Banks opt for digitalization, drop M&A plans — Moody’s

MANILA, Philippines — Moody’s Investors Services said Philippine banks are opting to ramp up their digitalization programs rather than to acquire and merge with problematic banks.

Simon Chen, vice president and senior analyst at Moody’s, said major players in the banking industry prefer to digitize their operations and grow their businesses rather than pursuing mergers and acquisitions (M&As).

“The current thinking we are seeing now across the banks is that rather than merging with another bank and inherit problems, it might be a lot more cost efficient to rely on digitization to scale up the business and grow a lot faster,” Chen said.

If we look beyond the Philippines, he said, there are some deals that did not go through because in the due diligence process the initial assumptions are unachievable and the digestion process and the consolidation of the two banks is a long-term process.

“These synergies will not materialize as quickly as previously expected so there are issues with consolidation and I think these are some of the key stumbling blocks why some deals did not go through,” he added.

Based on cost benefit analysis, Chen said banks believe digitization is the way forward instead of inheriting a bank and working through a long integration process of three to four years.

“More banks are thinking that it might be more cost efficient or more in line with other thinking that to grow forward it is to rely on digital and to scale up the business rather than to acquire another problematic bank and digest the issues over a longer period of time,” Chen said.

For the regulatory perspective, the senior analyst said there are incentives being offered by the Bangko Sentral ng Pilipinas (BSP) to encourage consolidation.

“But I think the regulatory stance is also to let market forces unfold. So I think this is the reason why there is no big push towards consolidation at this stage,” he said.

There are 584 banks operating 11,439 branches all over the country as of end-May. The industry is comprised of 43 universal and commercial banks, 55 thrift banks as well as 486 rural and cooperative banks.

The BSP, together with the state-run Philippine Deposit Insurance Corp., offers incentives via the Consolidation Program for Rural Banks (CPRB) to encourage mergers and consolidation as part of the strengthening of the banking industry.

“The banking system is pretty young and there is a lot of room for growth. If we look beyond the large banks, even mid sized banks are making money and it is not like we are in a position where there is significant price competition and margins in some banks are unviable,” Chen said.