In the world of banking, bigger is often better.
A bigger financial institution is usually stronger and can achieve more thanks to the greater resources at its disposal. And in the world of banking, which has become increasingly more competitive in recent years, a merged Land Bank of the Philippines (Landbank) and the Development Bank of the Philippines (DBP) would be able to compete better against their private sector counterparts in delivering better services to more Filipinos.
But with bigger size also comes greater risks, especially in the current environment where operating at a larger scale is no longer a guarantee against collapse, as evidenced by recent bank failures in the US and Europe.
As such, the Marcos administration should not rush the proposed Landbank-DBP merger and should study it more thoroughly, listening to all stakeholders involved rather than just those who stand to benefit from it.
It should be remembered that the two banks have very different mandates and their officers and staff have very different skill sets. It could be a marriage made in heaven between a couple that complements each other … or it could be a forced marriage between two fundamentally different parties with different temperaments. And everyone knows how the latter tends to turn out.
Landbank is primarily tasked with helping develop the country’s agricultural sector and providing support for the government’s agrarian reform program. In the process of doing this, it has developed a strong retail banking network, aided in no small measure by its large branch network which also helps it fulfill its role as a depository bank of government funds and holding payroll accounts for national and local government employees nationwide.
The DBP, on the other hand, has a very strong wholesale banking business that specializes in granting loans to state agencies, local governments, large corporations, and small businessmen, among others, for undertakings that help develop the country’s economy. These could range from infrastructure to transportation to real estate to simple entrepreneurial loans, mostly funded by wholesale international lenders who rely on the bank to distribute them to local borrowers. At the same time — thanks to its activities during the Arroyo administration — DBP also gained very specialized expertise in the investment banking field which made it a key player in financing government projects and packaging privatization deals.
Landbank has about P2.8 trillion in assets under management while DBP has about P1 trillion. Merging the two institutions would create a banking behemoth just slightly bigger than the country’s biggest private lender, BDO Unibank, which has about P3.7 trillion in assets.
A merged Landbank and DBP will be a formidable player in the world of banking. But because of this attribute of size—and that it will be run by the state which, historically, has had a less-than-sterling track record of managing its finances—a merged Landbank and DBP will also carry a level of risk not seen in the local economy in decades.
It is also worth remembering that the proposal to merge Landbank and DBP was first made during the term of President Benigno Aquino III, pushed by his then Finance Secretary Cesar Purisima.
Former finance secretary Carlos Dominguez also wanted to merge both banks but the clock ran out on the Duterte administration. Now, the same proposal has been put back on the table by the current finance chief, Benjamin Diokno, who had also served as budget chief of Duterte and other past administrations.
Remember that the finance secretary sits as ex officio chair of Landbank which will be the surviving entity in this proposed merger. And while it could be argued that the head of the President’s economic team knows whence he speaks when pushing for the creation of a bigger financial institution, it can also be argued that he is in a conflict of interest situation, given that this merger would give him greater financial and political clout.
Given this conflict of interest, the finance secretary’s push for this merger — though important to be taken into account—should carry less weight in this debate.
No doubt being a larger bank offers a financial institution the breadth and depth and muscle to better pursue its mandate and achieve its mission. But there is also no doubt that the risks rise commensurately to the increase in such a financial institution’s size. And while Landbank is supposed to be the surviving entity in this merger, there is no showing how it will affect the execution of its principal mandate to help the farmers and promote countryside development.
And because of these diametrically opposed truths, President Marcos must tread carefully before approving lock, stock, and barrel the proposal of his economic managers to merge the Land Bank of the Philippines and the Development Bank of the Philippines.
Bigger is better, yes. But it is certainly no guarantee of success because the bigger they are … the harder they fall.