Selective openness: The local market is beginning to look friendlier for foreign financial institutions

While the Philippine banking sector has been fast liberalising, its openness to foreign investment has been inconsistent. Brief periods of reform have been followed by stretches of policy stagnation in terms of market access for global institutions. Though there is no overarching strategy in this regard, a number of laws and regulations have worked together to make the market effectively closed to new entrants and highly restricted to those already in.

In that way, it is similar to other South-east Asian markets outside of Singapore and Indonesia. A clutch of foreign banks have entered the market and a few more are looking for ways in, but no rush is expected or possible given the current state of affairs.

With the exception of four institutions in the country prior to 1948 – Bank of America, Citibank, Standard Chartered Bank and HSBC – the Philippine market was closed to foreign banks until 1994. That year, Republic Act 7721 allowed for 10 foreign institutions to set up in the country as branches or as subsidiaries with majority control. In 2000 the General Banking Law said banks could take their ownership up to 100% within a seven-year period of the law’s enactment. The idea was to boost competition, but the law placed certain limits on how far the banks could go and served to limit how much the institutions could actually do.

LIMITATIONS: The banks that received permission for total foreign ownership had to be a top-150 bank globally or one of the top five in their respective countries. They have further been limited to six branches (with the exception of the original four banks) and have had to put up major capital if they want to expand – P210m ($5.06m) for each of the first three branches opened and P35m ($843,500) for each of the next three. Banks not in the top 150 globally or top five in their home markets and non-bank investors have been limited to 40% equity in local banks.

More broadly, the law requires that at all times 70% of the country’s banking assets be controlled by local banks that themselves are majority Filipino-controlled. Despite the cap, the share of foreign bank branches and subsidiaries to the total assets of the banking system remained less than half of the statutory limit of 30% at the end of June 2013.

The banks allowed in as subsidiaries were also required to float at least 10% of their local stock in the public markets, though no deadline was indicated in the 1994 law. That was subsequently clarified by the Bangko Sentral ng Pilipinas in late 2012, when foreign banks were given three years to comply in the Circular No. 775 released on November 28, 2012.

Not including thrift banks, the country has 16 foreign banks (six universal and 10 commercial), but only two of these operate as subsidiaries. Malaysia’s Maybank owns 99.96% of Maybank Philippines, and Chinatrust Commercial Bank of Taiwan owns 99.41% of Chinatrust Philippines Commercial Bank. Chinatrust was delisted from the Philippine Stock Exchange in late 2012 because its public float was less than 10%.

One new bank had been in the process of entering the country. In May 2012 Malaysia’s CIMB agreed to buy 60% of Bank of Commerce from shareholders including San Miguel. Bank of Commerce is now the 16th-largest bank in the Philippines, with 122 branches and 300 ATMs. But the deal was held up through mid-2013 due to IT integration and property ownership issues – foreigners are constitutionally prohibited from owning real estate in the country. Finally, in June 2013 CIMB pulled out of the transaction.

RURAL BANKS: At present, more liberalisation does not seem to be in the offing as cap on number of 100% non-resident owned foreign bank branches has already been reached. Because of the resistance to the further opening of banking sectors in most other ASEAN countries, the ASEAN Economic Community is likely to have little impact on the business regionally in the near term. Some activity is possible in terms of smaller banks. Under Republic Act 10574, signed on May 24, 2013, foreign investors (not just banks) will be able to take up to 60% of the equity of rural banks (see analysis).