Deals

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Sometimes a reputation for overpaying is deserved. That's true of the Japanese, whose largest bank yesterday said it would fork out $733 million for a fifth of Security Bank, the largest investment by an overseas lender in a Philippine financial institution.

Mitsubishi UFJ Financial Group is paying 245 pesos ($5.12) a share for new stock in the retail-focused bank, or an 81 percent premium to Wednesday's closing price of 135 pesos. There's no doubting the benefits for Security Bank. MUFG's investment will make it the country's fifth-largest lender by capital, with a common equity tier one ratio of 22.5 percent -- the highest among Philippine banks, according to Goldman Sachs. (Common equity tier one is the highest-quality capital that banks hold to protect against losses.) The infusion from MUFG gives the bank the resources to accelerate branch openings and lending expansion. Security Bank CFO Joey Mape forecasts profit will triple in five years.

But while the outlay is small for MUFG (which has a market value of more than $80 billion), the rationale for such a hefty premium is less clear cut. The purchase price equates to 2.8 times book value, the most paid by a Japanese bank for a financial asset in Southeast Asia in recent years. Philippine banks trade at an average of about 1.3 times book. Other Japanese purchases in the region have averaged 1.9 times.

MUFG itself paid 2 times book for a 77 percent stake in Thailand's Bank of Ayudhya in 2013. That $5.5 billion price tag included a control premium -- something the more expensive Philippine purchase lacks. The Dy Group will remain the biggest shareholder in Security Bank with majority voting control.

Southeast Asia has been a target for Japanese companies seeking growth-enhancing investments as they contend with a shrinking home market and aging population. Over-60s make up 32 percent of the population in Japan, compared with just 6 percent in the Philippines.

Hunting for Growth
Japanese acquisitions in Southeast Asia ($mln)

The Southeast Asian buying wave has waned as the region weathers the impact of the commodity bust, currency volatility and China's woes, with Japan's interest turning more recently toward the U.S. (where MUFG has also said it's keen to expand, following billions of dollars of investments  by Japanese life insurers in the past year).

The last significant Japanese investment in a Southeast Asian lender was in February last year, when trading house Sumitomo paid $460 million, a multiple of 2.6 times book, to raise its stake in Indonesia’s PT Bank Tabungan Pensiunan Nasional to 20 percent.

The Philippines remains a relative bright spot in the region, with a domestic demand-driven economy that has proved more resilient than its more commodity- and export-dependent Southeast Asian peers. Economic growth is running at 6 percent and the stock market, while weakening, has outperformed the region.

Least Bad
Philippine stocks vs. Southeast Asian peers, last two years

It's also open for business. In 2014, the country started loosening rules on foreign bank ownership, leading Japan's second-biggest banking group, Sumitomo Mitsui Financial Group, to be the first to get a license.

Still, it's hardly boom times anymore. Japan's Mizuho Financial Group, which has been slower in the game of buying into Southeast Asia, ended talks to acquire San Miguel’s controlling stake in Bank of Commerce for $500 million in October because the Philippine conglomerate was asking too much. 

As part of the Security Bank deal, MUFG is also getting 200 million preferred shares for a nominal price of 0.1 peso each. That dilutes the cost to the bank represented by the headline price. Even so, there are some lofty expectations built into this acquisition. Security Bank shares were trading at 145 pesos today, still more than 40 percent below the sale price. MUFG may end up wishing it had shown the same caution as Mizuho.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net