MANILA, Philippines–Waiting on President Aquino’s desk is a draft executive order that, once signed, would form a government-run mega bank that would challenge local tycoons’ dominance in the financial sector, documents obtained by the Inquirer showed.
The new bank would be the result of a planned merger between state-run Land Bank of the Philippines and Development Bank of the Philippines (DBP) to create a more efficient and financially viable institution.
The merger would also help in addressing financial constraints that make either bank uncompetitive in the rapidly-changing and growing industry.
Early last month, the Governance Commission for Government Owned or Controlled Corporations (GCG) submitted an executive order that, if signed by the chief executive, would authorize several agencies to map out the potential Landbank-DBP merger.
This inter-agency technical working group—with representatives from both banks, the Department of Finance, the National Treasury, and the central bank—would then work with Congress to see the proposal through.
“A merger of the two government financial institutions will solidify its position as the second largest bank in the country,” according to the GCG report which was submitted to Malacañang on Feb. 5.
On the same date, Batangas third district Rep. Sonny P. Collates filed a bill seeking the merger of the said banks.
Landbank would be the surviving entity after the merger, the GCG report said.
Combined, Landbank and DBP have P1.35 trillion in assets, which would put it ahead of George Ty-led Metropolitan Bank & Trust Co. and Ayala-run Bank of the Philippine Islands in terms of size. BDO Unibank, owned by Henry Sy, leads the industry with P1.70 trillion in assets.
Lucio Tan’s Philippine National Bank (PNB), itself a former state-run institution, was the fourth largest bank in the country as of the end of September with P565.2 billion in assets.
The GCG report also notes that the surviving bank’s capital should be hiked to P200 billion from the current P112.8 billion in combined capital that Landbank and DBP had at the end of September. This significant increase would make the merged entity the largest in the country in terms of capital, the GCG said.
In Southeast Asia, the merger would make Landbank one of the region’s top 20 lenders, giving it an upper hand once the region’s economic integration takes shape.
Apart from improving its financial position, both banks would be able to rationalize operations by closing down branches in they both serve.
Major challenges faced by Landbank and DBP as separate entities are higher capital requirements as a result of stricter rules implemented at the start of 2014 and the recent creation of the Treasury Single Account (TSA) for government finances. Both banks’ functions also overlap in several areas.
The merged bank would have an estimated capital adequacy ratio (CAR) of 18.9 percent at the end of 2016. DBP, on its own, expects its CAR to drop to 14.8 percent in 2016 from 21.78 percent in 2014. CAR, a measure of capital relative to a bank’s risky assets, serves as a buffer for potential losses.
In the meantime, it was noted that an unintended consequence of the government’s recent implementation of TSA was its adverse impact on government banks.
TSA provides the Bureau of the Treasury a more effective way to manage the cash the government has at any given time. It mandates that all government deposits be swept to a single bank account in the Bangko Sentral ng Pilipinas (BSP) at the end of each day.
Because of the TSA implementation, Landbank’s deposit base has fallen by P125 billion to P418 billion, while DBP’s deposits have dropped by P23 billion to P150 billion.
“This reduction will have effects on their financial positions,” the GCG report read.
With the significant decline in deposits, Landbank also faces a funding gap of P30 billion, which would force it to tap the capital markets to meet liabilities. A merger would help address this, the report said.
Operationally, a merged entity would be more efficient as redundancies are removed. For instance, both banks, in their charters, say they contribute in countryside development. Both provide funding for small businesses, and infrastructure projects, and both have cash transfer services. Neither should have to compete with the other, GCG said.
“The merger will introduce synergies that can potentially improve profitability,” the report read. About 220 Landbank employees will become redundant, while 170 DBP workers will lose their jobs.
For the merger to materialize, Congress would have to consolidate the charters of both banks. The merged bank’s board would have 11 members, coming from the Departments of Finance, Labor, Agriculture, and Agrarian Reform departments, and the private sector.
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