Aquino OKs Land Bank-DBP merger

MANILA, Philippines - The merger of Land Bank of the Philippines and the Development Bank of the Philippines (DBP) will create an institution with "unmatched" reach and resources that would make it the country's second biggest in asset terms.

Last February 4, President Aquino signed Executive Order 181 which effectively started the merger process for the two government financial institutions.

"The merger will build a stronger universal development bank with a solid resource base, unmatched geographical reach, a loan portfolio catering to priority sectors and institutional knowledge and experience in development financing," said Ma. Angela Ignacio, commissioner of Governance Commission on GOCCs (GCG).

The GCG, created by Republic Act 10149, has advocated for the merger since 2013, which will see Land Bank as the surviving entity with more than P1.6 trillion in assets.

That would make it the second biggest bank in the country, overtaking Metropolitan Bank & Trust Co. with P1.367 trillion and Ayala-led Bank of the Philippine Islands with P1.158 trillion.

Sy-led BDO Unibank Inc. will keep its top spot with P1.884 trillion. All figures were based on third-quarter performance reported to the central bank.

Nestor Espenilla Jr., deputy governor at the Bangko Sentral ng Pilipinas, said just like any other mergers, the DBP-Landbank transaction will be subject to its approval.

"A law or EO will only serve as legal basis for government banks to merge. But that said, no application has been filed with BSP so far," he said in a text message.

Astro del Castillo, managing director at First Grade Holdings Inc., said the merger is unlikely to get regulators worried of the government cornering higher banking assets.

He said Landbank's resulting assets will just be around 13 percent of the total Philippine banking assets of P11.9 trillion as of September last year.

"I am sure the regulators will examine the merger carefully and will have the necessary tools to prevent any distress from happening," Del Castillo said in a phone interview.

For the industry, the merger will have its pros and cons.

"You will have economies of scale, wider reach and bigger SBL (single borrowers limit) that can contribute to countrywide development," said Lorenzo Tan, president of the Bankers Association of the Philippines.

"If not governed and managed properly, it can be a 'too big too fail' situation," he added.

According to a merger fact sheet, the government said the merger was undertaken to remove the "unnecessary overlap" between the DBP's and Landbank's functions.

In particular, both lenders have concentrated their business on providing credit to the agriculture sector as well as micro-, small- and medium-enterprises.

Finance Secretary Cesar Purisima said the merger will expand the reach of both banks, backed by stronger capitalization that will help them extend bigger credits.

As of June 2013, DBP has 104 branches, while Landbank has 337. Both banks have capital adequacy ratios - a measure of financial strength - way above the BSP-mandated 10 percent.

In terms of deposits, an additional P300 billion in DBP deposits will be added to Landbank's P912.6 billion. DBP also has P204.56 billion in loans as of 2014.

Landbank will also absorb an institution which have recorded three straight years of positive net income until 2014.

"With better capital adequacy and robust resources, we can expect government banking to continue growing, especially in terms of efficiency and size of public served," Purisima said.