Regional-type bank M&As logical option

The biggest challenge of the country’s thrift and development banking industry is capital adequacy and asset quality. And the options for improving the situation are getting fewer.

Total deposits and loans slightly grew last year, but so have the weight of bad assets in the system.

Gross loan portfolio grew to P183 billion end September 2005 from P163 billion in the same period in 2004. But real or otherwise properties owned or acquired (ROPOA) likewise grew from P34.2 billion in 2004 to P34.8 billion as of September 2005.

Restructured loans grew to P4.5 billion last year from P4.2 billion in 2004 while distressed assets stood at P54 billion end September last year. Thus the system was forced to set aside allowances for probable losses in non-performing assets (NPAs) amounting to nearly P9.5 billion.

The opportunity to dispose of the bad assets utilizing the benefits of the Special Purpose Vehicle Law (SPV Law) has lapsed, and the thrift banks have been forced to dispose of, or attempt to, its huge NPAs without incentives.

"For 2006, the industry is expected to continue consolidating through mergers and acquisitions (M&As) with probably a few closures or downgrades due to capitalization problems," Alfonso Salcedo Jr., president of the Chamber of Thrift Banks (CTB), predicted.

Salcedo said that with the existing conditions, plus the new requirements under the International Accounting Standards (IAS), thrift banks will be hard pressed to improve its asset quality through increase in capital, or consolidation.

There are a little over 60 thrift and development banks with persistent reports that a few are quietly looking for buyers, and still a few contemplating downgrade to rural bank status due to their inability to raise new capital.

The CTB president is recommending that the industry consider the "regional bank" option. The proposal envisions the growth of a bank covering several regions due to the consolidation of the industry.

Instead of downgrading, thrift and development banks should consider merging with stronger players to create a bigger and stronger bank. Such a development would allow a larger deposit and loan base that would not have to rely on urban areas, or commercial banks for funds.

The "regional bank" could accept deposits and extend loans to the same areas it operates without having to remit or rely on larger commercial banks. The result is that the communities it services could utilize the same for growth and development.

The United States is a classic case of having several regional banks (like Wells Fargo) which in fact can compete head on with local giants like Citibank.

"Consolidating the industry could result in the formation of ‘regional banks.’ That would be the ideal situation, and that is the vision," Salcedo, who is also the president of BPI Familiy Savings Bank, said.

"It helps concentrate savings and lending in the area of operation rather than centralizing these in the urban areas especially in Luzon. That would allow financing or funding of development in the areas of operation," he added. "A fewer number of thrift and development banks that are stronger, more professional and better equipped to service its banking clients."

Coincidentally, the rural banks are also looking it that direction. The Rural Bankers Association of the Philippines (RBAP) calls it "community banks."

The challenge for the system is asset and credit quality, and consolidating its resources is one option. That coupled with increased training and education plus transfer of technology, could lessen closures that would only result in losses to the banking public.

CTB has already embarked in a traning module that will tackle issues such as the SPV, ROPOAs and its proper disposal, credit, credit quality, and credit sourcing, the IAS, Basel II, financial reporting and corporate good governance.