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WorldMarch 1 2013

Philippines back to full health

Confidence is running high in the Philippine banking sector as the country enjoys low interest rates and improved stability. But with the 2015 deadline for the economic integration of the Association of South-east Asian Nations approaching, increased competition and a reshaping of the market seems inevitable.
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Philippines back to full health

As countries around the world struggle to emerge from the economic downturn, the Philippines remains relatively unscathed, having learnt the lessons from previous crises. Banks in the country are seeing high growth and low interest rates, and are well poised to take on foreign competition.

“At the moment I am quite optimistic,” says Eduardo Olbes, head of Security Bank’s corporate and investment segment. “As a country we have never seen interest rates this low – a reflection of the amount of domestic liquidity. Generally, business confidence is quite high and companies are able to turn a profit and grow their business,” he says. He adds that this is a continuation of the positive results that the country’s banking sector saw in 2010 and 2011. “The Philippines’ banks came out of the crisis in 2008/09 unscathed,” says Mr Olbes. 

Lessons learnt

The Philippines is no stranger to crises. It has learnt the lessons of the debt crisis of the 1980s and the consequences of a lending boom in the 1990s, and has been dubbed in the past the ‘sick man of Asia’. While things are looking good for the Philippines now, international observers with a long memory are quick to point out that things had previously looked good for the Philippines, although the outcome then was not so positive. 

“There have been a lot of people who have been asking ‘is it real this time?’,” says Aurelio Montinola, president and CEO of the Bank of the Philippine Islands (BPI). 

“How come the Philippines is in better shape than it was in 1995/96 and in the 1980s? We learned the lessons the hard and painful way,” says Mr Montinola. Those lessons, he explains, are to have lower bank and corporate leverage, and not to borrow too much in a foreign currency. In 1983 the debt crisis reached the point where the Philippines was unable to meet its foreign currency debt obligations and needed a moratorium on payments.

“A lot of the people running the corporations and banks, and in the government, were around in 1996 and the 1983 moratorium. The Philippines was worse than Greece [is now] and weathered the moratorium, so people learned. The best teacher is a painful experience,” says Mr Montinola.

Nestor Tan, president of BDO Unibank agrees, saying that the banks have benefited from their previous problems in the 1990s. “This time around the banks know how to handle the boom cycle,” he says. “This has been aided by the declining interest rate environment.”  

Local interest

There are other differences that make it different this time for the Philippines, says Mr Montinola. “The locals are really investing. There are a lot of major conglomerates. Before there were five or six, but today there are 15, which makes a difference to investing in the local economy,” he says. 

Hans Sicat, president and CEO of the Philippine Stock Exchange agrees, pointing to the performance of listed companies in 2012. “Listed companies’ income as a group grew by 20% in terms of net income and the profitability growth is three times the growth of the economy. There is a lot of activity going on,” he says. 

Mr Sicat points to the structural changes that have occurred in the Philippines and credits the central bank with creating an environment of low interest rates and low inflation. “That is not something you can buy. It takes years of work and consistency of looking at price stability. That is something to be lauded,” he says. 

Added to this, there has been a policy of ‘good governance is good economics’ from the government, which has had knock-on effects for other industries. “There has been a clear change in governance from the top,” says Mr Sicat. “This more correct path in governance has the follow-on effect of demonstrating to various organisations that it is a good path to follow.”  

Healthy specimens

Aside from the broader environment in which the banks are operating in, the banks themselves are in good shape. “The banking industry is healthy and well capitalised with good asset quality,” says Mr Tan at BDO. 

And there is plenty of potential for the banks to grow. “There is low penetration in lending and good consumer demand,” says Mr Tan. Mr Olbes at Security Bank agrees that the penetration of banks is relatively low, but points to the increasing competition among Philippine banks. 

“If you look at the industry and the net interest margin within Asean [the Association of South-east Asian Nations] there are three broad brackets. Indonesia has the highest level of 5% to 6%, the Philippines is in the second bracket of 3.5% to 4%, and the rest of Asean has net margins of about 2%,” says Mr Olbes. “For our bank, net interest margins peaked in 2009 and every year since then it has been on a downward trajectory. It reflects the strong competition among local banks.”  

The Philippine banking market is fragmented and there has been speculation that consolidation in the industry can be expected. At the end of 2012, there were reports that BPI was in merger discussions with Philippine National Bank (PNB), but no deal was announced. 

On the topic of consolidation, Mr Olbes says: “The regulator is certainly very supportive of the market forming larger banks. It is difficult to say whether there will be any dramatic changes in the near term. Aside from the recent announcement that PNB and BPI were engaged in merger discussions, to date we are not seeing any activity beyond that.” 

On the topic of whether further consolidation can be expected in the Philippine banking sector, Mr Montinola at BPI says: “The central bank encourages and oversees, but does not mandate, unlike some countries where they are made to do acquisitions.”

“There are more than 30 commercial banks in the Philippines – they are looking forward to the prospects of additional consolidation, but our key insight is that it is still a seller’s choice,” says Mr Montinola. “I am personally a big believer in organic growth.” 

However, Mr Tan at BDO says: “I do not think [consolidation in the industry] will happen soon as it is quite good for the seller right now. The price expectation is on the high side because the stock market is doing well.” 

