Surprising merger

MALACAÑANG’S announcement last week of the merger between two financially healthy government banks came as a surprise to many. People had expected the union between Land Bank of the Philippines (LBP) and Development Bank of the Philippines (DBP) to be processed in Congress, where a proposed enabling measure has been under deliberation since last year.

President Aquino gave the go-ahead to merge the two state-run banks through Executive Order No. 198 issued on Feb. 4. Malacañang defended its move by quoting the Governance Commission for GOCCs (GCG) as saying that “it is in the best interest of the state to merge DBP and LBP,” noting in particular the two banks’ overlapping functions.

LBP will be the surviving entity when it merges with DBP—an entity with combined assets of about P1.6 trillion, just behind the country’s biggest private bank, Henry Sy’s BDO Unibank (P1.88 trillion), and surpassing George Ty-led Metrobank (P1.37 trillion). At present, LBP is the country’s fourth-biggest bank in terms of assets, with P1.14 trillion; DBP, seventh in rank, has P465 billion.

Bangko Sentral ng Pilipinas Governor Amando M. Tetangco Jr. rationalized the merger by saying that it “is actually in line with the BSP’s advocacy for bigger and better banks and would potentially allow the national government to benefit from economies of scale in the banks’ operations.”

LBP’s authorized capital stock will be increased to P200 billion, from P25 billion at present. This huge increase will make the merged entity the biggest in the country in terms of capital, the GCG noted in a report submitted to Malacañang last year. In Southeast Asia, the merger would make LBP one of the region’s top 20 lenders.

The merger is not without its cost. The GCG will implement the merger and undertake a reorganization plan in which about 220 LBP employees will become redundant while 170 DBP workers will lose their jobs. The GCG has said that personnel separated from service would receive a merger incentive pay (MIP) on top of separation or retirement benefits. The MIP will depend on the employees’ length of service. Those who served 20 years, for instance, will receive an amount equal to one month basic pay multiplied by years of service.

Mergers make sense when the objective is to improve efficiency and economies of scale. In the case of DBP and LBP, both banks were performing well, except for the few controversial transactions at the former that were investigated by the BSP. Both were likewise turning out respectable profits and contributing to the government coffers through their dividends every year.

DBP and LBP had distinct functions when they were created, and it appears that their overlapping functions today were due to management straying from their original mandate. DBP was to focus on SMEs (small and medium enterprises), which have been found to help create jobs and lift many out of poverty. LBP, on the other hand, was to concentrate on agriculture, on which nearly half of the population remains dependent despite the sector accounting for just a sixth of the total economy.

Then there is the question: Why merge and not just privatize the two banks? Historically, it is always best to leave to the private sector the things it can do best, financial services being one of them. Regulators should open the playing field only to foreign banks, to ensure that local players have competition. Regulators should also amend the agri-agra law to make sure that actual funds are indeed being lent to the countryside by the banking sector. As it is, the law allows banks to count their investments in treasury bills and bonds as compliance with the agri-agra law provision requiring them to set aside 10 percent of their loanable funds to agriculture and agrarian reform borrowers.

While the President’s EO pointed out that the LBP-DBP merger would enhance the financing of priority projects and sectors such as infrastructure, public services, agriculture/agrarian reform and SMEs, the danger now is that the strengthened LBP might concentrate on competing with its private-sector peers, and lending to SMEs and farmers and fishers might take a backseat to the more profitable commercial lending.

If that happens, the government might just as well privatize LBP.