BDO Mulls Capital Boost to Brace for Foreign Competition

BDO Unibank Inc. (BDO), the biggest Philippine lender, may raise more capital after a $1 billion share sale two years ago as it expands outside Metro Manila to prepare for increased competition from foreign banks.

“We might consider a Tier 2 debt issue, depending on opportunities for expansion,” President Nestor Tan said in an interview yesterday, without providing details. BDO, owned by billionaire Henry Sy, is adopting a defensive strategy as Philippine President Benigno Aquino is likely to sign a bill allowing more foreign banks in the country, Tan said.

The Philippines, which targets economic growth of as much as 8 percent in 2015 and won investment-grade credit ratings last year, will attract foreign banks seeking to expand outside of Singapore and Malaysia, which Tan said have become “saturated” markets. The House of Representatives and the Senate this month ratified a bill relaxing a 1994 law that limited the number of fully-owned foreign banks in the Philippines to 10.

“Foreigners will probably target small- to mid-sized local banks for acquisitions under liberalized banking laws,” said Charles William Ang, an analyst at COL Financial Group Inc. “Bigger banks such as BDO have always been seeking to bulk up in anticipation of Asean economic integration,” referring to the Association of Southeast Asian Nations.

Photographer: Julian Abram Wainwright/Bloomberg

Nestor Tan, president of BDO Unibank Inc. Close

Nestor Tan, president of BDO Unibank Inc.

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Photographer: Julian Abram Wainwright/Bloomberg

Nestor Tan, president of BDO Unibank Inc.

Accelerate Capital

A law that will allow more foreign banks in the Philippines will help accelerate the entry of capital in the country, Aquino said in a speech in Manila today. Japan Prime Minister Shinzo Abe, who met Aquino in Tokyo yesterday, welcomed the move as Japanese companies are more familiar transacting with banks from the North Asian country, Aquino said.

BDO is focusing on the consumer market and small- and medium-sized businesses that borrow 5 million pesos ($114,000) on average, Tan said in his office in Makati City. The bank is also counting on rising credit demand from the biggest companies, including Ayala Corp. (AC) and San Miguel Corp. (SMC), as they bid for $20 billion in infrastructure projects backed by Aquino.

BDO shares rose for a fourth day, adding 0.2 percent to 91.05 pesos at the close in Manila, the longest winning streak in almost three months. The stock has risen 33 percent this year, twice the 16 percent gain in the benchmark stock index.

Banks ‘Threatened’

“We will be threatened because the Philippine market is very attractive,” Tan said. “While Metro Manila is still the heart of the Philippine economy, more and more other cities are taking a bigger piece of the action.”

The challenge for BDO is to ensure it’s strong in markets it wants to be in, he said. “If there is a growth area, we would like to be ahead of foreign competition on those areas such that by the time they come in, we’re already in a good position.”

The Philippine banking industry is small relative to the region, COL Financial’s Ang said. The market is also underpenetrated and less developed, offering growth potential, he said.

Eight in 10 Philippine households have no deposit accounts, according to Bangko Sentral ng Pilipinas’ first consumer finance survey published in April 2012.

More than half of the 50 branches BDO opened last year and the same number planned this year will be outside of Metro Manila as regional cities including Cebu and Iloilo in the Visayas, Davao and Cagayan de Oro in Mindanao and Legazpi and Pampanga in Luzon boom, Tan said.

Provincial Growth

While Metropolitan Manila accounts for 36 percent of the national output, four of the five fastest-growing regions in 2012 were in the Visayas and Mindanao, according to government data. The Visayas is a group of islands in the central Philippines and Mindanao is the nation’s second-biggest island. Both are south of Manila, which is in Luzon.

CIMB Group Holdings Bhd., Malaysia’s second-largest lender by assets, is looking at the “mid-tier” Philippine banking sector for expansion, CEO Nazir Razak said in Manila on May 21.

The smaller banks are helped by a lower ratio than what lenders like BDO have to set aside in reserves, Tan said.

Smaller Philippine banks are required to hold 5 percent to 8 percent of their deposits in reserves, compared with 20 percent for the bigger ones such as BDO. Of the more than 650 banks in the Philippines at the end of last year, 569 were classified as rural and cooperative banks.

Level-Playing Field

The nation needs to decide whether it wants a handful of banks big enough to compete in the regional arena or continue to have hundreds of banks, Tan said,

“The policies that you will apply will differ based on what your vision is,” he said. “If you will leave it to the market to decide the direction, then there should be a level-playing field, without any preferential treatment.”

BDO is seeking more acquisitions to expand. It may be bid for a stake in United Coconut Planters Bank that the government plans to sell, Tan said. BDO raised $1 billion in June 2012 to boost capital ahead of the central bank’s stricter Basel III requirements.

Second-quarter profit is “on track” to help meet the full-year net income target of 22.8 billion pesos ($520 million), Tan said. BDO’s profit fell by almost half in the first quarter to 5.5 billion pesos after trading gains slumped.

Sy bought Acme Savings Bank in 1976 and renamed it as Banco do Oro Savings and Mortgage Bank the following year. Nine acquisitions amounting to $1.34 billion since 2001 made BDO the nation’s biggest lender in 2008, according to data compiled by Bloomberg.

To contact the reporters on this story: Clarissa Batino in Manila at cbatino@bloomberg.net; Cecilia Yap in Manila at cyap19@bloomberg.net

To contact the editors responsible for this story: Lars Klemming at lklemming@bloomberg.net Linus Chua

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