Philippines banking sector opens up to foreign banks since 2014

The Philippines has undertaken a wide range of banking reforms in recent decades, and the efforts have contributed to making the sector sound, stable and resilient. The one lingering issue has been foreign participation. For years the authorities offered only conditional access. In 2014 the doors were finally opened.

A Long History

A number of banks were allowed to fully participate in the market based on their historical presence in the country prior to 1948. These banks were Bank of America, Citibank, Standard Chartered and The Hongkong and Shanghai Banking Corporation.

For almost two decades, the country tinkered with its rules for international participation in the sector so that others could enter the market in a limited way. For the most part, that meant 60% ownership. Some banks could gain 100% ownership, but only for a limited time and by meeting a set of requirements including the one that they float their shares locally. A maximum of 10 banks could gain the permission for 100% ownership.

All that changed in 2014 when the government took the bold step to open the market almost completely. Under Republic Act (RA) 10641, the Monetary Board may now allow for the 100% acquisition of a local bank or the creation of 100% foreign-owned local subsidiaries. Branches of foreign institutions may have full banking authority. The act has a few stipulations, but they are minimal. Overall, 60% of the Philippine banking sector must be locally controlled. The acquiring institutions must also be either listed in their home country or owned by the government. Under the act, foreign banks get something that approximates national treatment: they can freely open branches and now have the same capital requirements as domestic banks.

New Entrants

The new law has resulted in a flood of foreign banks into the market. Through the middle of 2016 a total of nine international institutions had received permission to operate under RA 10641. Foreign banks are also participating in other ways. In January 2016 Mitsui Sumitomo bought a 20% stake in Security Bank. The transaction makes the Japanese bank the second-largest shareholder in the local institution. Meanwhile, in May 2016 BDO Unibank entered into a business partnership with Japan’s Aozora bank. The collaboration will cover merger and acquisition advisory, investment banking and other activities.

The open attitude dovetails with regionalisation efforts. In early 2016 the central banks of the Philippines and Malaysia, Bangko Sentral ng Pilipinas (BSP) and Bank Negara Malaysia, signed an agreement to allowing three qualified ASEAN banks (QABs) from each country to gain entry to the market of the other. Under the ASEAN Banking Integration Framework, QABs have to be strong, well managed and controlled by majority-ASEAN shareholders.

Foreign Banks Exit

But just as the market has been opened, some players are leaving. In May 2016 Standard Chartered said that it was exiting the retail business in the Philippines. The bank, which has been in the country since 1872, sold its retail business to East West Bank as a part of a global refocusing of strategy to remain only in the cities in which it has significant scale. Earlier, in 2012 five international banks, namely American Express Bank, Société Générale, Union Bank of California, First International Bank and Fortis Bank, left the Philippines. Despite being profitable in the country, they left due to global efforts to raise capital and lower leverage following the global financial crisis.

Questions have been raised about the opening of the market to foreign participation. While a good number of banks have entered the sector, it is not clear what role they will play. The large local banks are entrenched in terms of relationships and branch networks. While some foreign banks may have the technology and skills, it will be difficult for them to make much of a dent in the Philippine market. “We have created a legal framework for the foreign banks to come in, but our local banks are such that it will not be easy for them,” Nestor Espenilla, deputy governor of the BSP, told OBG.