Outline



The New Landscape of the Philippine Banking Industry

Outline

I. Introduction

II. Rationale of Liberalization

a. Liberalization and Increased Competition

b. Liberalization and Foreign Direct Investments

c. Liberalization and the ASEAN Integration

III. Mergers and acquisition in recent decade

a. Consolidation and the ASEAN Integration

b. Foreign banks access to mergers and acquisitions

c. The Human Dimension of Mergers

d. Protecting Workers’ and client’ interest

IV. Entry of foreign banks

a. The General Case

b. Immediate Effects of Foreign Bank on the Domestic Economy in 1994

c. Current Foreign Banks Operating in the Philippines: Impact on Stakeholders

V. Conclusion

I. Introduction

With barely two years left in his term, President Benigno S. C. Aquino III signed a law on lifting barriers to entry of foreign banks into the Philippines. The move was congruent with making the banking sector more competitive by attracting higher foreign investments ahead of the Association of Southeast Asian Nations (ASEAN) regional integration by 2015.

The legislation, which allowed foreign banks to own up to 100% of Philippine banks from 60%, swiftly passed the legislative process. House Bill 3984 was approved by the House of Representatives in May. A counterpart bill in the Senate – Senate Bill 2159 – was approved on third and final reading on June 9. The two bills were approved and reconciled two days after and reached Malacañang on June 26.[1]

Republic Act (RA) 10641 amends some provisions of RA 7721 or “An Act Liberalizing the Entry of Foreign Banks in the Philippines,” which was enacted in 1994. RA 10641 permits the full entry of “established, reputable and financially sound foreign banks” and removes the previous cap of only 10 overseas lenders allowed to operate in the country.

Communications Secretary Herminio Coloma was quoted as saying that leaders in the government and in the financial sector “have seen the wisdom of allowing this arrangement in order to fast-track economic activity, where banks have a key role.”[2] He claimed that the process taken to enact the law was a product of careful deliberation.[3] However, other stakeholders who are outside the government and the financial sector have argued that the actions taken on the passage of the law too sudden, leaving them with no room to participate in the discussion.

Hence, this paper attempts to revive the discussion on the potential impact of RA 10641 on various stakeholders. The paper works on the following premises:

1. The entry of foreign banks will lead to tighter competition in the domestic market. Merger and consolidation to build greater scale to survive the competition may be necessary.

2. Merger and consolidation may lead to redundancy or retrenchment of business operations.

3. Acquired domestic banks, especially countryside banks, by giant commercial banks (either foreign or local) may affect the access to credit of small clients.

This research also seeks to present how experiences in the past reveal that the transition during and after a merger or consolidation usually is a rough ride for employees; to highlight the various factors that contribute to smooth mergers; and to present the impact of foreign bank entry as seen in the past.

Supporting these goals, the paper will present the rationale behind banking liberalization and the history of banking liberalization in the Philippines. Mergers, acquisitions and consolidations that took place in the country will also be shown. Since the full liberalization of the banking industry may lead to tougher competition and may encourage more banks to consolidate, there will be detailed discussion of these issues in the paper. All these will be set to serve as a backdrop on the study’s objective of presenting the possible impacts of RA 10641 on different stakeholders and why there is a need for policymakers to revisit the law.

II. Rationale of Liberalization

Liberalization and Increased Competition

In 1994, the Philippines passed legislation of Republic Act (RA) No. 7721, the law liberalizing the entry and scope of operations of foreign banks. Since the 1948 General Banking Act, no foreign bank had been allowed entry except for the four already operating that time.

RA 7721 allowed the entry of foreign banks through any of the three modes: ownership of up to 60% of the voting stock of an existing domestic bank, thru a newly incorporated banking subsidiary, and establishment of branches with full banking authority.

Only 10 banks fully owned by foreigners were granted to operate in the country within the five years from effectivity of this Act. That time, the Philippine banking system was liberalized to foster greater competition through greater market participation.

It was envisioned that the entry of these foreign banks will create “dynamic banking and financial system that will stimulate economic growth, attract foreign investments, provide wider variety of financial services to Philippine enterprises, households and individuals, strengthen linkages with global financial centers, enhance the country’s competitiveness in the international market and serve as a channel for the flow of funds and investments into the economy to promote industrialization.”[4]

Within five years after the liberalization, seventeen foreign banks had operated in the country, including four that were granted licenses more than 50 years before. Those banks were Bank of America N.A., Citibank N.A., Hongkong and Shanghai Banking Corp. and Standard Chartered Bank.

The first 10 slots were filled by: Australia-New Zealand Bank, Bangkok Bank, Bank of Tokyo, Chase Manhattan Bank, Development Bank of Singapore[5], Deutsche Bank, Fuji Bank[6], International Commercial Bank of China, Korea Exchange Bank and ING Bank.

Three other foreign banks followed by setting up their subsidiaries during the early 1996: Chinatrust Commercial Bank, Banco Santander SA, and Dao Heng Bank Ltd.

Though the move of the government received some reactions from protectionist and inward-looking sectors of the society, the foreign banks, in fact, recorded contributions to the economy in the next immediate years.

According to Santos José O. Dacanay III of the University of the Philippines-Baguio (UPB), foreign banks’ share of the total assets of the commercial banking sector was at 8.6% in 1994. Ten years after financial liberalization, foreign banks nearly doubled its share of the total assets of the sector to 17.05%.[7]

Despite the increase of banking market players in 1996, the distribution of banks remained largely concentrated in Metro Manila, Southern Tagalog Region and Central Luzon. These were where industrial centers and more developed infrastructure facilities were located. [8]

The bank density ratio--measures the proportion of bank branches to the number of people in the population--in the country remains at a low 11,442 people per bank as of end-1996. This, however, was an improvement from the 16,900 people per bank in 1991. The number of bank branches in the country totaled 6,330 units from the 5,569 units in 1995.

During 1996, there were more than 50 commercial banks and more than 100 thrift banks, private development banks and rural banks in the Philippines.

