P-Noy OKs Landbank, DBP merger

Creates 2nd biggest bank in Philippines

MANILA, Philippines – President Aquino has approved the proposed merger of two state-owned lenders Land Bank of the Philippines and Development Bank of the Philippines (DBP), creating the country’s second largest bank with total assets of P1.604 trillion.

Bangko Sentral ng Pilipinas Deputy Governor Nestor Espenilla Jr. said just like any other merger, the DBP-Landbank transaction would be subject to central bank 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.

In his Executive Order 198, Aquino also approved the increase in Landbank’s authorized capital stock from P25 billion to P200 billion. Aquino said Landbank, as the surviving entity of the merger, requires higher capital to absorb the country’s seventh-largest bank in terms of assets.

“The merger of DBP and Landbank will build a stronger and more competitive universal development bank able to fulfill its mandate of providing banking services to propel countryside development and to contribute to sustainable and inclusive growth,” Aquino said.

With the merger, Landbank – DBP will be the second largest bank in terms of assets,   overtaking Metropolitan Bank and Trust Co. (Metrobank) with P1.367 trillion and Bank of the Philipine Islands with P1.158 trillion. BDO Unibank is still the country’s biggest bank with total assets of P1.884 trillion.

“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 RA 10149, has advocated for the merger since 2013.  

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 would 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 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.