More mergers, consolidations expected

The recent acquisition of East West Banking Corp. (EastWest Bank) of AIG Philam Savings Bank is actually part of the consolidation of the country’s banking system, which was triggered by the 1997 Asian crisis.

In fact, it is the second commercial bank in recent time that found profitability in acquiring a thrift bank rather than a smaller commercial bank.

In July 2007, the Rizal Commercial and Banking Corp. (RCBC) acquired 30-year old thrift bank Merchants Savings and Loan Association Inc. from Finman Capital Corp. The acquisition cost was worth P520 million, and included the 21 operating branches, seven of which are in Metro Manila.

RCBC president Lorenzo V. Tan said that the thrift bank is a better bet since its fits our requirements in the present crisis scenario, much like all other commercial banks.

“We want to grow out retail banking income by another 40 percent with our loan portfolio growing by 20 percent coming mainly from consumer lending,” Tan added.

The credit crisis that emanated from the shores of Uncle Sam has contaminated the rest of the globe that drivers for growth will come from local shores.

Standard Chartered Bank chief economist Nicholas Kwan said in a recent forum that among the critical drivers for growth will be domestic in nature.

“Aside from de-leveraging, there must be stronger domestic demand, domestic investments and domestic lending,” Kwan stressed.

EastWest Bank president Antonio Moncupa admitted that it was not the nine branches of AIG Philam Savings that was attractive. “It (AIG Philam Savings) is recognized as among the leaders in the domestic credit card business that made it attractive,” Moncupa said, adding that it will catapult EastWest Bank among the leaders in the consumer and retail banking.

Bank of the Philippine Islands (BPI) president Aurelio Montinola III at the start of 2008 was already predicting that banks are shifting more towards consumer banking, and away from complex investments strategies.

“Its back to the commercial basics. And consumer banking and the SME markets will carry the day,” Montinola said.

Exotic financial products and instruments is out, and greater emphasis will be refocused towards the domestic demand. After all, there is practically a void in the foreign capital markets after the US subprime fiasco.

Most commercial banks will the capacity and capability to acquire are more concerned about the right fit rather than just more numbers.

Metropolitan Bank & Trust Co. (Metrobank) chief executive Arthur Ty said that banks look at the strategic perspective in an acquisition.

“A prospective acquisition is a bank that is strong where we are weak, or a buy that improves the market share that the bank already has. We have learned a lot from the last acquisitions,” Ty said in an earlier interview.

But acquisition is not the only solution. Banks are also consolidating its existing forces to remain competitive in the face of the credit crisis that is said to impact on the Philippine and Asian market this year.

After integrating Equitable PCI Bank in what is considered a major event in the country’s banking system, Banco de Oro Unibank Inc. (BDO) say it fit to consolidate the rest of its resources.

In the second semester last year, BDO consolidated Equitable Savings Bank, BDO Elite Savings Bank, and PCI Capital Corp. with its overall banking and finance operations.

“Cost savings are expected to be realized by consolidation of administrative functions, elimination of redundancies, and unified branding and advertising. The four-way merger will also optimize the capital structure of the group,” BDO said.

BDO president and chief executive officer Nestor V. Tan said that the productivity of the two thrift bank outlets allows BDO to offer a wider array of bank products and services as branches of a universal bank.

Tan added that the four-way merger is in line with the BDO Group’s policy of streamlines operations and rationalization of the Group’s organizational structure.

Meanwhile, Bangko Sentral ng Pilipino (BSP) Governor Amando M. Tetangco Jr. urged banks to continue consolidating as the crisis worsens.

Tetangco said that the monetary authorities, since the 1997 crisis, has set a conducive environment for banks to take advantage of opportunities to consolidate or expand.

The BSP believes that less than 10 domestic commercial and universal banks, aside from the existing foreign banks is sufficient for the country. It likewise prefers that the thrift and rural banking system be reduced each by half of the number.

Regulators believe that the banking sector can take risks as long as they are able to show that they could adequately manage them, given their level of skill and capital.

“The banking industry has ample room for further consolidation and bank mergers as market pressures build up in favor of large, efficient institutions,” the BSP governor added.

The global banking sector is reportedly weighted down by losses and write-downs amounting to $3.6 trillion, according to New Work University economist Nouriel Roubini.

Banks worldwide are already admitting to over $1 trillion in losses and write-downs.

But Roubini claims that $2 trillion has to be written off due to reduced value of financial holdings estimated at $10.84 trillion. US banks and brokers alone is estimated to be bear some $1.1 trillion.