ONB consolidation: An acid test?

MANILA, Philippines - One Network Bank (A Rural Bank) Inc. (ONB) has applied with the Bangko Sentral ng Pilipinas (BSP) for the consolidation of the Rural Bank of New Corella (Davao del Norte) Inc.

And for the rural banking system, it is turning into a precedent setting or test case under the new merger and consolidation regulations under BSP Memorandum 2009-028.

The new regulations have now involved the Philippine Deposit Insurance Corp. (PDIC) into issues of mergers and consolidations, the government agency that has been in the middle of bank failures, closures, bailouts and fraud.

It likewise retains a number of incentives for mergers and consolidations from previous circulars but it has likewise left a window open “for flexibility.”

BSP Governor Amando M. Tetangco Jr. speaking before rural bankers early this year said that monetary regulators strongly encouraged mergers or consolidations.

“We are designing a program with PDIC to encourage mergers and acquisitions through targeted financial incentives to would-be ‘white knights’ of rural banks,” Tetangco said.

BSP Deputy Governor Nestor Espenilla Jr. said that existing policies already offers incentives for mergers or consolidations albeit some are outdated or too broad. “There are cases when we consider additional incentives as the conditions warrant,” Espenilla told The STAR.

The BSP defines merger as the absorption of one or more corporations by another existing corporation, which retains its identity and takes over the rights, privileges, franchises, and properties, and assumes all the liabilities and obligations of the absorbed corporation(s) in the same manner as if it had itself incurred such liabilities or obligations. The absorbing corporation continues its existence while the life or lives of the other corporation(s) is/or are terminated.

Consolidation meanwhile is the union of two or more corporations into a single new corporation, called the consolidated corporation, while all the constituent corporations will cease to exist as separate entities. The consolidated corporation will possess all the rights, privileges, immunities, franchises and properties, and assume all the liabilities and obligations of each of the constituent corporations in the same manner as if it had itself incurred such liabilities or obligations.

Among the existing incentives are relaxation or temporary suspension of regulations pertaining to valuation, un-booked reserves, net worth to risk asset ratio requirement, branch operations, and access to rediscounting window.

Likewise, the PDIC recently proposed an initial P5-billion financial assistance and regulatory support facility in collaboration with the BSP. It is somewhat similar to the billion-pesos bailout packages offered to distressed commercial banks, which included the Philippine National Bank (PNB), the Philippine Bank of Communications (PBCom) and the United Coconut Planters Bank (UCPB).

PDIC President Jose C. Nograles said there is need for a stronger yet leaner rural banking system to sustain countryside development and maintain financial stability in the economy.

 “PDIC encourages the rural banks to merge or consolidate. By providing the rural banks the necessary incentives, it is hoped that the rural banks’ long-term viability will be enhanced,” Nograles added.

The concept is basically preventive in nature, that is, instead of wasting taxpayers money on taking over distressed banks and paying deposit insurance, among others, the financial package would stimulate mergers or consolidations and in effect, earn government money to reinforce its deposit insurance reserves.

“There are many white knights in the rural banking system just waiting for government assistance in strengthening the system,” officials of the Rural Bankers Association of the Philippines (RBAP) said.

RBAP past president Tomas S. Gomez IV said that they are seeking more incentives to accelerate the natural consolidation of the (rural banking) sector.

The so-called white knights are banks that are prepared to acquire or consolidation with other banks, either to save it from closure or to strengthen it.

The Bank of the Philippines Islands (BPI) was the white knight when it acquired Prudential Bank, and in the process saved government money from receivership and deposit insurance costs.

But the case of the One Network Bank or ONB is a history of consolidations.

ONB vice chairman Antonio P. Avelino claims that the biggest rural bank in the country is actually a product of 10 rural banks.

It all started with the consolidation of six RBs in San Isidro, Gov Generoso, Bayugan, Pantukan, Kalamansig and Davao City and forming Network Rural Bank.

In the process of its long drawn consolidation process, Network Rural Bank established working partnerships were with the Rural Bank of Panabo for Davao del Norte and the ProBank (the former CRB of Matalam) for Cotabato Province.

“Mergers were also made with the Rural Bank of Monkayo and Capitol Rural Bank of Tacurong,” Avelino pointed out.

By 2002, Network, ProBank and the RB of Panabo were consolidated into ONB.

Bank regulators meanwhile said that of the 726 rural banks, nearly a hundred rural banks are reportedly inactive. Over a hundred more may not be able to survive the demands of higher capital, risk-weighting requirements, and competition.

“They are good candidates for mergers or consolidation,” they said.