Furthermore, foreign banks continued to increase their participation through mergers and acquisition, as well as setting their own subsidiaries in the Philippine market.

Liberalization and Foreign Direct Investments (FDI)

Recently, the government has sought to increase the number of foreign banks in the country. President Benigno S. C. Aquino III signed RA 10641 on July 15, 2014 which has taken the liberalization of the banking industry in the Philippines a step further by amending RA 7721.

Currently, there are 16 foreign banks operating in the Philippines. Fourteen function as branches while the other two as subsidiaries. With RA 10641, this number is expected to increase as foreign banks may now own up to 100% of an existing bank’s voting stock.[9]

Foreign banks are now given equal treatment as domestic banks, under the new law, as they “shall perform the same functions, enjoy the same privileges, and be subject to the same limitations imposed upon a Philippine bank of the same category.” Similarly, domestic banks under the new law will also enjoy “any right, privilege or incentive granted to foreign banks or their subsidiaries or affiliates.”[10]

The BSP said that the fundamental intent behind RA 10641 is to attract FDIs. Through the foreign banks, FDIs can be easily channeled into the country, especially in investment initiatives to increase productive capacity such as manufacturing. This coincides with the fact that the Philippines has attained investment-grade rating among international credit rating agencies.[11]

Historical data from United Nations Conference on Trade and Development (UNCTAD) show that the Philippines has progressed slowly in investment promotion. Tables 1-A and 1-B show the net FDI inflows in South East Asian countries. Notice that from 1993 to 2013, investment flows to the Philippines have been lower compared to that of Indonesia and Malaysia. Foreign inflows in the Philippines only started to breach the three-billion mark in 2012. With the county lagging behind its ASEAN counterparts, the full liberalization of the banking industry is expected to give a boost to FDIs.

Liberalization and the ASEAN Integration

Aside from strengthening and increased competition in the banking system, the full liberalization of foreign bank entry makes existing banks in the country better-positioned ahead of the implementation of the ASEAN Banking Integration Framework.

With RA 10641, foreign banks are provided viable avenues for entry. Under the old law (RA 7721), two of the three modes of entry of foreign banks into the country were not allowed. Thus, it was amended that foreign banks that are already authorized to operate in the country may now change their mode of entry. A foreign bank that currently operates as a branch of its parent may opt to convert to a wholly owned subsidiary and vice versa, the BSP explained.[12]

Table 1-A: Inward Foreign Direct Investment Flows, Annual, 1993-2011

In million USD

|Year |1993 |

|2004 |Consolidation of Mindanao-based Network Rural Bank, Inc., Rural Bank of Panabo, Inc. and Provident Rural Bank of Cotabato into|

| |One Network Rural Bank, Inc. |

|2005 |Citibank NA acquired Insular Savings Bank for roughly P1 billion |

|2005 |Banco de Oro Universal Bank acquired 66 of the 67 Philippine branches of Singapore's United Overseas Bank for P600 million |

|2005 |Bank of the Philippine Islands acquired a controlling stake in Prudential Bank |

|2005 |Banco de Oro Universal Bank purchased the Go family's 24.76% stake in Equitable PCI Bank for P10.2 billion |

|2006 |UCPB Savings Bank absorbed UCPB Rural Bank, raising the former's capital to P800 million from P400 million |

|2006 |UnionBank of the Philippines purchased 98.84% of The International Exchange Bank shares |

|2007 |Banco de Oro Universal Bank merged with Equitable PCI Bank, resulting in combined assets of P613 billion and combined deposits|

| |of P435 billion |

|2007 |Rizal Commercial Banking Corp. acquired 30-year old thrift bank Merchants Savings and Loan Association for P520 million |

|2009 |Rizal Commercial Banking Corp. acquired JP Laurel Rural Bank in Batangas for P375 million, paving the way for the former's |

| |entry into the microfinance business |

|2009 |East West Banking Corp. absorbed AIG Philam Savings Bank and its two subsidiaries, PhilAm Auto Finance and Leasing, Inc. and |

| |PFL Holdings, Inc. |

|2009 |Banco de Oro Unibank. Inc. acquired GE Money Bank worth P1.3 billion |

|2011 |East West Banking Corp. acquired Butuan City-based Green Bank, Inc. which added nearly P3 billion to the former's consolidated|

| |assets |

|2011 |Asia United Bank Corp. acquired Cooperative Bank of Cavite, which was renamed Cavite United Rural Bank, for P400 million |

|2012 |Asia United Bank Corp. acquired the banking business of Asiatrust Development Bank, Inc., giving the former additional 28 |

| |branches |

|2012 |BDO Unibank, Inc. acquired Rural Bank of San Juan, Inc., adding 30 branches to the former |

|2012 |East West Banking Corp. purchased Pasig City-based FinMan Rural Bank, Inc. for P42 million. |

|2013 |Philippine National Bank merged with Allied Banking Corp., creating the Philippines' fifth largest lender |

|2013 |BDO Unibank, Inc. signed an agreement to acquire 99.99% of Citibank Savings, Inc., Citi's thrift banking arm in the |

| |Philippines |

|2014 |China Banking Corp. paid P1.579 billion for the 84.77% of Planters Development Bank's capital stock |

|2014 |BDO Unibank, Inc. signed a deal to acquire the thrust business of Deutsche Bank AG, Manila Branch, which adds P70 billion to |

| |BDO's P770 billion assets under management |

|2014 |Philippine Bank of Communications bought Laguna-based Rural Bank of Nagcarlan, Inc., adding six branches to the former's 64 |

|2014 |Philippine Bank of Communications acquired a majority stake in Mindanao-based Banco Dipolog, Inc. |

Compiled by Octaviano, T.P. for BusinessWorld First Quarter Banking Report, May 29, 2014

