Aplanned law allowing foreign firms to take full control of Philippine lenders is drawing eager suitors to the sector, including Japan's Mitsubishi and Malaysia's CIMB, bankers familiar with the matter say.
The Philippines' is one of Southeast Asia's fastest-growing economies, with sharply boosted personal incomes and demand for loans, while the banking sector is highly fragmented, underdeveloped and ripe for consolidation.
Others looking at acquisition opportunities are private equity firms such as TPG and Taiwanese banks, say the bankers, who declined to be identified as negotiations are confidential.
"The Philippines' banking sector is an attractive market for foreign banks and PE funds because it offers the perfect mix of fast growth in individual wealth and investability," says Keith Pogson, Asia financial services leader at accounting and consultancy firm EY.
While China, Indonesia and Malaysia limit foreign investment in banks, the Philippine law will replace a cap of 60 per cent on foreign ownership and abolish previous rules that allow just 10 foreign banks in the country. Already passed by congress, the law awaits the approval of President Benigno Aquino, who indicated it is likely to come soon.
It is one of a slew of economic reforms following the Philippines long-sought-for investment-grade credit rating last year, and brings it in line with countries such as Australia and Japan, which allow banks to be wholly owned by foreign firms.
Gaining full control of a local bank will make it easier for foreign banks to capitalise on regional trade flows and serve companies in their home countries that want to invest in the Philippines. The latter motivation is particularly true of Japanese banks like Mitsubishi, banking sources says.
"All the heavy industries and construction companies from Japan see a huge amount of infrastructure spending in the Philippines," says an M&A banker at a European bank. "The Japanese banks want to be there ... so they can fund these companies. There is also a strong political desire on the part of the Japanese leadership to have strong ties with Asean."
A Japanese bank executive says his company was looking to acquire a Philippine lender, but added it had yet to narrow down any targets. The planned law was also discussed by Aquino and Japan Prime Minister Shinzo Abe on Aquino's trip to Japan last month, with Abe expressing approval.
The potential for growth in retail banking may appeal to foreign banks. Over the past 10 years, the growth rate for individual wealth has averaged 12 per cent - Asia's highest, according to EY and Credit Suisse data, yet 80 per cent of Filipino households still do not have a bank account.
Malaysia's CIMB said in May it was looking at mid-tier banks after efforts to buy 60 per cent of San Miguel's unlisted banking unit fell through. Singapore's DBS is also considering opportunities in the Philippines. Last year, it walked away from Indonesia's PT Bank Danamon after changes in ownership limits prevented it taking majority control.
TPG and CVC Capital Partners are among buyout firms looking at potential acquisitions, bankers say.
The outlook for loan demand in the Philippines is robust, accounting for the industry's forward 12-month price-to-earnings ratio of 14, the highest among banks in Asia-Pacific. Aggregate bank loans are expected to climb by 10 to 15 per cent this year. Central bank data shows loans for producing goods and project financing were up 19 per cent in May from a year earlier. Consumer loans were up 11 per cent.
But the industry in its entirety is small. Singapore's DBS has nearly 1.5 times more assets than the combined assets held by the Philippine banking sector. It is also overcrowded with 700 banks. Indonesia, with more than twice the population, has 120. And many lenders are truly minnows, with the top seven of 36 commercial banks controlling two-thirds of the industry's assets.
That has made a compelling case for consolidation, which has the backing of the central bank. "We've been sending the signal that if you are below a certain scale, sub-scale or your operations are not economical and competitive … either you level up or you combine or you sell out," says central bank deputy governor Nestor Espenilla.
The government is selling United Coconut Planters Bank, attracting interest from Philippine National Bank and may attract foreign bidders. Ranked 12th in the Philippines, it has assets of about 265 billion pesos (US$6 billion). But bankers note that the most appealing targets are less likely to accept a full takeover, although they may be open to selling a stake.
Two of the most attractive targets for foreign suitors may be Philippine National Bank, the country's fifth largest lender, and Rizal Commercial Banking (RCBC), ranked eighth, says Unicapital Securities equity research head Lexter Azurin. The two Philippine banks trade at price-to-book ratios of 1.4 and 1.1 respectively, cheaper than the industry average of 1.7.