Growth potential

The prospects for the banks in the Philippines are good because of the potential for them to grow further domestically. “It is still a large and growing market. Only 25% of people bank with the formal banks,” says Mr Montinola, estimating that there is a target market of at least 25 million that is still untapped. “Different banks have different interests. For us, the focus is the broad based consumer and the middle market, and small and medium-sized enterprises.” 

Other banks are also focused on retail banking and are targeting the mass market, which has seen an increase in consumption patterns. This consumption, explains Fabian Dee, president of Metrobank, is fuelled by remittances and the business process outsourcing industry. “A lot of that money is used for spending – we are seeing a lot of [shopping] malls being built.” 

When asked if there is the potential for a bubble, Mr Dee says: “I think we are far from that. That happens when all go for the same consumer and you start pushing pricing for the basis of getting business. There is enough demand, there is a big market out there.” On the question of competition in the market, Mr Dee says: “It is like golf – you have to compete more with yourself.”

As with other banks, Mr Dee at Metrobank notes the potential of retail banking: “The key challenge is how do you do your business while controlling the cost and building scalability?” Of his strategy for growth, he says: “We really want to increase our capability on the retail side, improving efficiencies so that we can do more scale business. Our strategy is to grow market share and do it profitably and not to take unnecessary risk.”  

In the past, in other sectors, there was a business style of building a business based on volume “and you wait until your competitor folds”, says Mr Dee.

Intense competition

Mr Tan at BDO agrees with Mr Dee's assessment of the Philippines' banking landscape. Previously, he says: “Competition was intense. The intensity went down when people realised that aggressive marketing actually hurts everybody and prices end up being depressed. Banks are sober now on pricing strategies.”  

Mr Tan adds: “The consumer and middle market are really the segments that are growing.” Banks are positioning themselves differently in an attempt to capture these customers. BDO aims to be the bank that is perceived to be innovative and flexible in what it offers its customers. “The IT infrastructure has made it easy for us to modify our operations,” says Mr Tan. “Banks close at 3.30pm. Most of us work until 5.30pm or 6.30pm, so by the time the client leaves work the banks are closed.” The bank has enabled branch managers to decide whether to extend their opening hours and in some areas whether to do Sunday banking. 

Security Bank is also positioning itself to benefit from changes in consumption patterns. “The expansion is largely in the mass affluent segment,” says Mr Olbes. “With their consumption patterns, consumer finance offerings would make sense to them,” he explains, giving the examples of mortgages, credit cards, car and personal loans. “As a mid-sized bank in the Philippines with a positive economic backdrop, we do still see a wide and compelling range of opportunities,” he adds. 

“Our prime focus is on profitability, more so than market share, and that has been the guiding principle of the bank. In our case market share for its own sake is not sufficiently compelling.”  

Security Bank is a pure domestic bank, and when asked whether it has plans to expand overseas, Mr Olbes says: “We would never rule out the possibility, however there is still quite a bit to do domestically.” 

In the regional context, there are few regional networks that have been established, aside from the US and European banks’ legacy networks, according to Mr Olbes. “The Malaysian banks have made significant investments in the Philippines in anticipation of Asean integration, as a regional banking network. You have not yet seen Philippines banks do the reverse,” says Mr Olbes. Mr Tan at BDO says: “The industry is too fragmented. While the banks are big in the local scene, on a regional scale they are quite small.” 

When questioned about the impact of the Asean economic community and if it will mean that regional banks will be able to take over the domestic market, Mr Tan says: “All competition worries me. Historically the foreign banks have been mostly US and European banks, who have stayed in urban areas and concentrated on niche markets.” These days foreign competition is coming from the Asean region, from Singaporean banks and Malaysia’s Maybank and CIMB. “Indonesian banks could be successful here,” says Mr Tan. “It is not the foreign competition we are used to. These people know how to operate in emerging markets.” 

The Philippines market is preparing itself for the 2015 deadline for membership of Asean's economic integration. “The country as a whole is progressing well to set up the domestic frameworks to deal with the free-trade area,” says Mr Olbes. “Philippine banks are cognisant of the impending change.”

Towards integration

The integration also extends to the stock exchanges, and the Philippine Stock Exchange is working with its peers in the region to establish greater co-operation across the Asean countries. On the domestic front, the exchange has been making big changes that fall in line with the wider national agenda of improving governance. “Any institution that is part of the economic activity has to be viewed as trying to improve confidence and credibility,” says Mr Sicat. To achieve this goal, the focus has been on improving corporate governance, improving liquidity and improving technology and systems, he explains.

“The biggest achievement last year was on the corporate governance side,” says Mr Sicat, explaining that the governance of broker dealers has gone to an independent entity, the Capital Markets Integrity Corporation, which is funded by the regulator. “The view of the exchange was that it was an ‘old boys network’. Now it is just a regular corporation,” he adds. 

Such changes signal the improvements in the wider economy and the banking sector in the Philippines. “All the factors and the ingredients are there for the Philippines to continue robust growth,” says Mr Olbes. “Interest rates are low, there is abundant liquidity, the banking sector is healthy and corporates have good earnings. On paper, it looks good. The question is whether those positive macro factors will be translated into sustainable high growth.” 

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