More than a year after the Philippines’ banking sector was opened to greater foreign direct investment, the international response has been underwhelming. The main reason is that asking prices for local assets are too high. Still, in terms of the numbers of new entrants, the reform has been a success. Five new international banks have been cleared to enter the Philippines since a law opening up foreign access to the sector was adopted in July 2014. The law allows foreign investors to own up to 100% of bank shares – up from 60% previously.
The law permits the share of foreign control of the sector to rise to up to 40% of overall banking sector assets. In theory, it makes the Philippines one of the countries most open to foreign investment in the banking sector in the ASEAN. However, as of June 2015 foreign-owned banks held less than 9% of sector assets, and the five new entrants’ operations were expected to be too small to have much impact.
Portfolio Bulls
Besides direct investors, foreign portfolio investors are present, holding large portions of the minority stakes of 11 large and midsized banks listed on the Philippines Stock Exchange. The bullishness of those investors is one of the main reasons foreign direct investors are finding it hard to enter. Philippine banking stocks are relatively expensive. As of November 2015, most larger banks were trading at around twice their book value. On top of that, owners expect a substantial premium for a controlling stake. That puts asking prices as high as 2.5 times book value, a level at which few deals anywhere have been done since the 2008 global financial crisis.
One of the clearest illustrations of the situation is the long-running effort by San Miguel Corporation, a major conglomerate involved mainly in food and beverages, to sell a controlling stake of about 60% in Bank of Commerce (BoC), the country’s 17th-largest bank with P102bn ($2.3bn) of assets and P15.3bn ($340m) of equity as of June 2015, according to data from the Bangko Sentral ng Pilipinas, the central bank. San Miguel and Japan’s Misuho Financial Group entered talks in February 2015. However, after San Miguel reportedly would not come down from its asking price of $500m for the stake, equivalent to 2.45 times June 2015 book value, Misuho quit the talks in October 2015. While the size of the deals so far is not large, it represents an important reversal from the situation that prevailed until 2013, when a number of foreign banks sold off all or part of their operations. The trend began in 2001, when DBS Group and Hong Kong’s Dao Heng Bank merged their subsidiary banks with major local banks, BPI and BDO Unibank, respectively. DBS and Dao Heng later sold out of their resulting minority stakes in BPI and BDO.
After The Exits
After the flurry of departures, there were 17 foreign-owned banks left operating in the Philippines, a number that will be boosted to 22 by the new entrants. Of the 17 existing banks, 13 were licensed as Philippine branches of foreign banks, while four are Philippine subsidiaries of foreign banks, which are not limited in the numbers of branches they can open. Most foreign banks specialise in corporate banking, investment banking and/ or capital markets and do little or no retail banking. That includes Citibank, which even after the sale of its 10-branch subsidiary bank to BDO in 2013 remains the largest foreign bank by assets, with P257bn ($5.7bn), or 2.3% of sector assets as of June 2015. HSBC, the second-largest foreign bank, has both a branch bank and a subsidiary, with six branches each and a total of P208bn ($4.6bn), or 1.9% of sector assets.
The foreign banks with the largest retail presence are Malaysia’s Maybank, with 79 branches, and Taiwan’s CTBC Bank, with 24 branches. They had 0.7% and 0.3% of sector assets, respectively, as of June 2015. Many smaller foreign banks mainly service corporate clients from their home countries, and most of the new entrants are likely to pursue that strategy.
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