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Philequity Corner (April 25, 2016)By Wilson Sy
Banking sector weathers the storm
The local banking sector has been on the spotlight lately. There
was concern that prices of bankingstocks may drop as a result of an
ongoing Senate investigation on the $81m cyberheist involving
stolenfunds from the Bangladesh Bank. Rizal Commercial Banking Corp
(RCB) is in the eye of the storm for thealleged involvement of its
branch manager in the matter. RCB’s st ock price fell when the
Senateinvestigation started. Recently, however, RCB’s stock price
has stabilized and has bounced sharply fromits lows. Moreover, the
banking sector as a whole has stood strong and has withstood the
incomingbacklash and negative publicity.
Still better than the West
The whole world is now watching how this scandal will be
resolved by our regulators. While local bankshave suffered from
negative publicity, recent events have not undermined the sector’s
strong
fundamentals. Local ba nks continue to benefit from our
country’s above -trend economic growth.Further, there still are
many unbanked segments and underpenetrated regions in the country,
proof thatthe potential for sustained growth is still there. More
importantly, local banks are not hobbled by capitalor growth issues
that have plagued its Western counterparts.
Growing foreign interest
The local banking sector continues to benefit from a growing
interest from foreign investors and banks.Asian banks who want to
establish a stronger regional presence are looking to set-up shop
in thePhilippines in order to participate in our country’s growth
story. This follows the liberalization of foreignbank entry, which
allows more foreign banks to enter the country and own up to 100%
of the votingstock of an existing domestic bank. Since then, six
foreign banks have received approval to operate inthe country:
Japan’s Sumitomo Mitsui, Korea’s Shinhan Bank and the Industrial
Bank of Korea, YuantaBank from Taiwan, Cathay United Bank from T
aiwan and Singapore’s United Overseas Bank. Accordingto the BSP,
there are more foreign bank applications in the pipeline.
Brewing Asean integration
Foreign interest in the local banking sector is also being
driven by the impending financial integrationamong members of the
Association of Southeast Asian Nations (Asean). The pact seeks to
strengthenintra-region trade and investment flows while promoting
the opening of Asean qualified banks amongmember countries. Last
month, the Philippines and Malaysia inked the first bilateral
agreement underthe Asean Banking Integration Framework (ABIF). The
deal paves the way for the entry of up to three
Asean qualified banks in each country. It will take a number of
years for the Philippines to ink bilateralagreements with various
Asean countries. Nonetheless, we expect regional developments to
continuedriving foreign interest in the local banking sector.
Another mode of entry
Aside from setting-up shop and opening branches, foreign banks
can also enter the country by forgingpartnerships with local banks.
It is a potential win-win scenario for both parties, as each side
bringssomething unique to the table. On the one hand, foreign banks
with global or regional networks can tap
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a diverse set of international clients who are also looking to
set shop in the Philippines. They also benefitfrom best practices
and specialized expertise that have allowed them to thrive in
different countries.
Locals know best
On the other hand, Philippine banks clearly have a better
understanding of the local playing field. They
have a deep knowledge of the Philippine market and long-standing
relationships with corporate andindividual clients. Further, local
banks utilize the contacts and network that their owners, directors
andofficers provide. Philippine banks are usually owned by
conglomerates which also have stakes in otherbig corporations and
listed companies. Hence, local banks benefit immensely from
associations withsister companies and related businesses. These
become captive clients for the core lending and deposit-taking
businesses of local banks.
Growing number of partnerships
In the past few years, there has been steady growth in the
number of partnerships between Philippinebanks and foreign
entities. We enumerate some examples below.
Partnerships between local banks and foreign entities
Source: Company data
The partnership template
The recent purchase by Bank of Tokyo-Mitsubishi UFC (BTMU) of a
20% stake in Security Bank (SECB) hasput the Philippine banking
sector on the spotlight. BTMU is the banking unit of Mitsubishi UFJ
FinancialGroup, one of the largest financial conglomerates in
Japan. This follows the investment of Cathay LifeInsurance Corp in
RCB, which has now been built to 22.7% even amidst the backlash of
the ongoingSenate investigation. We note that both investments made
by foreign banks into SECB and RCB werepriced at sizable premiums
to book and market value.
Current landscape opens up M&A possibilities
Changes in regulations have liberalized foreign bank entry.
Meanwhile, regional developments are alsopushing for the opening of
Asean qualified banks in member countries. There is also growing
interestamong other Asian countries to establish their banking
presence in Asean countries such as thePhilippines. These
developments open up possibilities for M&As and lay the
groundwork for furtherconsolidation in the local banking
sector.
Local Bank Foreign Partner Equity Investment by Foreign
PartnerBDO Unibank Japan Bank for Int'l Cooperation No equity
investmentBDO Unibank Nomura 49.0% in PCIB Securities (to be
renamed BDO Nomura
Securities)Metrobank Japan Bank for Int'l Cooperation No equity
investmentMetrobank Japan Finance Corp No equity investmentBank of
the Philippine Islands Mizuho Corporate Bank of Japan No equity
investmentSecurity Bank Bank of Tokyo-Mitusbishi UFJ 20.0% stake in
Security BankSecurity Bank CIMB No equity investment; strategic
partnership between
CIMB and SB EquitiesRizal Commercial Banking Corp Cathay Life
Insurance Corp 22.7% stake in Rizal Commercial Banking
CorpPhilippine National Bank Allianz 51.0% stake in PNB Life
InsuranceEastWest Bank Ageas 50.0% stake in EastWest Ageas Life