The BSP has long encouraged banks to merge or consolidate. This could be traced back from 1998 following the Asian financial crisis. The encouragement of mergers and consolidation among banks served as the regulatory body’s post-crisis response. [14] Thus, a surge of such restructuring activities was seen from 1998 to 2004. Santos José O. Dacanay III of UPB wrote in 2007: “Banks merged as they tried to reap economies of scale advantages and positioned themselves against a more intense threat of domestic competition and across borders.”[15]

Table 3: Mergers and acquisitions in the commercial banking sector, 1998-2003

|Acquired on: |Acquiring bank |Acquired Bank | Surviving Bank |

|September 1998 |Dev’t Bank of Singapore a (50) |Bank of Southeast Asia (36) | DBS Bank (Philippines) b (35) |

|September 1999 |Equitable Banking Corp (11) | Philippine Comm’l Int’l Bank(5) | Equitable PCI Bank (2) |

|November 1999 |United Overseas Bank Phil. b |Westmont Bank (25) |United Overseas Bank Phil b (26) |

|February 2000 |Prudential Bank (21) |Pilipinas Bank (32) |Prudential Bank (17) |

|May 2000 |Global Bank (40) |Philippine Banking Corp. (29) |Global Bank |

|October 2000 |Global Bank |AsianBank Corp. (20) | Global Bank (15) |

|April 2000 |Bank of the Philippine Islands (5) |Far East Bank & Trust Co. (7) | Bank of the Philippine Islands(2) |

|October 2000 |Metropolitan Bank & Trust Co. (1) |Solidbank Corp. (15) |Metropolitan Bank & Trust Co. (1) |

|September 2000 |Bank of Commerce (28) |Panasia Banking Corp. (50) |Bank of Commerce (23) |

|July 2001 |Banco de Oro (13) |Dao Heng Bank b (41) |Banco de Oro (13) |

|August 2001 |BPI Family Bank (thrift bank) |DBS Bank Philippines b (28) |BPI Family Bank |

|December 2001 |Bank of Commerce (23) |Traders Royal Bank (35) |Bank of Commerce (23) |

|1st qtr 2002 |ABN AMRO Bank, Inc. b |TA Bank of the Phils., Inc. (42) | ABN AMRO Bank, Inc. b (35) |

|September 2002 |Metropolitan Bank & Trust Co. (1) |Global Bank (15) |Metropolitan Bank & Trust Co. (1) |

|September 2002 |Banco de Oro (13) |First e-Bank (thrift bank) |Banco de Oro (9) |

|July 2003 |Banco de Oro (9) |Banco Santander b (39) |Banco de Oro (9) |

Sources: BusinessWorld Fourth Quarter Banking Report 2003, February 10, 2004; Pasadillo, G. and M. Milo (2005)

Notes: a Branch of a foreign bank; b Foreign bank subsidiary. Numbers in parenthesis are the banks' ranks in terms of assets prior to the merger/acquisition

Consolidation and the ASEAN Integration

Consequent to the approaching ASEAN 2015 integration and higher capital requirements under Basel 3, local banks have been keen to find means of survival and growth to secure their market share.

Philippine banks should brace for tougher competition as giant foreign rivals will soon penetrate the domestic market given that the banking industry has been further liberalized. Full liberalization is seen to trigger more mergers and consolidations as banks need to build greater scale to survive.

From a regional perspective, local banks are definitely small. In the Banker Top 1000 World Banks July 2013 edition, the Philippines’ largest bank in the country in terms of resources – BDO Unibank, Inc. – only ranked 21st among ASEAN banks as of end-2012. The combined assets of the country’s top three banks – BDO, Metropolitan Bank & Trust Co. (Metrobank) and Bank of the Philippine Islands (BPI) – were equivalent to that of the Bangkok Bank, which was seventh largest regional bank in Southeast Asia.

With Philippine banks having smaller business scale versus their regional peers, Standard & Poor’s (S&P) believed that it would be difficult for the country to defend their market share against potential foreign entrants while pursuing growth.

“We believe banks will have to walk a thin line to preserve market share while pursuing profitable expansion as ASEAN 15 draws closer,”[16] S&P said in its report entitled “Philippines’ Banking System: The Good, The Bad, And The Ambivalent.”

S&P said that consolidation, which had long been pushed by the BSP among small banks in preparation for the regional economic integration, would “likely improve the system’s competitive dynamics.”[17]

Small lenders made up majority of the sector, which mainly operated in the provinces. Of the 673 banking institutions, 566 were rural and cooperatives banks as of end-December 2013. There were 36 universal and commercial banks and 71 thrift banks. It is this context that the S&P characterized the Philippine banking sector as “fragmented” and “overcrowded.”[18]

“The numbers of universal and commercial banks – which dominate the system with more than an 80% market share – have remained stubbornly high,” the credit rating agency said.

S&P said the efficiency of the banking industry will improve through consolidation.

In an interview with BusinessWorld prior to the passing of the new banking liberalization law, Singapore-based S&P credit analyst Ivan Tan said that “despite the regulator’s preference for having fewer but stronger banks, the pace of consolidation has been slow.”[19]

“We believe this is due to the family ownership structure of the banks. In addition, there is significant overlap amongst the large banks in terms of customer base and branch locations, which in turn reduces the incentive for banks to merge. The regulators have thus far let market forces dictate the pace of merger, and we believe it will remain a protracted process,” Mr. Tan said.

But now that there is a full liberalization of the banking industry, it will be a different story.

KPMG[20] Asia Pacific Chairman Tham Sai Choy said that in the next years, there will be an acceleration of mergers and acquisitions across Southeast Asia, which will be driven by market forces and government regulations.[21]

"ASEAN banks have some way to go in growing to be internationally competitive. Smaller banks are inherently risky, and if enough of them are threatened, the domino effect can ensue and threaten the system as a whole."[22]

Foreign banks access to mergers and acquisitions

Under the new law, foreign banks may enter the Philippine banking system by “acquiring, purchasing or owning up to one hundred percent (100%) of the voting stock of an existing bank” as one of the three modes of foreign entry.[23] This provides foreign banks with more opportunities to acquire domestic banks.

