BSP sees more mergers in banking sector

Following the merger of Equitable PCI Bank and Banco de Oro, the Bangko Sentral ng Pilipinas (BSP) said it expects more consolidation in the banking industry over the near term.

Driven by the growing sophistication of the financial market as well as the large investment outlays required to adapt new technologies, bank regulators said it is unlikely that the consolidation trend is drawing to a close.

BSP Deputy Governor Nestor Espenilla Jr. told reporters yesterday that the banking industry in general was moving in the right direction and consolidation was only part of the maturation process.

"The industry is at that point where if they want to continue playing, they need to make what are sometimes large investments," Espenilla said. "If they do not have the critical mass, the investments required in technological requirements alone could be prohibitive."

Espenilla said banks that do not have this critical mass have the option of either merging with other banks or scaling down to play in specific niche markets.

Even the movements among the country’s largest banks, according to Espenilla, could not be conclusively considered as completed since the upheaval in the global financial market is also far from over.

The merger between Equitable and BDO, for instance, placed BDO as the surviving entity squarely in second place among the country’s biggest banks.

"The question now is what Metrobank and BPI will do," Espenilla pointed out. "Would they just sit there and wait? We don’t know. In fact, is BDO done with its acquisitions? We don’t know that either."

Espenilla said the growing sophistication of the banking industry and the technologies being developed to cope with this growth often required considerable investments.

"As bank regulators, we can not tell banks what to do or speculate on what business decisions they’re going to make," Espenilla said. "But there are market forces at work that, depending on their size, will compel them to make this kind of decision."

However, Espenilla admitted that the Philippine market is not big enough to support large consolidations and even from a geographic standpoint, there would be niches that only certain banks would be able to serve. "We know for a fact that big banks do not serve smaller customers and small customers are often turned off by big banks," Espenilla said.

The BSP has been encouraging the banking industry – particularly the medium-sized banks – to merge and consolidate. In an attempt to prevent death by overpopulation, the central bank also imposed a moratorium on bank branching in heavily-populated areas.

This year, however, the BSP implemented the calibrated liberation of its bank-branching policy, phasing the gradual lifting of the moratorium on branching in heavily congested urban areas.

The new regulation, however, imposed strict risk-based qualifications with heavy bias in favor of strong banks and officials said they would allow banks to establish branches anywhere in the Philippines only if they meet these qualifications.

The BSP also excluded the biggest cities in Metro Manila, namely: Makati, Mandaluyong, Manila, Paranaque, Pasay, Pasig and Quezon cities. The municipality of San Juan was also excluded.

The BSP has been hoping that its moratorium would compel banks to consolidate in order to expand their branch networks in the major cities. Big banks, specifically, were encouraged to buy into smaller banks that want to get out of the banking business.