SyCip Salazar Hernandez & Gatmaitan partner Vincente D. Gerochi IV discusses how new legislation allows foreign banks to qualify for full entry into the Phillipine banking system. He delves into the methods and implications of this innovation, as well as looking into the competition that is likely to arise.
Two recent regulatory changes are expected to foster acquisitions and consolidations in the Philippine banking industry.
Foreign banks are now allowed full entry into the Philippine banking system. Republic Act 10641 allows the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) to authorise foreign banks to operate in the country by acquiring up to 100 percent of the voting stock of an existing bank, investing in up to 100 percent of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines or establishing branches with full banking authority.
The new law also removed certain restrictive provisions under existing statutes. Previously, only the top 150 foreign banks in the world, or the top five banks in their country of origin, were allowed to set up a local subsidiary or establish branches. Now, any foreign bank can enter the market as long as it is established, reputable, financially sound, and (unless it is owned and controlled by the government of its home country) widely-owned and publicly-listed in its country of origin. Prior to RA 10641, the Monetary Board was mandated to ensure that control of at least 70 percent of the resources or assets of the entire banking sector are held by local banks that are at least majority-owned by Filipinos and shares of domestic banks that are controlled by foreign banks are listed on the Philippine Stock Exchange. RA 10641 brought that percentage down to 60 percent and removed the listing requirement.
 In addition, foreign banks authorised to carry on business in the country are now allowed to bid and take part in the foreclosure sale of land mortgaged to them. They can avail of enforcement and other proceedings, and accordingly take possession of the mortgaged property, for a period not exceeding five years from possession. However, they cannot acquire ownership of the property, given the Constitutional restriction against foreign ownership of land. If a foreign bank is the winning bidder in the foreclosure sale, it is required, during the said five-year period, to transfer its rights to a qualified Philippine national. A few months after RA 10641 took effect, the Monetary Board increased the required minimum capitalisation of banks based on the number of branches they operate. The increase is substantial for banks with a wide network of branches. For instance, universal banks with between 11 and 100 branches must now have a capital of at least Php15 billion, and those with more than 100 branches are required to have a minimum capital of Php20 billion. Commercial banks with between 11 and 100 branches must have a minimum capital of Php10 billion, while the requirement for those with more than 100 branches is Php15 billion. Prior to the increase, the required minimum capital was Php4.95 billion for universal banks and Php2.4 billion for commercial banks. Thrift banks with a head office outside Metro Manila and with between 11 and 50 branches must put up Php400 million, and those with more than 50 branches need to raise their capital to Php800 million. Previously, the required minimum capital for thrift banks with a head office outside Metro Manila was only Php250 million. Non-compliant banks have five years from the effectiveness of the new regulation to meet the required capital. It has been reported that many thrift banks outside Metro Manila will not be able to meet the requirements. |
 The expected entry of more foreign banks and the tighter competition this will bring about, coupled with the need to raise their capital, could drive domestic banks to merge or consolidate. They could also become potential acquisition targets of foreign or larger local banks. On the other hand, a recent memorandum of agreement between the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) has engendered a de facto merger control regime. A merger or consolidation of banks requires the approval of the SEC and the BSP. The MOA added another layer of regulatory review by providing that the Office for Competition (OFC), a unit of the DOJ, will now need to evaluate if a proposed merger or consolidation of two or more corporations is consistent with laws on competition, monopolies and combinations in restraint of trade. The MOA prescribes fixed periods within which the OFC must conduct its review and submit its report to the SEC. In case of a finding that a transaction could be in violation of any of those laws unless the parties meet the conditions or requirements set by the OFC, the SEC may still approve the merger or consolidation, subject to compliance with those conditions or requirements. Nonetheless, the DOJ and the SEC must ensure that the review periods are strictly followed, and that clear guidelines and procedures on the conduct of the OFC’s review are put in place. Otherwise, this process could delay transactions and discourage investments in the banking sector. |