Sensible merger

Among government financial institutions, Land Bank of the Philippines and Development Bank of the Philippines are two of the more profitable institutions. Still, their overlapping functions and redundant branches are enough reasons to support calls for a merger.

A draft executive order is now with President Aquino for approval. Once it is signed, the process of uniting the two banks to form a more efficient and financially viable institution can formally start. The merger will also help address financial constraints that make both banks uncompetitive in the rapidly changing financial sector here and in the region. The Governance Commission for Government-Owned or -Controlled Corporations (GCG) submitted early last month the draft executive order that, once signed, will authorize a number of agencies to map out the merger. This interagency technical working group—with representatives from both banks, the Department of Finance, the National Treasury and the central bank—will then work with Congress to see the proposal through.

“A merger of the two government financial institutions will solidify its position as the second-largest bank in the country,” according to the GCG report submitted to Malacañang last Feb. 5. On the same day, Batangas Rep. Sonny P. Collantes filed a bill seeking the merger of the two state-owned banks, with Landbank as the surviving entity. For the merger to materialize, Congress will have to consolidate the charters of both banks. The merged bank’s board will have 11 members from the departments of finance, labor, agriculture and agrarian reform as well as from the private sector. Combined, Landbank and DBP will have P1.35 trillion in assets, putting it ahead of the George Ty-led Metropolitan Bank and Trust Co. and the Ayala-run Bank of the Philippine Islands in terms of size. BDO Unibank of retail tycoon Henry Sy leads the industry with P1.7 trillion in assets.

Still, the GCG report pointed out that the surviving bank’s capital should be raised to P200 billion to make the merged entity the biggest in the country in terms of capital. In Southeast Asia, the merger will make Landbank one of the region’s top 20 lenders.

Apart from improving their financial position, both banks will be able to rationalize operations by closing down branches in areas they both serve. Operationally, a merged entity will be more efficient as redundancies are removed. Presently, both banks are tasked to contribute to countryside development. Both also provide funding for small businesses and infrastructure projects, and both have cash transfer services. Neither should have to compete with the other, the GCG correctly pointed out, adding that a merger would introduce synergies that could improve profitability. The only downside is that about 220 Landbank employees will become redundant while 170 DBP workers will lose their jobs.

However, money saved as a result of the merger can be used to invest in technology to improve the consolidated bank’s operations, or to put up new branches in areas still unserved by private lenders, helping bring formal banking services to a bigger segment of the population.

Proposals for the merger also come amid the impending integration of Southeast Asia’s financial industry, which will open the local market to the entry of big foreign lenders. A merged Landbank-DBP is expected to compete effectively under such an environment. The consolidated entity would be more efficient and sustainable in carrying out the mandates of both banks, particularly in anticipation of the wave of foreign banks that might enter the Philippines upon the integration of Southeast Asian economies, the GCG said. DBP has 104 branches, while Landbank has about 337. This means a merged bank will have a bigger footprint of 441 branches.

The proposed bill in the House of Representatives also provides that the merger, including all aspects of its
implementation, will be exempt from the payment of all national and local taxes, fees and charges.

The blurring of the distinction between agricultural lending and industrial lending with the advent of agro-industrial ventures has made a compelling case to merge DBP and Landbank. Aside from achieving economies of scale and saving on cost, the emerging financial institution will be capable of undertaking developmental lending activities far more efficiently.