Are depositors safer as banks merge?

The year 2009 is shaping up to be a year of mergers and consolidations in the overcrowded Philippine banking industry. And the question of who is acquiring who preoccupies many in the business community.

Bangko Sentral Gov. Amando Tetangco recently said he was hoping to see only five to six banking groups dominating the sector, but was quick to add that banks will not be forced to merge. What the regulator intends to do, he said, is to create an environment that encourages banks, through market-based policies, to consolidate or expand based on their appetite for risks and profits.

The latest central bank data shows that the number of banking institutions (head offices) in the Philippines fell further to 835 as of end-September 2008 from year-ago level of 852, reflecting the continued consolidation of banks as well as the exit of weaker players in the system.

By classification, banks consisted of 38 universal/commercial banks, 80 thrift banks, and 717 rural banks.

The system’s operating network increased to 7,811 branches from 7,736 branches a year earlier, mainly due to the increase in commercial and rural banks’ branches. The number of players, however, likely decreased further because several rural banks have been padlocked since December last year for allegedly unsound business practices.

Still, what we have is an overcrowded industry offering basically the same services to the depositing public.

More savings

The encouraging development is that the industry’s total resources rose by 11.2 percent to P5.6 trillion as of end-September 2008 from year-ago level of P5.1 trillion. This may be an indication that the public’s trust in the system remained intact despite the adverse effects of the global financial crisis on banks’ profitability.

The BSP attributed the increase in banks’ resources to the rise in cash and loan accounts. Universal and commercial banks continued to account for almost 90 percent of the system’s total resources.

For the BSP chief, the “ideal” situation is to have five or six local banks plus branches of foreign banks holding about 70 percent of the system’s total assets. This is stretching things a bit, and may take several more years before it becomes a reality. By that time, Tetangco may no longer be the central bank governor.

Merger trends

The latest merger move was last month’s signing of a deal by the Gotianun-led East West Banking Corp. to acquire AIG PhilAm Savings Bank. The Gotianun family’s goal is to transform EastWest from a mid-sized commercial bank into a much bigger player, perhaps one of the 10 largest in the Philippines, and that means it may continue looking for merger partners.

A 67-percent stake in Philippine Bank of Communications is supposed to be up for sale by March, when the five-year deadline for its three major shareholders – the Luy, Nubla and Chung families – to give up control of the bank expires. Prospective bidders may include tycoon Lucio Tan, who controls two of the country’s biggest banks, and Don Emilio Yap’s Philtrust Bank.

And by the middle of this year, assuming all legal and regulatory issues are out of the way, the Tan-controlled Philippine National Bank (PNB) and Allied Banking Corp. are expected to have fully merged.

PNB, the surviving entity, will become the fourth largest local bank in terms of assets. The bigger ones – Banco de Oro, Metrobank, and Bank of the Philippine Islands – have already made major acquisitions but are keeping their doors open for further expansion.

Asiatrust Development Bank, which is partly owned by the Social Security System, is also reportedly up for sale, and the Yuchengco-controlled Rizal Commercial Banking Corp. has already made public its offer to buy the Quezon City-based lender.

These prospective mergers involve mostly big names and strong institutions. With the merger trend expected to continue beyond 2009, there is a big possibility that small, weak players and those being run by rogue bankers will be gobbled up next. This would definitely benefit small depositors who need the most protection on their hard-earned money.

Mismanaged banks

International credit rating agencies have been saying that Philippine banks are well-capitalized and their balance sheets remain strong. Even regulators – including key bankers – assure us that the local banking system is sound.

And yet, reports about some of the biggest names in the US banking sector collapsing and many others in other first world countries wading in deep shit are justifiable cause for local depositors to be scared and nervous.

It certainly hasn’t helped that we have just witnessed 25 bank failures in recent months. Regulators are saying that the collapse of these small institutions has nothing to do with the crisis but simply due to mismanagement. These padlocked banks were reportedly already being closely monitored for potentially unsafe and unsound banking practices even before the global financial turmoil exploded.

The big question now is – how many more are mismanaged banks in the country? Corollary to this, is our money still safe in any of the local banks especially now that we are in such a highly uncertain and volatile economic environment?

More decisive regulators

Not surprisingly, everyone expects local banks to be in for rough times, with weaker profitability and declining asset quality anticipated this year given the difficult operating environment.

Under the present circumstances, it could be timely to push more banks to merge. This will not only create stronger institutions, but even weave a sturdier safety net for depositors.

But perhaps regulators should not just “create” the environment and wait for things to fall into place, but rather decisively move to weed out the weak players or encourage them to find merger partners and set up stronger institutions.

Apart from actively pushing for mergers, bank regulators must also be more decisive and take faster action in identifying and closing down mismanaged institutions. The depositing public deserves no less. 

Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. For a compilation of previous articles, visit www.BizlinksPhilippines.net.