Merger Mania
While there may be no pressing urge to merge, top-tier banks are still on the prowl By Noel G. Reyes Is another wave of commercial bank mergers in the offing? This is the vexing and tantalizing question uppermost in the minds of bankers and security analysts who follow the industry in the local equities market. The same question popped up two years ago. In January 2004, the president of Banco de Oro Universal Bank (the banking arm of retail tycoon Henry Sy Sr.) and the chairman of the Social Security System (the private-sector pension fund) stunned the local business scene when they disclosed that they had signed a binding agreement whereby Banco de Oro would purchase the 29% equity interest of SSS in Equitable PCI Bank in exchange for P14 billion in cash and a promissory note. The deal’s closing got derailed after some awkward questions were raised by observers—including politicians, pension holders, and the media—regarding the terms of the stock sale. As a direct consequence, the politically mindful SSS board exhibited some last-minute jitters regarding the deal. Two years later, the Banco de Oro-SSS deal on the sale of the latter’s Equitable PCI shares remain tied up in legal proceedings brought up by pensioners.
Despite this legalistic Gordian knot, Banco de Oro’s implacable drive to become one of the top three commercial banks in the land—from its current perch at No. 5—continues to capture the imagination of market analysts and bankers. For the moment unable to consummate its original deal with SSS, Banco de Oro and an affiliate last year turned around and simply purchased (for almost P10 billion) the 23% stake of Equitable PCI Bank’s founding family, the Gos.
With representatives ensconced in the Equitable PCI board, the Sy family then made some overtures to the board regarding a “merger of equals” between the two banks. They have so far been rebuffed, but most observers believe the two banks’ corporate union is inevitable, especially when Banco de Oro starts sweetening its bid.
MERGER SEASON ONCE AGAIN?
But what do the aggressive moves of one go-getting bank have to do with the next wave of industry consolidation in the Philippine banking system? Plenty. The conventional thinking is that any sudden movement in the industry rankings among major banks leads to a scramble for merger-and-acquisition deals among the rest of the peer banks. Parallels may be seen in the first M&A wave that hit Philippine banking shores seven years ago.
Comparisons among M&A waves can be slippery, however, for the simple fact that circumstances over time change and no expert on the subject has truly figured out what sets off these waves. It is for this reason that a minority doubts that a true M&A wave, similar to the one that occurred in 1999–2000, is building up.
“The competition for size was more heated at the time,” notes Francis Varela, president and chief operating officer of AB Capital and Investment Corporation. “Banks were very concerned with maintaining the No. 1 position” (or their position in the pecking order).
This concern with being No. 1, Varela explains, rests on the perception that size is a major competitive factor in the banking industry. During times of uncertainty, such as right after the 1997 Asian financial crisis, depositors and investors took refuge in the larger banks on the philosophy that a large bank would be less likely to sink in turbulent weather than a small one.
A DIFFERENT BALLGAME
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| Banker Francis Varela believes that the next bank mergers will be “on an opportunistic basis: big banks will not go for size for its own sake” |
Whether this quest for size remains as imperative as before for local banks remains to be proven. Some believe that the focus may have shifted elsewhere. “Now, the concern is more on banks’ capital bases being sufficient to satisfy new international accounting standards and banks having solid equity bases for growth,” continues Varela. “The next mergers will be on an opportunistic basis: big banks will not go for size for its own sake.”
Price, for one, would be a major consideration in succeeding bank M&As. The latest deals have been notable for being less rich in valuation, in sharp contrast to the 1999–2000 merger wave when acquiring banks paid as much as three times the book value for their target acquisitions. Prices have gone down substantially since then. In some instances, acquirers have put up bids for less than a target bank’s book value.
Aside from valuations, other factors in the environment have changed. Bids that made sense in the immediate postcrisis setting of 1999 may not be so sensible in a more stable environment.
FLASHBACK: 1999–2000
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| BSP governor Amando Tetangco Jr. reiterates BSP’s readiness to “facilitate the consolidation process through appropriate regulatory incentives” |
A confluence of factors laid the groundwork for the merger wave of 1999–2000, a sweeping industry consolidation that effectively trimmed the number of players in the local banking industry. From 53 commercial banks prior to the merger wave, only 40 remained standing as of end-2005. As expected, the big banks grew bigger as a direct consequence of the industry consolidation. The top-tier banks, those with assets worth more than P100 billion each, now account for 85% of the industry’s P4.14 trillion in total resources, up from a premerger 71% share, even though they number just 15 banks, up from 12 prior to the mergers.
The package of factors that came together to trigger the merger wave seven years ago encompassed buoyant stock prices, an abrupt drop-off in loan volume demand, the steady deterioration in the quality of bank assets, and the resulting slump in bank earnings.
An industry with too many firms, too much capacity, and not too much demand for its goods and services—those are the prime ingredients for industry consolidation. These conditions tend to trigger an M&A wave. The main driving motive for mergers in this situation is to reduce costs, improve efficiency by cutting out the fat in the industry.
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Related: Managing Mergers
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Circular 156: The first BSP policy statement on consolidation, the circular raised the minimum capital requirements for expanded commercial banks to P5.4 billion and that of commercial banks to P2.8 billion. It also raised the minimum capital base of thrift banks headquartered in Metro Manila to P400 million and those outside the metropolis to P64 million. Rural banks were ordered to put up minimum capital ranging from P3.2 million to P32 million, depending on the location. 
