In November 2014, the BSP approved Republic Act 10641, which eases regulations and allows for the further entry of Foreign Banks into the country. In addition to removing a cap on the number of banks, the new law also allows Foreign Banks to acquire up to 100 percent of the voting stock of an existing domestic bank and allows Foreign Banks to control up to a combined 40 percent of the total assets of the banking system.

 

In the last few months, many Foreign Banks have expressed interest and applied for branch or subsidiaries. Three have been approved already: Cathay United Bank- Taiwan, Sumitomo Mitsui Banking Corp- Japan, and Shinhan Bank- Korea. According to the Central Bank Deputy Governor, there are also two applications under evaluation and four more banks have expressed interest. The interest seems to stem mostly from Asian Banks possibly given the ASEAN integration and the fact that many of the European and North American banks are busy addressing their own challenges and issues. Many Foreign Banks (13) are already in the Philippines and have a “non banking” presence in the form of representative offices. Singapore Banks dominates the ASEAN banking scene and have a modest presence in the form of rep offices (DBS and OCBC/ Bank of Singapore), worth noting is that United Overseas Bank had a presence but in 2006 it converted to thrift bank and sold its 66 branches to local player BDO. In addition to opening branches or subsidiaries, banks could also acquire or partner with local banks but so far we have not seen any major news on this tactic beside some minority equity sale activity on RCBC (Cathay and IFC) and the rumored sale of some of UCBP shares. Many of the larger banks are part of the wealthy family groups and conglomerates and would not be open to M&A activity. Some of the smaller and mid tier city bank could be candidates.

• Cross border lending and investments. Many officials are hoping the new entrants will spur increased lending and foreign investment particularly in PPP (Public Private Partnerships) and infrastructure projects which continue to be a cited a weakness in Philippines’ growth strategy and outlook. Many regional banks have private or high net worth clients and institutional services so there are also prospects that there can be more established channels and sources of investments.
• Possibly increased overall domestic credit/lending. The Philippines has a low Domestic Credit to GDP ratio (29.1%) compared to ASEAN neighbours (see chart). Domestic debt is in the bottom of the pack as well at around 35%. Higher credit and lending helps spur growth driving consumption and investment and possible there would be a modest push to increase credit. Keep in mind that too aggressive lending could also lead to distressed assets, so the Central Bankers and Banking Managers need to find the appropriate lending level to support growth without overleveraging the economy.
• OFW remittance costs. The Philippines is number 3 in terms of global remittances after India and China. The entry of some regional bank players might help reduce the cost and burden for the many OFW’s who use these services.
• Product offerings. Foreign Banks should be able to offer products for underserviced sectors which include the expats or small and medium enterprises (SMEs). For example, it is challenging for foreigners to obtain mortgage loans as many local banks say they will offer loans but with all of the administrative rules and cumbersome requirements most banks practically don’t lend. Offering easier mortgages to cross border expat clients or foreign individual investors could increase condo sales and other investments. Many SMEs face lending rates north of 15% (APR) because of smaller balances sheets or more modest financial statements. Again, this is an opportunity for bank to pick up net interest margin. Many residents of Philippines will also look forward to new banking options and overseas services and global products. New products could offer some increased options and hopefully increase competition and lower prices for consumers on some banking products.

• ROPA (Real and Other Properties Acquired). Foreign Banks will face a challenge given limits on foreign ownership of land. They won’t be able to hold ROPA and so will need to create structures and exit strategies to work around this issue or limit lending to just condominium units.
• Branch Networks. Foreign Banks face the strong infrastructure of the local players with an existing network of over 6,000 branches for Universal and Commercial banks. It is costly and requires a lot of manpower to expand locally so many banks might just opt for a NCR location and compete on international business versus going after any domestic business.

The Philippine Banking sector continues to be stable and has positive fundamentals. The Commercial and Universal bank NPL key indicator ratios continue to remain low with a 4.1% Distressed Asset ratio and a 1.96% Gross Non-performing loan ratio as of February.

There should be “No worries” about the Foreign Bankers at the gate and these “barbarians” can be welcomed with open arms and bring benefits to the Philippines’ economy. With their current 9.9% asset share of the banking system, the Foreign Banks have some way to go to hit the regulatory ceiling of 40%.

There is plenty of pie and it’s getting bigger so this could be a great benefit not only for the new foreign entrants and consumers in the Philippines but for the ASEAN community as a whole.

 

Summary statics and list of Foreign Banks in the Philippines as of December 31, 2014

There are 13 Foreign Banks with Representative Offices in the country, as of April 2015

Bank of Singapore Limited Representative Office

Barclays Bank PL Representative Office

Cathay United Bank Representative Office

DBS Bank, Ltd. Representative Office

Japan Bank For International Cooperation Representative Office

Rothschild (Singapore) Limited Representative Office

State Bank of India Representative Office

Sumitomo Mitsui Banking Corporation Representative Office

The Bank of New York Mellon Representative Office

The Export-Import Bank of Korea (Korea Eximbank)

UBS AG Representative Office

Wells Fargo Bank, National Association Representative Office

Korea Development Bank Representative Office

 

3 Foreign Banks have offshore banking units: Taiwan Cooperative Bank, BNP Paribas, JP Morgan

There are also several Foreign “Investment” Banks and reputable Broker/dealers operating in the Philippines not touched upon in this report.