Why foreign banks exit the Philippines


By Abigail Marie P. Yraola, Researcher

MORE than two years since the coronavirus pandemic struck, the country’s banking system has not been left unscathed. Amid the geopolitical uncertainties, surging commodity prices, and rising interest rates, a couple of foreign banks opted to leave the country.

In April last year, Citigroup, Inc. announced it will sell its consumer banking business in the Philippines as well as other Asia-Pacific markets, but will retain its corporate banking presence.

The Manila branch of Dutch bank ING Bank N.V. also made a similar announcement in June this year, saying it will leave the Philippine retail banking market amid uncertain global conditions that affected its operations. However, it will keep its wholesale banking unit and global shared services operations in the country.

John Paolo R. Rivera, Asian Institute of Management economist, said that foreign retail banks exiting the country is most likely a strategic decision.

“There are more productive (profit-generating) ventures that these banks can take using the resources allocated for Philippine operations by simply leaving. These ventures can cover the costs of leaving and its accompanying opportunity costs,” Mr. Rivera said in an e-mail.

These exits mean less competition, more mergers and acquisition of operations, change in user experience for clients who are left behind and who choose to stay, he said.

“There will be less exposure of the Philippine banking sector to changes in foreign banks downside risks, more transactions and opportunities for market growth for locally based banks,” Mr. Rivera said.

UNIONBANK BUYS CITI’S RETAIL ARMThe global banking giant came to an agreement to sell its consumer banking arm to UnionBank of the Philippines. The acquisition will cover Citi’s local credit card, unsecured lending, deposit, and investment businesses, as well as Citicorp Financial Services and Insurance Brokerage Philippines, Inc.

The Philippine Competition Commission approved the P55-billion takeover in April this year, while the Bangko Sentral ng Pilipinas gave its green light in July.

Beginning Aug. 1, Citi said that it successfully completed its sale of its consumer business to UnionBank.

This transaction is expected to result in capital benefit of approximately $700 million for Citi.

The largest foreign bank in the Philippines, Citi has set up its bank in the country way back in 1902. Its corporate and investment banking platform helped propel growth for institutional clients in the country and across the globe.

Citi is recognized as the pioneer in business process outsourcing (BPO), providing customer sales and service, and other client-based support services to various Citi operations.

“We now rank in the top three in terms of credit card spending or usage. More importantly, it has provided us with one of the most diversified loan portfolios in the banking industry,” UnionBank of the Philippines Senior Vice-President and Head of Corporate Planning and Investor Relations Carlo I. Eñanosa said in an e-mail.

Consumer-to-total loans portfolio of the bank increased to 49%, more than double the industry average, he said. Mr. Eñanosa added that the acquired consumer portfolio is very profitable and further improves our net interest margin.

“We will also increase our retail customer base by almost one million new-to-bank customers, which are mostly in the middle- to upper-income segment and expect to generate additional value from the synergies across the merged consumer business,” Mr. Eñanosa said.

He also highlighted that this meant continuity of business operations and deeper leadership bench within the organization.

For Mr. Rivera, this shows a greater market for UnionBank and opportunities to leverage on what Citi has left behind.

The total assets that will contribute to UnionBank is close to a hundred billion pesos, Mr. Eñanosa said. This will consist of P65 billion of net loans, largely in credit cards, about P30 billion of cash, as well as other assets like the real estate property that houses their operations.

“With the Citi consumer business, our recurring income will increase in a major way. Our current net interest margin is at 4.7% and this will increase to 5.5% because of the Citi consumer banking business,” Mr. Eñanosa said.

Central banks around the world, including the Philippines, continued tightening their policy rates to temper rising inflation. Should this continue, Mr. Eñanosa said, this could impact the consumers except for products where there is a rate cap.

“Having said that, we think that the rate cycle might be approaching its peak,” Mr. Eñanosa said.

