The Philippines loosens foreign investment rules

In a move to open its banking sector to foreign investment in 2014, the Philippines eased or lifted key restrictions that had kept foreign participation at a stunted level, with gradual investments from foreign players expected over the course of 2015 and 2016.

STEP BY STEP: A law adopted in July 2014 and implemented in December 2014 reduces or removes most of the prior restrictions on foreign investment. Foreign-owned banks can now control 40% of total bank assets, up from 30% – an ambitious signal, as they controlled 10.4% as of September 2014. Since 2008 virtually the only way foreign banks could enter the market was by acquiring an existing bank. The number of chartered branches of foreign banks was also capped, at 14. While the creation of new banks is still suspended, the cap on foreign banks branches has been eliminated. However, the cap on the number of sub-branches of foreign banks branches remains in place, at 6.

Under previous regulations, most foreign firms and individuals were allowed to own no more than 40% of a Philippine bank, with qualified foreign banks able to buy up to 60% since 2007. To qualify, the foreign bank had to be among the five largest in its country or 150 largest in the world, and be government owned or publicly listed and widely owned. Now, thanks to Republic Act No. 10641, qualified foreign banks can buy up to 100% of a Philippine bank, with three modes of entry now open, and they do not need to meet any of the ranking criteria. Other foreign investors can buy up to 60% of rural banks, and multiple non-qualified foreign investors can now buy up to a combined 60% of thrift banks. Lastly, the constitution forbids more than 40% foreign ownership of any land-owning company. The 2014 reform addresses this by permitting foreign banks to control land for up to five years after a foreclosure.

Amando M Tetangco Jr, governor of the central bank, told local press in November 2014 that several foreign banks from Asia, the Middle East and Europe had already expressed interest in applying for licences. In February 2015 the BSP approved the application of Sumitomo Mitsui Banking Corp. to open full banking operations – making it the first foreign entity to gain entry since the new law was passed. The BSP approved a second application in March 2015, for Shinhan Bank.

ASEAN INTEGRATION: The move is a response to an ambitious plan to integrate the ASEAN banking sector by 2020. Although the bloc moves gradually, the government wants to ensure that the Philippines’ banks are prepared for international competition. Bank executives and other observers told OBG the liberalisation was expected to attract foreign banks that had previously been prevented from operating – especially large banks from countries with substantial foreign investment in the country, most of which would be interested in niche corporate banking and trade finance.

“Given that the Philippines does not have a comprehensive credit bureau operating efficiently for most middle market accounts or the retail segment, international banks would probably prefer not to deal in this space given the lack of credible and reliable financial statements. As a result, international banks would most likely participate in the corporate segment, which is the most competitive market, and potentially also taken on the credit card proposition,” Justo A Ortiz, chairman and CEO of Union Bank, told OBG.

Whether the reform will succeed in spurring foreign acquisitions of existing banks is harder to predict. The ban on foreign land ownership remains an obstacle, as any foreign bank buying over 40% of a Philippine bank must negotiate how to dispose of land it owns. An agreement by Malaysia’s CIMB Bank to buy 60% of Bank of Commerce fell apart in 2013 over land issues.

Some foreign banks have been gradually withdrawing or reducing their presence, while others like Malaysia’s Maybank and Taiwan’s CTBC Bank have been expanding their networks, which as of January 2015 totalled 79 and 24 branches, respectively. Continued foreign interest was further confirmed by the $400m sale in late 2014 of a 20% stake in Rizal Commercial Banking Corporation to Taiwan’s Cathay Financial Group.