Interview: Reynaldo A Maclang, Alfonso L Salcedo Jr and Justo A Ortiz
In what ways has the liberalisation of the banking sector altered the landscape for local banks?
REYNALDO A MACLANG: Liberalisation will bring about increased competition for mid-sized banks, which are not only coping with larger domestic players but also face a growing presence of foreign banks. The latter have the advantages of a built-in clientele from their country of origin and advanced technologies that they have integrated elsewhere as their main competitive edge. Domestic banks, on the other hand, have a local presence both in distribution networks and local knowledge, both of which play a big role in the Philippines, where relationships are very important.
Liberalisation of the banking industry began as far back as 1994, when large international banks came into the Philippines, introducing new technologies, processes and products, whereas mid-sized domestic banks have benefitted as they have adopted best practices and transfer of technology, ideas, processes and products. The focus of international banks has been big customers and top corporations in the institutional sector. The industry is preparing to compete against regional players, for instance those in Indonesia, which are strong in retail banking.
ALFONSO L SALCEDO JR: From a competitive standpoint, foreign banks will be entering the corporate space, limiting their presence to the top 1000 corporations, which will be fairly limited in terms of impact, as competition among the local players has been intense. A limited presence in retail banking is expected for foreign players for a variety of reasons. Regarding mortgages, for example, foreign entities cannot own property and therefore can avoid the hassle of legal procedures associated with foreclosures.
A foreign bank would be able to gain a foothold into the retail banking sector only if they were to buy an existing bank that has a fairly substantial footprint in terms of branch network; however, there is a limited number of domestic banks of that size eyeing a sale.
Additionally, given that the Philippines does not have a credit bureau operating efficiently for most middle-market accounts or the retail segment, international banks would prefer not to deal in this space, given the lack of credible and reliable financial statements available to them.
The strategy of domestic mid-sized banks is largely the same: they are all focusing on growing their retail banking space because the margins are found there. On the corporate commercial side, all banks are tapping commercial lending or small and medium-sized enterprise (SME) lending because margins are larger, while trading gains, on the other hand, have been very scarce and are expected to remain low, which will affect bank profitability. Declining trading gains, coupled with lower margins on the corporate side due to abundant liquidity in the marketplace, have forced banks to go into retail banking and mid-market lending. Additionally, given heightened activities to generate fee income, investment houses have become increasingly involved in corporate finance and initial public offerings, largely because that is where the bigger fees will come in. A major source of fee income for banks has been on the corporate finance side, while on the retail banking side, domestic players have tapped credit cards, transactions on the cash management side and even bancassurance as a source of fee income.
To what extent can technology and mobile solutions accelerate the penetration and availability of banking products and services in the market?
JUSTO A ORTIZ: For mid-sized banks, where size is not a competitive advantage, technology acts as the great leveller by enabling them to leverage their expertise vis-à-vis the extensive branch network and large capital of the bigger banks. Capital is important when one deals with large corporates, where the single borrower limit is an important consideration; however, when dealing outside that market, mid-sized banks do not have a competitive disadvantage. Additionally, over time, the capital markets will become an alternative for capital-raising for large corporates. Concerning the branch network, the domestic market is increasingly getting closer to mobile, and brick-and-mortar presence is expected to become less of a disadvantage for medium-sized players.
Over time, as the Philippine economy continues to grow the middle class will follow suit, and this development timeline will bring banks to the next generation of Filipinos, who will be very comfortable with mobile and probably less comfortable with face-to -face transactions in a branch. Technology is not only a great leveller, but also a necessary tool to enable the community to avail itself of banking services – especially as the demand side for banking services rises for the emerging middle class, while it remains fragmented, being composed of banks, pawnshops or money lending institutions.
Mobile technology will become essential to expanding banking services, otherwise the transport costs relative to the value of their transaction is out of proportion. The Philippine market is ripe for the adoption of mobile platforms given high internet usage and SIM penetration; it is just a question of the right applications and delivery systems.
What value does partnering with third parties or intermediaries present for extending the reach of banking services and products?