Foreign banks are likely to take over smaller banks such as countryside banks as initial entry to the domestic market before attempting to bargain or offer a proposal to or compete head-on against major local lenders.

Local lenders may also find themselves competing against foreign banks when it comes to acquisitions. Gobbling up rural and thrift banks is more cost-efficient for universal and commercial banks than establishing new branches or offices. As mentioned, acquiring rural banks also allows giant banks to achieve growth in market share, widen their market reach, distribute services in more areas and increase their customer base. These advantages may give additional weight for foreign banks into deciding acquisition as a more preferred mode of entry.

Meanwhile, taking steps ahead of the ASEAN integration, CIMB Group Holdings Bhd, Malaysia’s second-largest bank and region’s fifth largest lender in terms of assets, was reportedly looking for acquisition opportunities in the country. In July, talks on CIMB’s possible acquisition of state-controlled Al-Amanah Islamic Bank of the Philippines surfaced the news, which might serve as the bank’s entry point to the country.

The rivalry between Malaysian giant banks Malayan Banking Bhd (Maybank) and CIMB are expected to go beyond borders as the latter has expressed buyout plans extending to countries such as the Philippines.[24]

Given the size and scale of regional banks, their presence in the local banking scene would make the country’s largest banks appear like rural banks. Consequently, countryside banks may struggle to survive.

The Human Dimension of Mergers

Mergers, consolidations and acquisitions affect employment on various scales. Change in the institutional or organizational setting may affect employees’ morale and their productivity. It also has an impact on local communities of which cannot be directly measured. In an article, Knowledge @ Wharton presents the “human side of mergers” – those who lost their jobs and those who were left behind. Peter Cappelli, director at Wharton’s Center for Human Resources, said, “The investment community focuses on costs. They generally always like the idea that you can cut workers.” He noted about how the investment community think of the money that can be saved after the announcement of a merger and it doesn’t factor in the “associated costs of layoffs” as it cannot easily measure these costs.[25]

Managers and leaders should also take care of those who are the survivors of the mergers or acquisitions. In the same Knowledge @ Wharton article, merging companies must communicate its message with consistency and clarity to those who were laid off and to those who were retained so as not to violate “a psychological contract.” John Paul MacDuffie, co-director of Wharton’s Reginald H. Jones Center for Management Policy, Strategy, and Organization, noted that: “It’s important that the employer turned to layoffs as a ‘last resort, not a first resort.”’

According to the International Labour Organization (ILO), mergers and acquisitions entail human costs and they affect stakeholders not limited to the employers and employees of the enterprises involved. Disregarding the human dimension of this form of enterprise restructuring may hamper success and may “even lead to complete failure”.[26]

In fact, in the same study, the ILO identified culture clashes, gaps, or incompatibility and losses of key talent as the most frequently cited reasons of M&A failure. “People problems are a major cause of failed mergers, and you must ensure that most if not all of the people you want are still in place at the end of the integration period.”

At home, the largest corporate marriage in recent history of the banking industry took place last year when Philippine National Bank (PNB) merged with Allied Banking Corp. The merger, bank officials said more than a year prior to the merger, would cost 2,000 jobs and would save the two Lucio Tan-owned banks about 8 to 10% in cost reductions a year.[27] PNB Executive Vice President Carmen Huang said combined manpower would be cut to between 7,000 and 8,000 from PNB’s 5,200 and Allied’s 3,800. Both parties, however, cleared that the personnel reduction would be achieved through resignation and retirement and not by retrenchment or early retirement program.[28]

A spate of mergers in acquisitions in 1999 and 2000 cost some 10,000 jobs, including at least 3,000 as a result of the merger between Equitable and PCI Bank.[29]

In 2005, then Cebu Rep. Eduardo Gulas expressed his concern over the impact of bank mergers on people’s jobs. He said: "These M&As (mergers and acquisitions) in the banking industry will surely lead to the dislocation of workers as the banks involved consolidate their operations and try to extract cost-savings." At that time, six publicly-listed banks had been involved in some form of enterprise restructuring, including BPI’s acquisition of Prudential Bank. (Refer to table 3)

Consolidation among bank branches could also result in job cuts as in the case of Far East Bank and Trust Co. in 1999. In a disclosure to the Philippine Stock Exchange, bank president Octavio Espiritu said that the consolidation of its nine branches and the streamlining of its head office would leave some 300 employees cut off as their positions had been determined as redundant and might reach as high as about 700 employees.[30] "[R]eorganization is a natural consequence as a tight fit is created between the bank's strategies and the organization's skills, competencies and structure. This will entail shifting resources from one another; consolidating units and operations; and streamlining work processes and internal support systems," the bank announced.[31]

Table 4 shows that from 1991 to 2000, the banking sector employed a yearly average of 22.5% of total employed in the country. The highest annual average was seen in 1995 (24.1%), a year after the Philippines passed R.A. 7721 which paved the way for the entry of ten foreign banks. The decline, however, was recorded in 2000 at 19.3%. The number of employed in banking institutions were on an uptrend until it began to fell in 1999 until 2000 when a decline of about 14,000 workers was recorded. During this two-year period, eight mergers and acquisitions took place, including the giant mergers of Equitable and PCI in September 1999 and BPI and Far East Bank in April 2000.

Table 5 shows that the number of displaced workers in the financial intermediation sector shoots up 44.5% to 6,670 from 4,616 for the period 1999-2000. In the same period, a total of 266 financial intermediaries resorted to permanent closure and/or retrenchment, which grew more than half of the period before.

