Philippine banks braced for more mergers

Consolidation will remain headline news in the Philippine banking sector in 2016, with mergers and acquisitions expected among smaller lenders, particularly in rural areas.

The trend is being driven in large part by the Bangko Sentral ng Pilipinas (BSP), which has been actively working to create a less fragmented banking environment and foster greater financial inclusion.

Analysts, meanwhile, have reacted positively to the changing sector landscape, citing an increasingly favourable operating environment in what looks likely to be a challenging year for financial services on a regional level.

Change under way

The total number of banks operating in the Philippines fell to 635 in September 2015, down 2.6% year-on-year (y-o-y), according to a report issued by the BSP at the beginning of January.

Rural and cooperative banks topped the list of closures, with their numbers dropping from 547 to 529. Universal and commercial banks, meanwhile, edged up by one to 37, and the number of thrift banks operating remained unchanged at 69.

The BSP, which regulates the sector, sees consolidation as an essential tool for strengthening lenders’ balance sheets and operational capacity, while also reducing structural weaknesses and exposure to risk.

In line with its broader plans for bolstering the sector, the bank ordered the closure in early January 2016 of 14 rural lenders whose operations had been placed under the supervision of the Philippine Deposit Insurance Corporation (PDIC) last year.

Incentives to merge

The BSP stepped up its drive to promote mergers last July with the unveiling of its Consolidation Programme for Rural Banks (CPRB). The programme, which was launched in cooperation with the PDIC and Land Bank of the Philippines, contains a series of measures and incentives aimed at reducing the number of small-scale lenders.

To be eligible for the CPRB’s merger scheme, banks must have at least five branches, preferably in the same region; must post a 12% capital adequacy ratio; and must have combined unimpaired capital of P100m ($2.1m) or greater.

A total of P25m ($525,000) has been set aside to fund the initiative, which is scheduled to run through to 2017.

Speaking to media in early January 2016, Nestor Espenilla, deputy governor of the BSP, said consolidation would enable rural banks “to improve their financial strength, enhance their viability, strengthen management and governance, generate synergies and economies of scale and expand market reach”.

As of late December, the PDIC was reportedly in talks with at least eight groups of rural banks. Larger banks are also being encouraged to invest in the rural banking segment, which could help broaden the reach of financial services.

In addition, the BSP has sharpened its focus on the micro-banking segment, which is seen as another key conduit for extending services into more remote parts of the country.

Measures introduced in January broadened the scope of permissible activities at micro-banking offices (MBOs) to include the introduction of an end-to-end process for customers to open accounts at MBOs – something that had previously necessitated a trip to a branch or head office.

According to the BSP, 11 out of 19 previously unbanked municipalities now have a banking presence as a result of MBOs, while the remaining eight saw formal banking offices open in 2014.

Stability a plus

In mid-December ratings agency Fitch upgraded its outlook for the Philippine banking sector from stable to positive, despite forecasting a more difficult year for the financial industry across the broader region.

According to Fitch, the Philippines is the only banking market in Asia and the Pacific with a positive ratings outlook for 2016.

While the agency noted a slowing of credit growth in the second half of 2015, it sees the country’s banks as operating in a robust domestic environment, with lenders viewed as resilient to external risk and protected by strong regulatory standards.

“Philippine banks’ generally high capitalisation, healthy funding and liquidity, and satisfactory loan-loss reserves help to balance the risks from relatively high credit growth over the past few years,” Fitch concluded.

Bank profitability should also remain broadly stable in 2016, the agency said, with the continued shift towards higher-yielding consumer and middle-market loans helping to offset competitive pressure on net interest margins.

Fitch’s assessment was broadly in line with an analysis by Moody’s, issued in late 2015. According to the agency, the coming year should see Philippine banks record stable profits, as higher lending yields are offset by small increases in the cost of credit.

“The Philippines’ stable operating environment and low banking sector penetration are supportive of credit growth,” Moody’s said in December. “The country is one of the fastest-growing economies among emerging markets globally.”

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