. “At Sun Life, we converted housewives into cross-selling machines and my mission is to do the same in banking,” he says. He unabashedly uses gimmicks such as handing out balloons inscribed with “Let’s go for Php3B” to staffers in order to boost sales – and silencing critics by achieving his target.
Alfred Dy, head of research at CSLA Philippines, says that in the new battlefield of consumer banking, Nestor has been at the forefront of “revolutionising the banking industry.”
To capture the retail market, BDO has 68 of about 700 branches in Mr Sy’s 30 shopping malls around the country, which draw in up to two million people daily. Moreover, BDO keeps its doors open for longer hours than other banks on weekdays – and opens at weekends.
With such aggressive tactics, BDO was able to increase its consumer business by 35% in 2007 and expects further strong growth this year.
Big expansion
Not to be outdone, Lorenzo says that RCBC plans to expand to 400 branches and plans to put branches and ATMs in competing retail outlets such as appliance centres. Ever the global thinker, he says that he is inspired by ICICI Bank in India, which grew from 400,000 customers in 1996 to 27 million currently, after focusing on consumers.
By using mobile phone and internet technology in targeting the Philippines’ 10 million overseas Filipino workers and its 37 million-strong professional/middle-management market, he aims to grow RCBC’s customer base from one million to at least five million within the next decade.
One banking analyst says: “Lorenzo has vision and he hires leaders in their specialist field to implement that vision.”
Nestor, on the other hand, is more of a hands-on manager, although he repudiates any suggestion that he is a micro-manager. Nestor says: “I am aware of all the issues and the major decisions to be made, who’s making them, and how they are made. But we couldn’t have grown this business so fast as we have done if I were micro-managing.”
Although their management styles might differ, the results that they are achieving with their western-influenced approach is making others take notice. Traditionally, the Chinese Filipinos who dominate Philippine business like to keep things in the family. However, Deutsche Regis’ Mr Garchitorena says: “The success of people such as Nestor and Lorenzo is encouraging more of them to hire professional managers.”
