Phl banks urged to scale up for Asean integration

MANILA, Philippines - Philippine banks need to further scale up ahead of the Association of Southeast Asian Nations (ASEAN) banking integration in order to compete with bigger lenders in the region, Standard & Poor’s Ratings Services said.

“Philippine banks are at an important crossroads. They’re riding the tide of one of the fastest-moving economic upswings among emerging-market economies, and the banking system has sufficient capitalization and ample liquidity to take advantage of this growth,” the debt watcher said in a report.

However, S&P added: “It remains to be seen whether Philippine banks can emerge as regional champions ahead of the impending Asean 2015 integration, which envisages a single market and production base.”

“Philippine banks will need scale to deal with more intense competition from potential new entrants, in our view, and it will be a tough balancing act for Philippine banks to defend their market share while pursuing growth,” S&P also said.

Asean members have been working on creating an integrated economic community (AEC) by 2015. Part of this is the ASEAN Banking Integration Framework (ABIF), which members are targeting to achieve by 2020.

Since the ABIF’s objective is to create strong and well-managed banks in the region, exposing banks to brisker competition and allowing them access to bigger markets are being eyed under the framework.

S&P pointed out that as member countries have begun liberalizing restrictions for their own banking sectors, Philippine banks face tougher competition given the size of other banks in Asean alone. 

“Some doubt exists as to whether all the facets of the AEC will kick in by 2015. In our view, the precise timing and pace of the rollout are beside the point: Banks will need to be prepared for the rollout,” the credit rating agency said.

“Those with regional ambitions need to invest in building a presence and strong franchise in foreign markets to gain market share. Those that plan to remain domestic players might have to defend their home turf from a growing number of regional players in the coming years,” S&P continued.

It further added: “We believe the Philippine banks belong to the latter category.”

With a credit-to-gross domestic product (GDP) ratio of 40 percent, Philippine banks have enough domestic growth opportunities seen, decreasing the need for them to expand in the region.

“That said, we believe greater scale is essential for banks to deal with the more intense incoming competition. Even the largest domestic banks are relatively small compared to banks in Singapore and Malaysia banks,” S&P said.

The Bangko Sentral ng Pilipinas last month has said local banks have been raising capital and aggressively expanding in and out of the country in preparation for the regional integration.

The central bank has also said ABIF will benefit local banks as this presents them with more opportunities despite a big discrepancy in the size of Philippine banks and other lenders in the region.

Illustrating this, BSP Deputy Governor Diwa C. Guinigundo in February said the assets of the top three Philippine banks are only as big as that of Thailand’s Bangkok Bank, and half of the assets owned by Malaysia’s Maybank. The Philippine banking system’s total assets, meanwhile, are only about 70 percent of Singapore’s DBS assets.