“There are other factors that banks consider in their pricing — such as competitive landscape, regulations, and market liquidity. It does not mean that as rates rise, we automatically pass the same level of increase to the consumers,” he added.

Credit rating agency Fitch Ratings said in a report rising interest rates will put more pressure on consumers and small businesses.

In its report “Impact of Rising Interest Rates on APAC Banks,” Fitch Ratings said that most banks will benefit from higher interest rates and that lending rates are likely to adjust more quickly than deposit rates.

“In the most competitive markets, such as Indonesia, the Philippines, and Taiwan, banks will have a weaker scope to pass on higher rates to borrowers, limiting the upside,” it said.

Moving further, UnionBank recently launched UnionDigital Bank, Inc. which is among the six digital banks that has been given digital banking licenses by the central bank alongside Overseas Filipino Bank, Tonik Digital Bank, UNO Digital Bank, GOtyme Bank and Maya Bank, Inc. As per BSP’s regulation, digital banks in the country must have a minimum capitalization of P1 billion.

The launch of UnionDigital completes its strategy of becoming a Great Retail Bank, said Mr. Eñanosa.

“A large universal bank would probably have less than 10 million customers on average and most banks are servicing the same customers. So, there is a large segment that remains to be unbanked or underserved. With UnionDigital, we will be able to extend financial services to this segment because digital has no boundaries in terms of reach,” Mr. Eñanosa added.

UnionDigital provides ease in opening accounts and facilitating financial transactions. Its cost to serve its customer is lower compared with a universal bank. UnionDigital has no branch legacy cost, no relationship managers, lower reserve requirements, and lower license cost per account.

“This means that it is now viable for us to cast a wider net in serving the Filipino consumers. Not to mention that it is 100% owned by UnionBank which means it addresses the level of trust which is sometimes a concern of customers in choosing a bank,” added Mr. Eñanosa

ING BANK MANILA’S EXITOn June 24, the Dutch banking giant ING Bank announced that it will exit the Philippine retail banking market before the year ends. Still, it will continue to invest in its wholesale banking business and global shared services operations in the Philippines.

In a statement, ING Bank said its exit is due to uncertain global macro situation in the last few years leading the bank not to expand the activities to other countries, which meant that the retail operations in the Philippines had to be re-assessed for its scalability as a standalone business.

The bank assured its retail customers that there is no change to their accounts. They can continue to access their funds and accounts anytime and their money remains safe and secure, the bank said.

This exit from the Philippine banking market also mirrored the same move ING made in European countries such as France, Austria, and Czech Republic in 2021.

ING was the first bank to go fully digital in the Philippines. It was also popular among savers due to its high-interest savings accounts.

Since 1990, ING Bank has been servicing corporate and institutional clients in the country. Its retail banking has begun operations in late 2018 which served more than 380,000 customers with savings accounts, current accounts, and consumer lending.

Since its launch, the bank has performed well, demonstrating good progress, commercial momentum, and growth potential. Currently, the bank has around 120 employees in both wholesale and retail banking.

ING is a Dutch member of the Inter-Alpha Group of Banks which is a cooperative consortium of 11 prominent European banks. They operate in more than 40 countries with its corporate headquarters in Amsterdam.

It also began its ING Business Shared Services, Inc. in 2013 which supports its banking operations across the world.

AIM’s Mr. Rivera assessed that the Dutch financial giant leaving the retail banking market is “strategic move in order for them to be able to harness their full revenue and profit potentials.”

“I believe ING will not leave their customers hanging behind. They are an established bank with a reputable track record. There are post departure systems in place to ensure consumer welfare,” he added.

UnionBank’s Mr. Eñanosa said the Philippine banking sector will benefit from the unique position in terms of growth prospects given the country’s demographics.

“Our country is composed of a young population at the beginning of their credit cycle and we have a large population that remains to be unbanked,” Mr. Eñanosa said.

“Our regulators also continue to support digitalization to promote financial inclusion and to accelerate distribution of financial services to the consumers.” he added.

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