On the Landbank-DBP merger

Last month, Finance Secretary Benjamin Diokno announced his plan to merge the Development Bank of the Philippines with Landbank. From the merger of these two government-owned institutions will emerge the country’s largest bank with assets worth P4.18 trillion and deposits of some P3.59 trillion. Landbank is the bigger of the two and will be the surviving bank.

This is not the first time the idea of merging Landbank with DBP was floated. It will be recalled that in 2016, then president Aquino issued Executive Order 198 which instructed the Department of Finance to merge both banks. The move was approved by Congress but rejected by the Senate. Years later, Mr. Duterte decided not to implement EO 198. Instead, Mr. Duterte issued EO 142 which called for the merger of Landbank with United Coconut Planters Bank. This merger took place in 2021.

The proposal to merge both banks is now the subject of contentious debate. Sec. Diokno cites the many benefits the merger will bring. Among them is the creation of a stronger bank, one able to better withstand global financial shocks; the elimination of redundancies that is said to yield savings of some P5.3 billion per year or P21 billion over four years; the streamlining of development financing applications and relief, on government’s part, from having to recapitalize DBP.

Mergers are a highly recommended tactical move for most banks. It typically results in stronger financial positions, increased market share, a more diversified suite of   services, better access to new markets and improved efficiencies.

But the case of Landbank and DBP is different. For one, they are not private banks, but government banks. Second, both have distinct mandates that do not intersect. Landbank’s mandate is to provide financial and management support to develop the agricultural sector. They exist to serve the farmers and the entire agricultural value chain. DBP, on the other hand, is mandated to support infrastructure development, industrial and export development, urban-centric MSME and technology-driven industries.

The distinct mandates of both banks make this proposed merger a risky affair. Here’s why…

The merger will dilute the respective mandates of both banks. The union between two institutions created to fulfill    two different mandates will cause them to lose focus of their core purpose. We simply can’t take this risk, considering the urgent need to revive agriculture and catch up on industrialization. Rather than blunt their focus, both banks need to sharpen their commitment to their mandates.

Farmers will be made the last priority. A unified bank will always prefer (and prioritize) granting loans to the industrial sector rather than agriculture. This is because industrial ventures carry less risk. Since resources are always scarce, the agricultural sector will likely be crowded out of financing access.

Difficulty in accessing credit. The merger of Landbank and DBP will create a monopoly in dispensing developmental funds. As we all know, monopolies become less agile and more inefficient over time. This will work against farmers, industrialists, entrepreneurs and LGUs, all of whom will find it increasingly difficult to access credit. Thus, rather than accelerate development with easier access to financing, the monopoly may retard it.

The merger creates a risky behemoth. Merging two of government’s largest financial institutions is akin to putting the lion’s share of government’s resources in one basket. It becomes too big to fail. Concentration of risks can render government vulnerable.

Mind you, this is the worst time to weaken our defenses. With the inevitable war in Taiwan and the migration of governments away from the US dollar, our financial system has to be stronger than ever.

A single government bank may retard agricultural and industrial growth. In banking parlance, there is such a thing as a Single Borrowers Limit (SBL). In other words, a limit to the amount a bank can lend to a single borrower or group. This is a risk mitigating mechanism imposed by the BSP.

The Philippine situation is unique in that our conglomerates are involved in a cross-section of industries. The Metro Pacific Group, for example, is involved in infrastructure, power, mining and even agriculture. Having a single government development bank, which complies with the SBL regulation, will starve the likes of Metro Pacific of the financing it needs. This can result in stunted growth.

A behemoth government bank may encroach on private banks. By virtue of the 899 branches between Landbank and DBP, they will be present in practically every corner of the country. It will be but natural for them to engage in commercial banking activities to maximize profits. This will encroach on the main business activities of private banks.

Landbank is not ready. Landbank is still in the process of integrating its operations with UCPB. To merge with DBP at this juncture, may cause organizational and operational chaos.

The risk of displacement. As of end 2021, Landbank employed some 10,000 employees while DBP employed 2,700. Along with the merger will come the inevitable retirement of thousands of staff on account of redundancy. Sure, they will all be granted their respective severance pays. Still, hundreds of displaced workers will be hard-pressed to find alternative jobs in other financial institutions, given the relatively small size of our banking industry.

No urgency. Both DBP and Landbank remain financially stable. Both comply with the threshold standards imposed by the BSP. Although the DBP is in need of additional capitalization, this can easily be remedied by relieving the bank from having to remit dividends to government for a few years.

The strongest argument in favor of this merger is the savings of P5.3 billion per year. From where I sit, it is not worth the risk and disadvantages that will emerge from uniting both banks. This is why I cannot support the plan at this time.

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Email: [email protected]. Follow him on Twitter @aj_masigan