Table 4: Employment Statistics in All Industries, 1991 – 2000

(Household-based data)

|INDICATOR |1991 |1992 |

|1995 |37 |452 |

|1996 |37 |609 |

|1997 |52 |870 |

|1998 |190 |4,652 |

|1999 |153 |4,616 |

|2000 |266 |6,670 |

|2001P |304 |4,251 |

Source: Bureau of Labor and Employment Statistics, Establishment Termination Reports

Protecting Workers’ Interests and Managing Adjustments

The impact of bank consolidation transcends the government and the financial industry. The mere news of a company merger stirs a feeling of insecurity among employees and the transition after a merger takes place can be a traumatic period for them. Mergers and acquisitions do have human costs. Failing to consider employees as important stakeholders may hamper the success of bank consolidation and may even affect the public perception of the company.

The first step that banks participating in a merger may take is to communicate clearly the merger plan to employee stakeholders. Banks must be transparent and be ready to answer questions that are filled with fears, doubts and uncertainties of the future.

In an interview for Employment Relations Today, Chairman Mark Brenner of the Global Consulting Partnership said that messages expressed to all parties must be consistent or else, confusion, fear, and lack of faith would emerge. Mr. Brenner said:

“Be assured that whenever there is an information vacuum or partial information vacuum, the human species can be counted on to fill that vacuum with its own fantasies about what is ‘probably’ going on.” “Most employees are constantly talking about all the ‘worst-case scenarios,’ in terms of who will be retained, who will be released, and how the everyday rules of the game will change, once the dominant culture shifts into ascendancy.”[32]

Layoffs and downsizing are inevitable when companies merge or consolidate. Companies can take the opportunity of providing assistance to terminated employees which in turn can boost the morale of the retained workers. Such a move can demonstrate that the company cares for the welfare of its people.[33]

Before the planned measures of integration occur, employees as stakeholders must be consulted ahead to get better results. Such, however, is not strongly supported by public policy in the Philippines. In the European Union, states recognize the employees’ consultation rights. Depending on the member state, consultation rights may be related to, for instance, “changes to the company’s legal status, the removal, expansion or downsizing of areas of the company or business; the introduction of new technologies.”[34] In India, constitutional provisions that favor the protection of labor interest are deemed inadequate, according to a study done by Meghna Rajadhyaksha. The author recommends that there should be reforms of corporate and legislation laws to provide for consultation and participation of workers as well as the protection of their interests during amalgamation.[35]

Through public policy, the government can protect laid off workers, their families, and the communities where they belong. The United States, for instance, has a labor law called Worker Adjustment and Retraining Notification Act (WARN Act), which requires most employers with 100 or more workers to provide a 60 calendar-day lead time for notification of plant closings and mass layoffs. Aside from the employees, the Act requires key stakeholders such as employees’ representatives (e.g. labor unions) and appropriate local government unit to be notified as well.

When Solidbank Corp. merged with Metrobank in 2000, the result was 1,924 retrenched workers – a chunk of the total 4,729 workers in the banking sector that were laid off for the first nine months of that year. During that period, nearly half or 43.7% of the total number of workers cut off were due to company mergers.[36] The impact of a massive layoff such as this multiplies to thousands of families and hundreds of communities, which will definitely create a dent to the overall economy. The government can protect workers by creating and properly implementing a policy similar to the WARN Act of the US; and through the Department of Labor and Employment, it can support retrenched workers in their re-integration in the job market by providing skill trainings or re-tooling programs.

IV. Strategies of Foreign Banks: Motives, Modes of Entry, and Activities

The General Case: Motives of Entry

Authors Michael Pomerleano and George J. Vojta said that there are two main behaviors of banks when they enter a foreign market. One is the follow-the-client, where a foreign bank seeks to serve its multinational firms clientele that are headquartered in the banks' home market. The second behavior is to search for growth and profitable opportunities. The examples of the latter are ABN AMRO and Deutsche Bank, whereas the former are Citibank, HSBC.[37]

However, with the above framework, little is said about the motives of those banks that enter a foreign market by acquiring domestic institutions. Adrian E. Tschoegl offers a complete explanation of the motives of foreign banks. The author classifies these in to two categories: the traditionals and the innovators.[38]

“The traditionals consist of those many foreign banks, especially those operating via a branch or a small, wholly-owned subsidiary in a national financial center that are essentially engaging in normal international banking", that is, servicing trade and multinational firms and usually big local corporations. These banks, however, do not seek to engage in retail banking.7

The innovators are those who come to emerging markets to seek new opportunities as created by deregulation, transition, and crisis. These banks, usually, become part of the solutions needed by these economies in trouble. They can be divided into three sub categories.7

The bettors are those whose implications are purely financial, such as portfolio investments into institutions which are promising. Their investments do not attain controlling threshold. Prospectors and restructures both invest by establishing subsidiaries, joint ventures, or taking large equity positions in local banks. However, prospectors are simply exploratory. Often time, if their profitability outlook seems bad, they walk away. Restructurers, on the other hand, are strategically positioned. They invest on large scale commitments.7

Modes of Entry

Foreign banks enter a country in different forms. A branch remain an integral part of its parent bank, thus it is not independent legal entity. Meanwhile, affiliates and subsidiaries are legal entities, however, in the latter the parent bank has less majority ownership, while the in the former parent has more.

Nonetheless, there is confusion with respect to classifying mode of entry, as emphasized by authors Ngoc-Anh Vo Thi and Dev Vencappa. In order to identify the impact of foreign bank entry to the domestic stakeholders, one should distinguish institutional forms of entry such as representative offices, branches, affiliates, and subsidiaries, and the modes of entry by foreign banks, i.e. Greenfield investment (Greenfield) versus merger or acquisition (M&A) of an incumbent bank.[39]

Greenfield involves establishment of an institution from scratch. It allows a foreign bank to take advantage of its international reputation. Their edge lies on depositors who may feel more secure banking with well-known banks. Also, this mode of entry allows foreign banks to target market segments, unlike in M&A who will it costly to make adjustments on the existing customer profiles they acquired.

M&A implies the purchase of a bank's shares or other form of capital. Most foreign banks would prefer this mode, especially if the bank has a comprehensive retail network strategy. Since it gives the foreign bank access to local knowledge, this is a more feasible alternative, particularly if moving quickly. It hands immediate access to core deposits which allow foreign banks to engage in local lending more rapidly.

