The hunt is over – SM takes control of EPCI

Since we came out with our article "The Hunter becomes the hunted (Philequity Corner – May 27, 2005)," there have indeed been a flurry of M&A activity in the banking sector similar to what happened in 1999. It all started when the SM-BDO group announced in early 2004 its bid to take control of Equitable-PCI Bank (EPCI) by securing a memorandum of agreement with the SSS to purchase the latter’s stake in EPCI. This move eventually led to a court case which blocked the sale of the said shares.

Up to now, however, the Supreme Court has yet to decide whether SSS can enter into a negotiated deal with regard to the sale of shares in its investment portfolio. Meanwhile, a lot of deals have already pushed through:

In May 2005, BDO purchased 66 branches (with P11 billion in deposits) of United Overseas Bank for P600 million.

Likewise in May 2005, Citibank acquired Insular Savings Bank (with 30 branches).

In July 2005, BPI acquired and later merged with Prudential Bank (with 187 branches) for P6.1 billion.

In August 2005, the SM-BDO group delivers a coup by acquiring the Go family’s 25-percent stake in EPCI for P56.50 per share.

Also in August 2005, the Lucio Tan group regained control of Philippine National Bank (PNB) after it matched Union Bank’s during a joint-auction with the government to sell a combined 67-percent stake in PNB. For all intents and purposes, Allied Bank and PNB are both firmly in the hands of the group.

In October 2005, GE Consumer Finance bought Keppel Savings Bank (with 30 branches).

In May 2006, Union Bank joined the foray when it acquired International Exchange Bank (with 74 branches) for P13.5 billion.

After more than two years of pursuit, the SM-BDO Group finally secured control over EPCI through tender offer of P92/share payable in two years, an offer taken up by GSIS (13.6 percent), EBC Investments (10.8 percent) and retail investors (1.3 percent). SSS has also signified its intention to sell, pending the court case awaiting resolution from the Supreme Court. Nonetheless, the SM-BDO Group is now firmly in control.

What’s left in the spectrum?

The recent series of banking consolidations has left the industry with five dominant banking groups well ahead of the pack (SM Group’s BDO+EPCI & China Bank; Ty Family’s Metrobank, Ayala Group’s BPI, Lucio Tan’s PNB & Allied and the Aboitiz family’s Union Bank & IBank).

But with EPCI, PNB, IBank and Prudential already out of the way, what’s left in the M&A spectrum?

BPI – The bank is clearly ahead of the pack in terms of M&A experience. In previous years, it has successfully acquired and merged with a number of banks and finance companies, foremost of which was Far East Bank (2000) and the latest being Prudential Bank (2005). They may be ready to acquire again and definitely have the resources and experience to do so.

Banco de Oro – The most aggressive and fastest growing bank today. While the resolution to the case with the SSS block is still pending, the merger between Banco de Oro and EPCI is already a foregone conclusion.

Metrobank – The bank is definitely an acquirer as it tries to keep its top ranking among Philippine banks. But with a total of $325 million Tier-2 bonds accruing over the next two years, the bank is constrained by capital which prevents it from making a decent size bank acquisition.

Union Bank – The bank is likewise a consolidator as seen from what they’ve done with IBank. Now ranked 6th biggest bank, Union Bank still has a lot of capital to acquire other banks.

China Bank – The SM Group has taken over the bank through its purchases in the market. As of the moment, however, the group seems keen on operating China Bank and BDO separately.

RCBC – The bank is in dire need to recapitalize due to poor asset quality. Its huge branch network makes it an attractive acquisition but the Yuchengco’s seem bent on maintaining control. The planned capital raising (partly Tier-2 & partly equity) could bring in a strategic partner to the fold.

Security Bank – The bank has been rumored before as a potential acquisition target with only the matter of price causing the deal to fail. The bank could also turn out as an acquirer given its high capital adequacy following its aggressive provisioning policy over the past years.

Export-Import Bank – The bank was supposed to have been up for grabs a long time ago but the owners refused to sell and decided to recapitalize by putting in more money together with more funding from the Philippine Deposit Insurance Corp. (PDIC).

DBP & Land Bank – These two government banks may also merge. In fact, it may be a good idea to put in the smaller banks such as Phil. Veterans Bank and government owned thrift banks.

Others – There are other banks left that are potential M&A candidates such as Bank of Commerce, PBCom., Asia United Bank, East West Bank and UCPB which is under receivership. However, only PBCom is listed.

Is the consolidation game over?

After the successful takeover of EPCI by the SM Group, we believe that M&A activities will likely quiet down. Firstly, the commercial banking industry is not fragmented as it used to be in the early 1990s. Together, the top five banking groups now account for 54 percent of the total assets of the commercial banking system (see figure below). If we exclude the foreign banks and the two development banks (Land Bank and DBP), the top 5 banking groups should account for more than 70 percent of the assets. In effect, the BSP is succeeding in the banking consolidation that it has encouraged and pushed for.

Secondly, the pool of potential acquisition targets has shrunk. Looking back, the reason why EPCI, IBank, Far East Bank and PCI Bank were successfully acquired was because: 1) each was a well-run and profitable bank, 2) each had a strong franchise, and 3) each had no single majority owner. For example, in EPCI’s case, SSS, GSIS, EBC Investments and the Go family each had only between 13 to 30 percent stake, which left a window for the SM group to buy in. In Ibank’s case, while the bank was profitable and well run by Ramon Sy, ownership was likewise fragmented with four owners having around 20 percent each. The same thing characterized the ownership structure of PCI Bank and Far East Bank prior to their acquisition.

Lastly, as far as the listed stocks are concerned, there are not much potential targets left out there that have as much liquidity as EPCI.

What’s next?

After consolidation, the next banking theme is recapitalization. The implementation of the Basel 2 accord would require most banks to have additional capital to reflect the risks involved in their businesses. This would ensure that banks have the capacity to serve its customers and meet its obligations during periods of financial stress. Among the more prominent banks that may need to recapitalize in the near future are RCBC and Metrobank. In EPCI’s case, the eventual merger with BDO would eliminate this need.

Just as industry consolidation has succeeded in creating bigger and more efficient banks, bank recapitalization (as a consequence of Basel 2) would help the industry to brace itself against an increasingly-competitive global landscape.

Ed Bunyi appointed president of Philequity Management & iVantage Corp.

Philequity is pleased to announce the appointment of Edmundo Marco P. Bunyi as president and chief operating officer of Philequity Management, Inc. Prior to the appointment, Ed (as he is fondly called) was the treasurer and senior vice president of International Exchange Bank. He is one of those credited for the profitable trading operations of the bank. Ed will also be in charge of managing Philequity’s Money Market Fund and Dollar Income Fund where his expertise in fixed income trading will surely be an asset.

Concurrently, Ed has been appointed as president and COO of listed firm iVantage Corp., an affiliate of Philequity Management, Inc.

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