Bangko Sentral eyes various incentives for bank mergers

Merging banks will be given temporary relief from the risk asset ratio requirement of setting aside huge amounts of money as reserve from "sudden financial shocks."

According to the Bangko Sentral ng Pilipinas (BSP), that is just part of an incentive package that will be introduced to encourage new mergers and acquisition especially in the commercial banking sector.

The incentive package, both in monetary and non-monetary forms, is part of the monetary authorities’ attempts to further consolidate the banking system and thus keep up with its Asian counterparts.

But BSP Gov. Rafael B. Buenaventura made it clear that they will not allow two "trouble" banks to enter into a merger. "We will however prevent bad banks from merging with each other so that they will take advantage of the incentives," Buenaventura stressed.

The BSP prefers mergers between a strong and healthy bank with either a smaller albeit healthy one or a medium or large commercial bank with financial problems.

Another reason for heightened calls for bank mergers or acquisitions is the huge non-performing loan (NPL) ration (NPL) ratio of the commercial banking system.

The NPL ratio has been hovering at the 18-percent level in the commercial banking system while it was recorded over the 14-level among the thrift banking system.

Mergers allows the banks to cope with the high level of NPLs with their combined capital and reserves while its disposal of bad assets and liabilities could be made attractive.

Meanwhile, another incentive being designed for "new" banks as a result of a merger exercise is greater leeway in the revaluation of assets to allow banks to book higher values to fixed assets and real estate, and more generous treatment of appraisal incements. Merged banks would be allowed to stagger their booking of losses on operations or soured investments and loans.

Banks will also be given longer periods to amortize goodwill, i.e., monetary value assigned to intangible assets or chattels like trade names, to allow benefits from merging with reputable banks.

Monetary authorities have been making calls for mergers and acquisitions in the banking system since the late ’90s. First as a direct reaction to the Asian financial crisis in 1997 and later, to keep Philippine banks competitive with its Asian counterparts.

This has resulted in a number of spectacular bank mergers such as the acquisition of a relatively smaller Equitable Bank of a larger capitalized PCI Bank resulting in Equitable PCI Bank.

Then there was the Ayala-controlled Bank of the Philippine Islands (BPI) absorption of the Far East Bank and Trust Co. (FEBTC). Less spectacular but equally important was that of industry leader Metrobank acquiring medium-sized player Solidbank and the Asian Banking Corp. and the Philippine Banking Corp.

What is somewhat frustrating monetary authorities is the inability of the thrift and rural banks in initiating mergers among its banks. "While it is not making a major dent in the banking system, it affects thousands of depositors when their thrift or rural bank are not financially healthy," BSP officials said.

Rural banks’ NPL levels have remained in the 20 percent and mergers are practically unheard of at this level.

Early this year, the BSP redefined "unsound and unsafe banking practices" as a direct reaction of the collapse of thrift bank Unitrust Development Bank.

Monetary authorities were forced to review and redefine what constitutes bad bank practices in the view of way the bank’s stakeholders allegedly milked depositors money.

"We may have to redefine what constitutes unsafe and unsound banking practices. We have come up with a list of these practices," BSP officials said.

It is also looking at applying a single borrower’s limit (SBL) on conglomerates and their subsidiaries. They are also looking at reducing the maximum lending amount of banks in lieu of dark forecasts of the banking sector’s NPLs levels.

It is also considering a circular that might expand the coverage of DOSRI loans. Presently, DOSRI only applies to the directors, officers, shareholders and "related matters."

"There are proposals that the so-called ‘related matters’ might mean relatives of bank directors and shareholders which is equivalent to the directors or the shareholder’s total deposits," BSP officials said.