Why the Philippines’ Two Largest State-Owned Banks Are Contemplating a Mega-Merger

pacific money | Economy | Southeast Asia

The government expects the merger of DBP and the Land Bank of the Philippines to boost profitability, with the possibility of backing its embryonic sovereign wealth fund.

The Land Bank of the Philippines and the Development Bank of the Philippines (DBP), the country’s two largest state-owned banks, plan to merge by the end of the year. As explained by rappler, this idea was originally proposed during the presidency of Benigno Aquino III before being rejected by Duterte. Chairman Ferdinand Marcos Jr. revived the plan, which calls for the lenders to be combined under the Land Bank, which is the larger of the two. If the merger goes through, it will create the country’s largest bank, which will be wholly owned by the government.

While the Finance Department supports the idea, not everyone agrees including DBP itself, which has voiced its opposition to the merger. For one, the two banks have different mandates, with the Land Bank traditionally tasked with agricultural lending, while the DBP focuses on industry and businesses. The government argues that consolidating the two will improve profitability and efficiency.

Let’s look at some of the numbers, which I have converted from Philippine pesos to US dollars. He combined assets of both banks in 2022 it was $77 billion, including $29 billion in loans. Together they had $66 billion in customer deposits. That would make them bigger than their closest trading peer, which is publicly traded. BDO Unibancowhich has total assets of $75 billion.

Despite a smaller balance sheet, BDO has a loan book of $48 billion and a customer deposit base of $59 billion. This means that BDO has made more loans than government banks and has fewer deposits, and this is reflected in its profits. DBP and Land Bank’s combined after-tax profit was $655 million in 2022, compared to $1 billion for BDO. Part of the rationale for the merger is to streamline operations, eliminate layoffs, and make these banks more profitable.

Not surprisingly, state-owned banks can be less profitable than publicly traded banks that are accountable to shareholders. The only reason state banks exist is that they can make loans to places and to people who would otherwise have a hard time getting credit. They also support important strategic national industries, even if it is not especially lucrative. Carrying out such functions can be good for the economy, but not necessarily for the bottom line, which is why state banks often end up doing it.

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That being said, state banks can of course also be profitable. In neighboring Indonesia, banks had a very good year in 2022. Rakyat Bank Indonesia (BRI) ended the year with $126 billion in total assets, including a loan portfolio of $73 billion. BRI directs much of its lending to rural and small business clients, including at least $34 billion in microloans to borrowers who often have limited or no collateral. BRI posted an after-tax profit of more than $3 billion in 2022 and paid $1.8 billion in dividends. The Indonesian government owns 53 percent of the bank.

This is where things get interesting. When Indonesia began to think of ways to finance its newly created sovereign wealth fundINA, one of the things that occurred to him was to transfer part of the government’s participation in profitable state banks to the investment fund. In this way, the state could avoid the direct injection of capital and the banks’ profits would provide a constant source of cash flow. As of 2022, INA owned shares in Bank Rakyat Indonesia valued at $1.8 billion and raised a cash dividend of $65 million.

The Philippines recently proposed creating its own sovereign wealth fund, but has fought devise a clear financing plan. An initial idea involving the use of state pension funds was scrapped, and planners have since begun to contemplate an INA-type situation, where seed capital come from state banks that the fund would then reinvest. The problem is that neither the Land Bank nor the DBP in their current structures are optimized for profit.

It seems reasonable to me that if you were to use government-owned banks as sources of cash for your new sovereign wealth fund, making them more profitable would be a top priority. It would also be important to consolidate them under a single entity, over which the executive branch could exercise tighter control. Historically, Lank Bank and DBP have not been huge profit makers in their current iterations, but a merged entity that takes advantage of economies of scale and streamlined operations could be. And that’s probably why we’re suddenly seeing a new life under this old idea.

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