Local banks brace for tougher 2015 new law to change banking sector’s playing field

CEBU, Philippines – Next year and beyond will be challenging times for local lenders. The expected entry of foreign banks into the country and their right to full ownership in the local industry concern the local bankers.

President Aquino recently signed a law that would allow 100 percent foreign bank ownership in the Philippine banking sector ahead of the greater economic integration among ASEAN nations next year.

The law also abolishes previous rules that allowed just the fixed 10 percent foreign banks in the country.

The Bangko Sentral ng Pilipinas said allowing full foreign ownership would make local banks more competitive and increase investments in the country.

Cebu Bankers Club president Gino Gonzalez says smaller banks will have to merge with bigger ones for their capital plans. Merging is a way to address the additional capital buffer requirements imposed by the central bank.

Republic Act 10641 (An Act Allowing the Full Entry of Foreign Banks in the Philippines) allows foreign banks to merge with Philippine banks and the entry of qualified lenders.

It also allows overseas lenders to acquire up to 100 percent, up from the previous 60 percent cap, of the voting stock of an existing domestic bank.

Central bank governor Diwa Guinigundo already said before Philippine banks are relatively smaller compared to other ASEAN banks in terms of assets and capital. He though said banks have done expansion efforts to prepare for greater competition.

“The criteria for allowing new entrants in the banking system are done in a multilateral basis,” he told an economic forum in Cebu last October.

‘We have the potential’

Gonzalez, Metro Cebu area head of Philippine National Bank, sees the positive side of the more liberalized banking industry.

He says foreign banks will take advantage of the country’s economic potential spurred by a stable economic growth forecast.

He notes these firms might also consider the fact that some of the richest people in the Philippines are into the bank business such as the Sy family (BDO Unibank), Lucio Tan (PNB), Ayala (BPI) and Gokongwei (Robinsons Bank Corp.).

J.P. Morgan Chase & Co., Standard Chartered Bank, Citigroup Inc., HSBC, Deutsche Bank and Bank of America Corp. are among the foreign lenders that have already operated in the Philippines.

The full entry of foreign bankers are seen to augment the nation’s financial resources and increase its foreign direct investments.

It also gives the Philippines an advantage in the economic integration which seeks to create the ASEAN Banking Integration Framework.

ABIF suggests the uniformity of rules and regulations of ASEAN countries on the banking system so that banks in the region can operate as local banks -- and not as foreign banks.

Strong growth

With the economic cooperation, Gonzalez believes the banking sector can expect a strong growth next year on the back of positive economic conditions amid the shocks from the global economy.

Aside from strong asset growth, the CBC official explains loan and deposit portfolios of banks continue to increase every year.

“While banks are lending out more money, that’s good for the economy,” he says. “The loans include commercial, consumer loans, credit card, personal loans, auto and housing loans.”

The central bank says banks’ assets are mostly in loans and cash.

In addition, he also expresses that while the country’s total economic output slowed down to 5.8 percent for the first nine months, it’s still on the high side of five percent.

He hopes the country's GDP for this year can slightly expand considering the increase in private consumption in the fourth quarter and economic activities.

He notes the slowing exports and global economic conditions have affected the country’s economic performance.

Credit ratings firm Moody’s Investors Service has recently expressed its positive outlook for Philippine banking because of its robust economic growth and low banking sector penetration which can support credit growth.