Consolidation Craze

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The wave of consolidations that has swept through the Philippine banking sector over the past several years is far from over, according to Amando Tetangco, governor of the central bank. Growing competition and a more stringent regulatory environment will continue to push the nation's banks towards higher economies of scale and growth through acquisition. However, market watchers were warned that the era of large-scale mergers might be quickly coming to an end.

"We may see a few more [mergers], although probably not as large as we have seen recently," said the head of the Bangko Sentral ng Pilipinas (BSP) on May 5. "The entry of non-bank financial institutions like credit card companies, financing companies and insurance companies has been changing the dynamics of the industry."

Market conditions are not the only forces pushing the industry towards consolidation. The BSP has been urging the industry to consolidate since the 1997 Asian financial crisis. At the onset of Governor Tetangco's tenure at the BSP in 2005, he publicly stated his hope that the nation's commercial banks would merge into five large entities. Larger banks, he said, would be better situated to withstand and ward against future crises.

To encourage this trend, the BSP raised capital requirement rules, limited the amount banks could lend to a single party and implemented a new regulatory framework which favoured larger capital bases and higher economies of scale.

These polices effectively raised the cost of doing business for mid-sized banks. Higher capital requirements meant banks could put less of their money to work. Single borrower limits restricted the ability of small banks to make big loans. Stringent lending rules put emphasis on risk assessment and thus increased end costs for banks.

Big mergers quickly followed. In 2006, International Exchange Bank and UnionBank joined forces. In 2007, ChinaBank absorbed the family-owned Manila Bank. Both parties admitted that the BSP's new politics were a major influencing factor in their decisions. Additional consolidations continued, with Banco de Oro and Equitable PCI Bank combining to create the nation's second-largest bank in terms of assets the same year.

The most recent example of this trend came just one week before Tetangco's statement. Philippine National Bank and Allied Banking Corporation, both controlled by tycoon Lucio Tan, announced on April 30 that they would go through with their plans to merge.

The combined bank, which will retain the PNB name, will have P388bn ($9.2bn) in assets, making it nation's fourth-largest. PNB will be able to broaden its consumer base by combining its strong remittance business with ABC's established relationships with middle market Filipino-Chinese firms.

The success of the BSP's policies over the past several years should be put into perspective. Over 30 commercial, universal or branch banks still exist in the country. This number rises into the hundreds when thrift and rural banks are included - still a far cry from the five-bank system Tetangco had hoped for upon entering the BSP.

Furthermore, many of nation's banks are family-owned enterprises that have been resistant to consolidation, as selling the family business can be seen as a betrayal of one's heritage and history. In such instances there is little the BSP can do.

"For our part, what we have done is create the environment that would encourage banks to improve their capital base," Tetangco said. "The number of market players would really be determined by how banks see economies of scale fitting into their business models within this new regulatory framework."

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