Moreover, M&A is advantageous for multinational banks that are less known in potential host markets

Areas of Activities

Foreign banks are inclined to focus on corporate banking while domestic banks are more reclined to service local retail and small and medium enterprise (SME) markets.

In their research Pomerleano and Vojta said that foreign banks are in a “better position to deliver products and services that require a global platform, a considerable amount of capital, have a strong technological content, and demand sophisticated skills and experience.” Meanwhile, it is easier for domestic banks to deliver products and services that require local capabilities (i.e. local knowledge, access to local currency, possession of a local branch network). Therefore, “foreign-acquired banks are better able to capture these capabilities compared to their Greenfield counterparts." [40]

Immediate Effects of Foreign Bank the Domestic Economy

The Foreign Bank Liberalization Act of 1994 was the first time the Philippine government has deregulated the entry of foreign banks in the country. The law had allowed 10 foreign banks to operate fully or establish their branch locally. As for foreign banks that failed to make it to the list, they either taken up majority stakes in local banks or set up a local subsidiary. Those that set up their local subsidiaries were Dao Heng Bank, Banco Santander, and Chinatrust Commercial Bank in 1997.

Since the 10 foreign banks were authorized to set up branches in the country, and came in without partnering with an existing domestic bank, they can be classified as Greenfields. (Refer to table 4)

Data from the past showed that the 10 banks granted full banking licenses immediately recorded contributions in the economy. A total of P37.44 billion ($1.42 billion) was infused into the financial system in 1996, which was more than six times bigger than the $192.9 million the banks brought in the year before. The central bank said the investments were in the form of permanently assigned capital and the "net due to head office/other branches" account of the 10 banks.[41]

A wider loan portfolio and clientele can also be attributed to the 10 banks, as shown by their total loans amounting to P56.177 billion by year end 1996. This was 72% higher than the P32.7 billion they extended as of the first half of 1996.34

Moreover, the banks have proven to bring in capital directed to finance the expansion of key industries which in turn helped sustain Philippine economic growth. By the end of 1996, these banks facilitated roughly P29.47 billion foreign direct investments. Combined, the 10 foreign banks had deposit liabilities of P58.505 billion or 5.13% of the entire commercial banking industry's P1.14 trillion.34

Table 6: Foreign Banks Operating in the Philippines, as of 1997

|Foreign Bank |Form of Entry |Mode of Entry |

|Australia-New Zealand Bank |Branch |Greenfields |

|Banco Santander* |Subsidiary |Greenfields |

|Bangkok Bank |Branch |Greenfields |

|Bank of Tokyo |Branch |Greenfields |

|Bank of America NA |Branch |Greenfields |

|Chase Manhattan Bank (formerly Chemical Bank) |Branch |Greenfields |

|Citibank, N.A. |Branch |Greenfields |

|CTBC Bank |Subsidiary |Greenfields |

|Dao Heng Bank Ltd* |Subsidiary |Greenfields |

|Deutsche Bank |Branch |Greenfields |

|Development Bank of Singapore |Branch |Greenfields |

|Fuji Bank |Branch |Greenfields |

|Hongkong & Shanghai Banking Corp. Ltd. |Branch |Greenfields |

|ING Bank |Branch |Greenfields |

|International Commercial Bank of China |Branch |Greenfields |

|Korea Exchange Bank |Branch |Greenfields |

|Standard Chartered Bank |Branch |Greenfields |

a Additional subsidiaries of foreign banks set up in 1997

b Acquired by BDO

c Banks operating in the Philippines prior to RA 7721

Source: Tabulated by the researcher based on Garcia, R. E. (1997, June 12). “New foreign banks infuse P37.4B in funds in 1996.” BusinessWorld. pp.17.

Current Foreign Banks Operating in the Philippines: Impact on Stakeholders

So far, there are 16 foreign banks operating in the country. Fourteen function as branches while the other two as subsidiaries. (Refer to table 7)

Table 7 shows that among the original seventeen foreign banks present in the Philippines after the 1994 liberalization, the banks Banco Santander, Dao Heng Bank Ltd, and Development Bank of Singapore do not exist anymore.

Both Dao Heng Bank Ltd. (DHBL), the local subsidiary of Dao Heng Bank Group Ltd. and Banco Santander Philippines, Inc. (BSPI), the local subsidiary of foreign banker Banco Santander Central Hispano SA, were acquired by Banco de Oro Universal Bank[42] (BDO) in 2000 and 2003, respectively.

During the acquisition, BDO claimed that it would benefited from DHBL’s transfer of technology, particularly in electronic banking, point of sale technology, and call center banking. Also, BDO would gain competitive advantage in the local banking industry since it will resume DHBL’s development of cross-border products, like the remittances of Filipino workers from Hong Kong, trade finance services supporting the Hong Kong, Manila and China trade, and private banking activities. Other benefits oft eh merger include a wider reach for BDO after acquiring DHBL’s existing local branches, and its product and services.[43]

Table 7: Foreign Banks Operating in the Philippines, as of August 28, 2014

|Foreign Bank |Form of Entry |Mode of Entry |

|Australia & New Zealand Bkng. Group Ltd. |Branch |Greenfields |

|Bangkok Bank Public Co. Ltd. |Branch |Greenfields |

|Bank of America N.A. |Branch |Greenfields |

|Bank of China Ltd. |Branch |Greenfields |

|Bank of Tokyo-Mitsubishi UfJ Ltd., The |Branch |Greenfields |

|Citibank, N.A. |Branch |Greenfields |

|CTBC Bank |Subsidiary |Greenfields |

|Deutsche Bank AG |Branch |Greenfields |

|Hongkong & Shanghai Banking Corp. Ltd. |Branch |Greenfields |

|ING Bank N.V. manila Branch |Branch |Greenfields |

|J.P. Morgan Chase Bank N.A. Manila Branch |Branch |Greenfields |

|Korea Exchange Bank |Branch |Greenfields |

|Maybank Philippines, Inc. |Subsidiary |M&A* |

|Mega International Commercial Bank |Branch |Greenfields |

|Mizuho Bank Ltd. Manila Branch |Branch |Greenfields |

|Standard Chartered Bank |Branch |Greenfields |

*MayBank Group acquired 60% stake in PNB Republic Bank, a commercial bank and subsidiary of PNB

