VIEWS FROM THE PEAK: Banking on growth

By Joey Cipres

Foreign institutions are buying into PH banks at all costs.

Over the past few years, we have seen several foreign banks making strategic investments in the Philippine financial sector. 

The most recent of which is Hong Kong’s CSC Holdings acquiring a 26.8-percent stake in Citystate Savings Bank (CSB) for P736 million, which translates to a premium of 185 percent over the stock’s last traded price of P5.96/share before the deal’s announcement.

Another recent major investment deal was the entry of Japan’s largest bank, MUFG Bank Ltd., into Globe Telecom’s fintech arm GCash with an 8-percent stake. 

This deal valued GCash at a staggering $5 billion, which is more than double the previous valuation of $2 billion in its last funding round in 2021. 

That same institution, MUFG of Japan, bought into Security Bank (SECB) in 2016 with the purchase of 150.7 million primary common shares at a purchase price of P245/ share and 200 million preferred shares at P0.10/share, which marked a premium of 81.4 percent vs SECB’s closing price of P135/share before the deal’s announcement. 

Joey Cipres
AP Securities, Research Analyst 

Thailand’s Krungsri (Bank of Ayudhya PCL) also acquired a 50-percent stake in SECB’s consumer finance subsidiary, SB Finance Company, in 2020 for a total consideration of P1.5 billion.

Sumitomo Mitsui Banking Corp., another of Japan’s three major megabanks, bought a 5 percent stake in RCBC in 2021 for P44/share, a 151 percent premium over RCBC’s last traded price at the time. Sumitomo later raised its stake to 20 percent through a fresh injection of P27 billion, with RCBC selling 382.1-million shares at P71/share, which again results in a hefty premium of 218 percent.

So, why are foreign institutions so keen on investing in the Philippine banking sector to the point that they would pay a massive premium for a minority stake? 

It's a numbers game

It is likely that one of the main reasons is the wide discrepancy between the Philippines’ growth potential as a developing economy compared to the advanced economies where these foreign banks operate, where there is limited potential for business expansion. 

Looking at the numbers, the Philippines GDP is projected to grow at an average rate of 6.3 percent per year from 2025-2029, while Japan and Hong Kong are forecasted to grow by 0.7 percent and 2.8 percent respectively.

Another key growth driver for the Philippines is its people. 

The Philippine population is projected to grow by 5.4 percent annually over the next five years, adding 6.2 million Filipinos to the current population of around 120 million. 

The population of Hong Kong, on the other hand, is projected to add only 155, 200 people during the same period, while Japan’s population would continue its decline of 2.6 percent annually, or roughly 3.3 million people. 

Even in the unlikely event that we see an economic slowdown, the seemingly unstoppable population growth in the Philippines will ensure that there will be an ever-growing market for banks to tap into.

Tapping the unbanked

The BSP’s latest Financial Inclusion Survey conducted in 2022 showed that the country’s banking population reached 65 percent, a massive leap from just 29 percent in 2019. Despite this huge jump, the current figures are still nowhere close to Hong Kong’s 97.8 percent (2021) and Japan’s 98.5 percent (2021). 

This yet untapped market, coupled with the BSP’s digitalization push to aid financial inclusion, is surely an irresistible lure for foreign banking institutions to buy into the Philippine banking sector’s growth story. 

The growing middle class

The Philippines is also home to a middle class that is both growing in number and income. 

The GDP of the middle class in the Philippines, which is a key target market for banking services, grew at a scorching pace of 54 percent over the past decade. 

Finance Secretary Recto’s confidence that the Philippines will achieve upper-middle income status by end-2025 also adds to our country’s attractiveness as an investment vehicle full of potential.

"Without sounding overly optimistic, we feel that the growth story for the Philippine banking sector, and the Philippines in general, is still being written. Because of that, we expect that more deals like these will come through in the future. While we do not subscribe to the mentality that domestic investors should look to foreign money for guidance, we hope that the apparent bullishness of these foreign institutions in the Philippines (and our banks) would inspire us to invest in our country as well." 
- Joey Cipres,  AP Securities 

The bottom line

The combined effects of population growth, widening financial inclusion, and increasing affluence of the middle class has fueled substantial growth in both deposits and loans. 

Data from the BSP showed that total deposits surged by over 51.8 percent in the past 5 years while loans jumped by 44 percent. 

The lucrative consumer loans segment, in particular, grew by a whopping 98.7 percent over the same period. 

The banking sector’s asset pool is expected to continue along this trajectory as more Filipinos eventually become part of the banked population, as the latest data from the BSP showed that as of the end of the second quarter, only 31.4 percent of households have savings, of which only 79.4 percent keep their savings in a bank. 

On the other hand, only 24.6 percent of respondents have availed themselves of loans in the past 12 months.

The growth prospects

Taking all these factors into consideration, it comes as no surprise that foreign financial institutions seem to have no ceiling when it comes to the premium they are willing to pay just to get in on the action in the Philippine banking space. 

Without sounding overly optimistic, we feel that the growth story for the Philippine banking sector, and the Philippines in general, is still being written. 

Because of that, we expect that more deals like these will come through in the future. While we do not subscribe to the mentality that domestic investors should look to foreign money for guidance, we hope that the apparent bullishness of these foreign institutions in the Philippines (and our banks) would inspire us to invest in our country as well.

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Wednesday, 6 November 2024
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