Local banks have edge over foreign – IFC

Philippine banks will still have home-grown advantage over larger foreign lenders in the local market, even as the foreign financial giants have as much as 40 percent foreign control of the entire banking system.

“In the beginning, Filipinos will not go to somebody they don’t know so having the local advantage will be there for some time,” commented International Finance Corp. (IFC) resident representative to Manila, Jesse Ang. IFC is the World Bank’s investment arm.

“But, given time and as people become more familiar (with the foreign banks), they will go where they will get better returns for their deposit products, where they can access the (bigger) loans, etc.,” said Ang.

The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) approved last Thursday the implementing rules and regulations (IRR) of the Republic Act No. 10641 or the law that opened up the banking sector after removing the 10- bank restriction and allowed foreign banks to acquire up to 100 percent of the voting stock of an existing domestic bank.

The central bank said size will not be the be-all in approving who can set up here but that these foreign banks will have to be publicly-listed financial institutions in their own country.

Ang sees mergers and joint ventures shaping the new domestic banking sector to achieve economies of scale. “It depends how open is open. There’s (an allowed) 100 percent investment but the question is who can access the Philippine market? Can a bank in Malaysia without having a Philippine franchise access work here? That means they don’t have to merge here. It’s not clear.”

Despite the BSP’s pronouncements about size and reputable banking institutions, Ang said the relatively small size of Philippine banks will be a key factor in how effective can local banks compete. “You’re allowing size to come in with economies of scale (so) I think our size will be a challenge.”

There will also be rules on the slew of banking products and services that can be offered by the new entrants. “How this will evolve will depend on how much access is allowed and what the Philippine banks and as well as foreign banks will do,” added Ang.

The IFC country head said the prospective for expanding the domestic banking market is huge and this is what will attract the big foreign banks with global or regional networks to establish a branch or a subsidiary in the country.

About 27 million Filipinos of a population of 100 million have bank accounts. “So there’s a lot of potential. But, I think if you want to expand in a major way banks have to find a way to really get to the bottom of the pyramid because if it is just where the top local banks have access, it’s a relatively small market. They need to go get the 73 percent of the market who do not have bank accounts,” said Ang.

“For me it’s not clear yet,” commented Ang. “Right now, the banks are not big enough but the rules need to be set.”

According to the BSP, there are three ways for a foreign bank to enter the local banking market.

The minimum capital requirements applicable to foreign bank branches have been aligned with that of domestic banks of the same category. However, foreign banks entering under new law will have to comply outright with the new capital requirements as well as with the prescribed minimum capital ratios.

With the limits of the old 1994 foreign bank entry law, only 11.8 percent of the current local banking market is controlled by foreign banks. Of the 36 universal and commercial banks in the Philippines, six are branches of foreign banks.

Under the 20-year- old law, foreign banks are allowed entry either through ownership of up to 60 percent of the voting stock of an existing bank or of a new banking subsidiary with full banking authority.