Sources: BusinessWorld 2nd Quarter Banking Report; Banks' official websites

For DHBL, BDO stood as a strategic partner in the Philippines where the foreign bank could gain access to a wider market for its diversified products and services, through the branch network of BDO. Similarly, it was advantageous for the clients of the combined entities, as they deal with a much bigger bank with better and more products and services to provide for their specific financial requirements.12

BDO’s acquisition of BSPI gave it access to a niche high net-worth individuals in the Philippine market, as well as expand its consumer and private banking market base. Meanwhile, BSPI executed the agreement with BDO as part of its worldwide strategy of concentrating activities in its core markets.[44]

Development Bank of Singapore, however, was a different case. After DBS waived its full branching license in 1998,[45] the bank was acquired by the local thrift bank BPI Family Bank.

Furthermore, among the 10 foreign banks granted full branching license under RA 7721, nine continue to exist after 20 years, excluding Development Bank of Singapore.

III. Conclusion

To attract and create better channels for FDIs into the country, the central bank of the Philippines has sought greater participation of foreign bank in the country. Also, in line with the looming ASEAN Banking Integration Framework set to take place within 2018-2020, by operating in the country, foreign banks can help existing domestic banks prepare before country fully opens its financial markets to big banks of ASEAN members.

Thus, the government saw the urgency of passing the law that fully liberalizes the ownership and operations of foreign banks in the country. As a result, experts expect an acceleration of mergers and acquisitions, and consolidations of local and foreign banks in the Philippines.

However, other stakeholders who are outside the government and the financial sector have argued that the actions taken on the passage of the law too sudden, leaving them with no room to participate in the discussion.

Hence, this paper attempted to revive the discussion on the potential impact of RA 10641 on various stakeholders. By presenting the impacts of the past partial liberalization in 1994, as well as past mergers and acquisitions, stakeholders will be able to place necessary safety nets to protect their interest, and be able to reap the advantages of liberalization rather than the disadvantages.

The findings of the study showed that past M&As and consolidations had a negative impact on employment in the form of job cuts, retrenchments, early retirements, and resignations.

Though reorganization and human costs may be natural consequence of M&As, “It’s important that the employer turned to layoffs as a ‘last resort, not a first resort,” said John Paul MacDuffie of Wharton’s Reginald H. Jones Center for Management Policy, Strategy, and Organization.

Moreover, this paper presented that consolidations can better improve the efficiency of the Philippine banking industry. Foreign and local banks in a certain country have their own forte. They should find a strategic and complementary partnership to gain comparative advantage among their peers.

Foreign banks’ edge is corporate banking as they are in a “better position to deliver products and services that require a global platform, a considerable amount of capital, have a strong technological content, and demand sophisticated skills and experience,” authors Pomerleano and Vojta said.

Meanwhile, domestic banks specialize on servicing local retail and SME markets, since they have the access to local knowledge, access to local currency, and possession of a local branch network. This is how M&A banks are at an advantage versus Greenfield banks.

As for thrift and rural banks, through consolidation with a foreign bank, it can achieve higher capital, while the foreign bank can gain access to potential yet unbanked market in the country.

Greenfield banks, however, have better stability, as shown by the findings of this study. Except for the Development Bank of Singapore, of the 10 foreign banks granted full license to establish their branch in the Philippines, nine are still exists as of date.

Bibliography

Anderson, J.K. (1999). People Management: The Crucial Aspect of Mergers and Acquisitions. Industrial Relations Centre. Current Issues Series. Kingston: Ontario.

Bangko Sentral ng Pilipinas, p. 1. Retrieved from on September 4, 2014

Dacanay, S. J. O. (2007). Profit and Cost Efficiency of Philippine Commercial Banks Under the Periods of Liberalization, Crisis and Consolidation. A paper presented at The International Business & Economics Research Conference, Beverly Hilton, Los Angeles, California. p. 1

Employee representation and co-determination rights in Europe. Labour and Employee Benefits Handbook 2010/11 Volume 1: Cross-border. Practical Law Company.

Gochoco-Bautista, M.S. (1999). The Past Performance of the Philippine Banking Sector and Challenges in the Postcrisis Period. In: Rising to the Challenge in Asia: A Study of Financial Makets: Volume 10-Philippines. Asian Development Bank, 30-78.

In "Mergers and Amalgamations in India: Protecting Labour in Times of Change," published in 2007. The International Journal of Comparative Labour Law and Industrial Relations, Volume 23/3, 375-399.

Knilans, G. (2009). Mergers and Acquisitions: Best Practices for Successful Integration. Employment Relations Today. pp. 3 Knowledge @ Wharton. (2005, May 30). The Human Side of Mergers: Those Laid Off and Those Left Aboard. Retrieved from on 31 August 2014

Pomerleano. M. and G. J. Vojta. (2001). Foreign banks in Emerging Markets: An Institutional Study, In Open doors: Foreign participation in financial systems in developing countries, World Bank/IMF/Brookings Emerging Market Series. Brookings Institution Press. Washington, D.C.

Shuler, R. S. and S.E. Jackson. (-) HR Issues, activities and responsibilities in mergers and acquisitions. International Labour Organization. Geneva

Standard and Poors Ratings Services. (16, April 2014). "Philippines' Banking System: The Good, The Bad, And The Ambivalent." McGraw Hill Financial. pp. 2

The Wall Street Journal. (2014, July 22). Philippines Scraps Limits on Foreign Ownership.

