PHL banks to favor digitalization over mergers or acquisitions for expansion

PHILIPPINE BANKS are less likely to explore mergers as they now favor digitalization in their bid to expand their client base, a credit analyst said.

Simon Chen, senior analyst at Moody’s Investors Service, said industry players have been setting sights on investing in digital technology instead of bank acquisitions.

“The current thinking we are seeing now across the banks is that rather than merging with another bank and inherit problems, it might be a lot more cost efficient to rely on digitization to scale up the business and grow a lot faster,” Mr. Chen said in a media briefing held last week in Makati City.

Talks to buy and merge smaller banks have proven to be “tricky” given the laborious task of conducting due diligence and resolving acquisition costs, the credit analyst said, versus the “high aspirations” set by the surviving bank in terms of a broader network.

Like in other countries, Mr. Chen said some consolidation plans have fallen apart due to a number of factors that stand in the way for synergies between lenders, while other deals take several years to carry out.

The Bangko Sentral ng Pilipinas together with state agencies are offering a Consolidation Program for Rural Banks until 2019 as they seek to promote mergers among small lenders. Since 2015, the program targets to fortify the capital and asset base of these small banks via a merger to make them more financially sound.

The regulator has been evaluating proposals from three groups of rural lenders since 2017, but none have come into fruition so far.

Compared to integration strategies, Mr. Chen said a cost-benefit analysis argues for organic growth by mounting bank services onto the digital space.

“More banks are thinking that it might be more cost efficient or more in line with the thinking that to grow forward, it is to rely on digital and to scale up the business rather than to acquire another problematic bank and digest the issues over a longer period of time,” Mr. Chen said.

He added that there is “a lot of room for growth” for digital banking services, especially with the millennial market in the Philippines coupled with far-flung areas which are deemed unreachable via brick-and-mortar branches.

Mr. Chen has said that while near-term gains from using digital channels will be “muted,” the longer-term benefits will eventually pay off for banks.

Central bank officials are encouraging banks to tap digital solutions in order to widen their reach and get more Filipinos to use formal financial platforms. Studies show that gross domestic product could increase by more than 14% if the financial inclusion gap was closed in the Philippines.