SALCEDO: The branch expansion strategy of banks is determined by the right location and the right people. Location is driven by deposit-based potential and the availability of manpower to man new branches. There have been several banks which have expanded their branch network quite aggressively; however, they have not established these new facilities with branch managers, which has hurt their bottom line as those branches become major expense drags for years to come. Once a branch becomes a losing one due to a wrong manager or the absence of branch managers, regardless of the location, the branch will not make money. The goal in network expansion would be to have a fully staffed branch from the inauguration date, as it will make the gestation period shorter and enable the bank to ramp up its products faster.
The reverse would be true if one opens a branch and everyone in the community sees it languish due to the lack of right management and little customer traffic. Branch managers need to be embedded in the community they serve to fully realise the potential of the branch as a client acquisition and point-of-sale platform. Given that strong competition among banks will continue, the need for qualified manpower will also be heightened. Banking jobs have declined in popularity for college graduates, which coupled with the aggressive expansion plans of banks by both domestic and new foreign entrants, has intensified poaching, especially on the retail banking side and the credit card industry, where talent is very limited and the available talent pool is shallow. As banks continue to set up new branches, even if they focus on corporate banking, pressures on available skilled labour and rising wages will continue to grow.
MACLANG: The industry has been active in expanding partnerships with third-party financial services providers like pawn shops. Banks not only fund the requirements of the pawn shops, but are also co-branding with them and establishing collaborations in terms of settlements and the remittances business. Banks also serve as conduits for these financial service providers to move into the retail-banking ecosystem and to be linked to large domestic corporations. The thrust of the banking sector to extend their reach through partnerships has become highly competitive, with many players seeking to create supply chains of cash and services, while using the distribution capabilities of the pawn shops as a way to embed themselves in the provincial business. Many of the large players in urban areas – for instance, in retail – are not the ones with market presence in the provinces, therefore banks are aiming to link them into one banking ecosystem by providing them with the technology to perform their transactions on a digital basis and by providing the funding for wholesalers and retailers. Partnerships also allow banks to reach into the “sachet” economy by developing the products and delivery systems to serve the unbanked and under-banked segments of the population.
ORTIZ: The banking sector needs to do more partnering with third parties, given that clearly whatever one does, there will be a cash component in the interim, and one does not go from unbanked to banked overnight. Even when target customers are banked, they will not immediately start paying through debit cards or issuing checks, as the cash component of their financial or commercial transactions is still going to be high. The branch network proposition to cater for the emerging middle class is a very difficult one in the context of 42,000 barangays (neighbourhoods) and roughly 30m Filipinos of banking age.
When dealing with corporates, or with the affluent and higher to middle-market customers, the bank branch is still a major proposition, especially for origination. Once the customer or business has been initiated, alternatives like ATMs, call centres, internet and mobile options are easier to tap. However, origination for target customers is still more effective face-to-face as it is culturally best suited to the way we do business in the Philippines.
How is the banking sector in the Philippines working to reverse current low loan-to-GDP ratio?
ORTIZ: Regulators have been very conservative towards the banking industry, which could put a constraint on future domestic loan growth. The Philippines needs to explore its existing capital investment regime in the economy, as capital-intensive activities that create loan demand, namely manufacturing or infrastructure, have been very low.
On the other hand, the fastest-growing segments for the country have been low capital-intensive areas like business process outsourcing (BPO) or tourism, which do not require significant financing or loans. As a result, the banking system exhibits excess liquidity which coupled with a continuous inflow of remittances from overseas foreign workers and of BPO revenues, further increases the money supply while conservatism persists in lending.
MACLANG: As mid-sized organisations, many banks have expanded their branch network with a heavy emphasis on provincial areas, awarding those institutions with a clear advantage to position themselves as drivers for economic and community development. Bank branches sit beside churches and municipalities, focusing on strengthening their relationships with the local business community over time, fuelling business growth and turning into pillars of community growth. These relationships are something that multinationals or even bigger domestic banks will have difficulty trying to cope with. In the Philippines, banking continues to be relationship-driven.
SALCEDO: Commercial lending will continue to be very competitive and an area where banks will heighten activities, particularly in identifying expansion potential into provincial areas to penetrate the fast-growing middle-market segment across the archipelago. Commercial lending has been outpacing other loan types in bank’s portfolio, even faster than the corporate side. Although the middle market has had a tendency to have higher non-performing loans (NPLs), risk management on banks has improved and NPLs have been minimised, while the banking system taps into the significantly more attractive margins of commercial lending vis-à-vis corporate banking.
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