Thi, N. V. and Vencappa. (2008). Does the Entry Mode of Foreign Banks Matter for Bank Efficiency? Evidence from the Czech Republic, Hungary, and Poland. William Davidson Institute. University of Michigan.

Torrijos, E. R. and Nazareno, R. (1999, October 2). "Mergers, competition resulting in lost jobs." pp. 3.

Tschoegl, A. E. (2003). Financial Crises and the Presence of Foreign Banks. Wharton Financial Institutions Center. University of Pennsylvania.

-----------------------

[1] BusinessWorld. (2014, July 06). BSP ready for further liberalization.

[2] The Wall Street Journal. (2014, July 22). Philippines Scraps Limits on Foreign Ownership.

[3] Business Mirror. (2014, July 20). Banking sector fully liberalized.

[4] Section 1 of RA 7721

[5] Development Bank of Singapore (DBS) waived the full branching license it received from the Bangko Sentral ng Pilipinas in 1998, by merging the operations of its Manila branch with the existing local Bank of Southeast Asia (BSA). DBS saw BSA as a strategic partner as the former recovers from the 1997 Asian Financial Crisis.

[6] Now Mizuho Bank

[7] Dacanay, S. J. O. (2007). Profit and Cost Efficiency of Philippine Commercial Banks Under the Periods of Liberalization, Crisis and Consolidation. A paper presented at The International Business & Economics Research Conference, Beverly Hilton, Los Angeles, California. p. 1

[8] Garcia, R. E. (1997, July 2). Bank density ratio improves to 11,442 people per bank (...but still far from those of developed nations). BusinessWorld. pp. 13.

[9] Uy, L. G. (2014, August 28). Philippines fully opens doors to foreign banks. BusinessWorld. pp S4 2.

[10] Ibid.

[11] Ibid.

[12] Ibid. p 4

[13] Bangko Sentral ng Pilipinas, p. 1. Retrieved from on September 4, 2014

[14] Gochoco-Bautista, M.S. (1999). The Past Performance of the Philippine Banking Sector and Challenges in the Postcrisis Period. In: Rising to the Challenge in Asia: A Study of Financial Makets: Volume 10—Philippines. Asian Development Bank, 30-78.

[15] Supra note 7, at 4. pp. 1

[16] Standard and Poors Ratings Services. (16, April 2014). “Philippines’ Banking System: The Good, The Bad, And The Ambivalent.” McGraw Hill Financial. pp. 2

[17] Ibid. pp. 7

[18] Ibid. pp. 6

[19] Interview by Trishia P. Octaviano for BusinessWorld, May 2014

[20] An American consulting and auditing firm

[21] BusinessWorld. (2014, May 21). Bank M&As seen accelerating. pp. 1

[22] Ibid.

[23] RA 10641, Section 1.

[24] Aquino, L. B. (2014, July 28). Maybank, CIMB rivalry extends to the Philippine. BusinessWorld. pp. S2/1

[25] Knowledge @ Wharton. (2005, May 30). The Human Side of Mergers: Those Laid Off and Those Left Aboard. Retrieved from on 31 August 2014

[26] Shuler, R. S. and S.E. Jackson. (-) HR Issues, activities and responsibilities in mergers and acquisitions. International Labour Organization. Geneva

[27] Agustin, V. A. “PNB-Allied merger to cost 2,000 jobs, save P1 billion.” . Retrieved from on 30 August 2014

[28] Ibid.

[29] The Philippine Star. (2005, Aug. 28). Bank mergers to lead to layoffs. Retrieved from on 31 August 2014.

[30] Philippine Daily Inquirer. (1999, July 30). “Far East Bank seen to cut 700 jobs.” pp. B5

[31] Torrijos, E. R. and Nazareno, R. (1999, October 2). “Mergers, competition resulting in lost jobs.” pp. 3.

[32] Knilans, G. (2009). Mergers and Acquisitions: Best Practices for Successful Integration. Employment Relations Today. pp. 3

[33] Anderson, J.K. (1999). People Management: The Crucial Aspect of Mergers and Acquisitions. Industrial Relations Centre. Current Issues Series. Kingston: Ontario.

[34] Employee representation and co-determination rights in Europe. Labour and Employee Benefits Handbook 2010/11 Volume 1: Cross-border. Practical Law Company.

[35] In “Mergers and Amalgamations in India: Protecting Labour in Times of Change,” published in 2007. The International Journal of Comparative Labour Law and Industrial Relations, Volume 23/3, 375-399.

[36] Jaymalin, M. (2000, December 2). Bank mergers caused massive retrenchments. The Philippine Star. Retrieved from on 11 September 2014

[37] Pomerleano. M. and G. J. Vojta. (2001). Foreign banks in Emerging Markets: An Institutional Study, In Open doors: Foreign participation in financial systems in developing countries, World Bank/IMF/Brookings Emerging Market Series. Brookings Institution Press. Washington, D.C.

[38] Tschoegl, A. E. (2003). Financial Crises and the Presence of Foreign Banks. Wharton Financial Institutions Center. University of Pennsylvania.

[39] Thi, N. V. and Vencappa. (2008). Does the Entry Mode of Foreign Banks Matter for Bank Efficiency? Evidence from the Czech Republic, Hungary, and Poland. William Davidson Institute. University of Michigan.

[40] Pomerleano. M. and G. J. Vojta. (2001). Foreign banks in Emerging Markets: An Institutional Study, In Open doors: Foreign participation in financial systems in developing countries, World Bank/IMF/Brookings Emerging Market Series. Brookings Institution Press. Washington, D.C.

[41] Garcia, R. E. (1997, June 12). “New foreign banks infuse P37.4B in funds in 1996.” BusinessWorld. pp.17.

[42] Changed name to BDO Unibank

[43] Philippine Star. BSP approves merger of BDO, Dao Heng Bank. Retrieved from:

[44] Torres, T.P. (2003, July 16). Banco de Oro buys Banco Santander for P2.56 billion. Philippine Star. Retrieved from:

[45] Refer to note 5

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