Philippines Throws Open Door to Foreign Lenders

July 25, 2014 at 11:04

Philippines Throws Open Door to Foreign Lenders


Updated July 22, 2014 6:18 p.m. ET

MANILA—Overseas banks are free to participate fully in the Philippine economy for the first time, after President Benigno Aquino III signed a law removing restrictions on foreign ownership.

Manila is liberalizing its banking sector as it tries to stoke foreign investment in the country, which has always lagged behind its neighbors in attracting money from abroad, and ahead of greater economic integration with fellow members of the Association of Southeast Asian Nations, or Asean.

Foreign banks were previously allowed to own a maximum of 60% of Philippine banks, but that has now been raised to 100%. A cap on the number of wholly-owned overseas lenders permitted to operate in the country—formerly fixed at 10—has also been abolished by the president’s move on Sunday.

Bank of America Corp. , Citigroup Inc. and J.P. Morgan Chase & Co. are among the overseas lenders that already have a presence in the Philippines.

Growth in gross domestic product in the Philippines fell back to 5.7% in the first quarter from 7.2% last year, but the deregulation of banking is expected to spur activity.

“Philippine leaders in the government and the financial sector have seen the wisdom of allowing this arrangement in order to fast-track economic activity, where banks have a key role,” Communications Secretary Herminio Coloma said after the law was signed.

Amando Tetangco, governor of the Philippine central bank, said market liberalization would bring clear benefits in the form of greater resources, skills and new technologies. “These will help further strengthen the banking system and make our banks better-positioned in the face of ABIF,” Mr. Tetangco said.

Under ABIF, the Asean Banking Integration Framework, which is to come into full force by 2020, all Asean banks will be classified as local banks throughout the bloc’s 10 member countries, bringing greater competition to the Southeast Asian banking system.

A new Asean Economic Community, designed to remove trade barriers and boost regional integration, is to be launched in 2015.

“The liberalized system is also expected to generate increased foreign direct investments in the Philippines, including in the manufacturing sector, that will create more jobs and raise output,” said Mr. Tetangco.

The governor warned that some local banks would need to improve their operations in the face of increased competition.

Eugenia Victorino, a Singapore-based analyst with Australia & New Zealand Banking Group Ltd., said the opening up of the sector would force some consolidation in the Philippine market.

“There are a few big banks in the Philippines, but also lots of small banks,” Ms. Victorino said. “Some of those banks could face some pain due to the increased competition,” making a round of mergers and acquisitions likely, she said.

Southeast Asian banks would be the first to increase their footprint in the Philippines due to the continuing Asean integration process, Ms. Victorino said. Other foreign banks are likely to see the country as “a good prospect in the long term, but they won’t be immediately jumping in,” she said.

Asean market liberalization is likely to be a two-way process, Ms. Victorino said, because the Philippine banking sector is strong overall and has ample liquidity.

Banks from other Asean countries may be interested in expanding here, she said, but Philippine banks were also eyeing opportunities in the region given their strong cash positions.

—Cris Larano in Manila contributed to this article.



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