Philippine rural banks decline in number

As the country’s largest banks expand into ever more remote areas, hundreds of small banks are wondering if they have a future. Most of these small banks spread across the country are tiny and operate in rural areas – mainly the product of a 1950s drive to bring basic banking services to the countryside, by encouraging the establishment of rural banks with low capital requirements and limited bank charters. These so-called rural banks are a precursor to microfinance, similarly targeting farmers, fishers and merchants with small and relatively high-interest loans, albeit through the formal institution of a traditional deposit-taking bank. According to the Philippine central bank, Bangko Sentral ng Pilipinas (BSP), there were 514 rural banks as of January 2015, along with 30 similarly small cooperative banks and 69 savings banks, which are larger on average but include many small banks serving remote areas.

CONSOLIDATION: This is down from 778 rural banks, 51 cooperatives and 117 savings banks in March 1999. Their numbers are shrinking, as small banks face increasing competition from bigger players on the one hand, and from non-bank microfinance and non-profit lenders on the other. This is largely due to consolidation, a trend that has been accelerating of late as the BSP has reacted to numerous small bank failures by tightening capital requirements and essentially arranging mergers among small banks that cannot clear the new hurdle.

“Consistent economic growth and liquidity allows breathing room for domestic mid-sized banks, however, whenever growth slows down, the stricter regulations will weigh in more heavily and competition will intensify, leading to consolidation,” Roberto F de Ocampo, chairman of Veterans Bank, told OBG.

In October 2014 the BSP announced large, across-the-board increases in minimum capital requirements for small banks. For rural and cooperative banks, minimum capital was raised from P5m-100m ($112, 500-2.3m) to P20m-200m ($450,000-4.5m), depending on location and branch numbers. Minimum capital was also increased for most savings banks, formally called thrift banks, from P250m-1bn ($5.6m-22.5m) to P200m-2bn ($4.5m-45m), compared to average assets of P381m ($8.6m) for rural banks, P455m ($10.2m) for cooperative banks and P12.4bn ($279m) for savings banks as of September 2014, according to BSP data.

To meet the new requirements, First Macro Bank (FMB), a small neighbourhood bank in Manila, was planning to merge with another small bank. Both were founded as rural banks, having transformed into city neighbourhood banks as Manila expanded. Pateros district, where it is headquartered, is a bustling low-income neighbourhood, where people looking for work in Manila are likely to find accommodation they can afford. Most of FMB’s loans go to small merchants and area homeowners who are building ad-hoc extensions to their houses and renting out rooms to day labourers. Consolidation also fosters much-needed economies of scale for resource-intensive operations. “Brick and mortar is relevant in the Philippines to reach both individuals and smaller firms. However, physical branches are also very expensive given the low interest rate environment. Because of this, the break-even deposit level per branch has tripled, to as much as P150m ($3.38m),” Abraham T Co, president of Asia United Bank, told OBG.

DECLINING NUMBERS: Beyond consolidation, rural and cooperative banks appear to be receding. BSP data show that rural bank locations, which peaked at 2619 in 2010, were down to 2441 by September 2014. Cooperative banks peaked at 167 in 2012 before falling to 159. The competition is driving some small banks out of business, while giving others the opportunity to sell at attractive prices. In late 2014 the Philippines’ largest bank, BDO Unibank, announced it was buying the biggest rural bank, One Network Bank. Many other large and mid-sized banks have also bought rural banks, and private equity investors have been eyeing segment opportunities. Reggie L Ocampo, president of FMB, warned that this trend will not last forever. “I think there is maybe a 10-year window for rural banks. After that, what they have to offer to commercial banks will be gone.”