Dominguez: Next admin may merge DBP with a bigger bank

Finance Secretary Carlos G. Dominguez III–DOF photo

MANILA, Philippines—Finance Secretary Carlos Dominguez III on Tuesday (Feb. 22) said the next President should consider further raising the capitalization of state-run lenders like Land Bank of the Philippines (Landbank) to reach more small borrowers.

Dominguez also told members of the Financial Executives Institute of the Philippines (Finex) that the next administration may “really have to review the viability of DBP on its own.”

It was a turnaround from the Duterte administration’s previous stance on the state-run Development Bank of the Philippines, which led to setting aside the executive order issued by the late President Benigno Aquino III that should have merged Landbank and DBP in 2016, the year of transition from the Aquino to the Duterte administration.

During the Duterte administration’s first year in office, the Governance Commission for Government Owned and Controlled Corporations (GCG) composed of the President’s appointees, including Dominguez who’s an ex-officio member, cancelled the implementation of Aquino’s Executive Order (EO) No. 198, which should have established the country’s second-biggest bank in terms of assets that could challenge local tycoons’ dominance in the banking sector.

Back then, Dominguez, who oversees government financial institutions (GFIs), had said a Landbank-DBP merger “would not serve the public interest to transform the two institutions into one, given their different functions.” Landbank caters to agriculture, while DBP takes care of industries, Dominguez noted in 2016.

This time around, Dominguez told Finex members that DBP’s niche in the banking industry may be reviewed in the future, and after the troubles of also state-run United Coconut Planters Bank (UCPB) was resolved through its merger with Landbank.

Asked by Inquirer if the Duterte administration missed a chance to strengthen Landbank and DBP when it cancelled Aquino’s EO, Dominguez replied: “There was no ‘missed chance’ but rather a deliberate decision to focus on prioritizing the de-risking of the financial system by having UCPB absorbed by the well-capitalized and well-managed Landbank.”

“Now that the [Landbank-UCPB] merger is done, there may be an opportunity to reconsider the original plan” to merge Landbank and DBP, Dominguez said. The surviving entity in Landbank and UCPB’s merger will also be the second-largest in terms of assets, worth a combined P2 trillion.

“I prioritized that over the merger of DBP because UCPB, if you analyzed it, we have a potential risk of failure of UCPB that will cost PDIC P150 billion. So we decided we will put UCPB first in a safe place,” Dominguez said, referring to the Philippine Deposit Insurance Corp.

Had the Landbank-UCPB merger, which takes effect on March 1, not pushed through, UCPB’s capital adequacy ratio (CAR) had been set to fall below the Bangko Sentral ng Pilipinas’ (BSP) mandatory level.

Had it not been for the state-run PDIC’s capital notes, which saved UCPB in the past, the bank would have been non-compliant with the CAR requirement, industry sources said.

The merger would end the government’s direct support to ailing UCPB, whose shares had been acquired through Marcos-era coco levy funds, which the Supreme Court had declared as publicly owned.

In 2003, the PDIC granted financial assistance to UCPB’s recapitalization program. The PDIC also restructured a portion of its assistance into P12-billion convertible capital notes in 2019.

This was on top of the “substantial deposits” maintained by the government, through the Bureau of the Treasury, in UCPB, PDIC president and chief executive Roberto Tan said in 2020.

Dominguez said the next administration should also pursue what the Duterte administration started through a pending bill to amend Landbank’s charter and further hike its capitalization.

He conceded that the Department of Finance (DOF)-backed House Bill (HB) Nos. 10440 and 10581 may no longer by passed during the 18th Congress, which will adjourn in early June.

“Landbank has a stupid charter which says only cooperatives can invest in it — come on, that’s really stupid,” said Dominguez.

“So what we are doing is increasing the authorized capital of Landbank from P200 billion to P800 billion, increasing the paid-up capital to P200 billion, and hopefully, start listing Landbank to the stock market to the extent of about 20 percent, with no group holding more than 5 percent of Landbank. That is the plan,” Dominguez said. “I hope it gets done by the next administration.”

Dominguez said the tack to recapitalize Landbank and DBP in recent years helped the agriculture sector and small businesses gain easier access to credit amid the prolonged pandemic.

He noted that DBP’s capital was hiked from about P25 billion in 2016 to P70 billion at present. Landbank’s was nearly tripled to P200 billion from P70 billion at the start of the Duterte administration.

“Number one, we did not collect any dividends from them, because we are confident in our other sources of funds. Number two, we convinced the Congress that the best way to help small enterprises with this COVID-19 crisis is to put the money in banks because if you put it as a capital in the bank, they can lend out probably eight or 10 times that amount, rather than a government agency lending the money directly to an enterprise [in which] you can only lend it once,” Dominguez said.

“Banking has a multiplier effect of about 10 times. We also boosted up the capital of the PhilGuarantee [state-run Philippine Guarantee Corp.], which has a multiplier effect of about 17 times,” Dominguez said.

“In fact, the MSME [micro, small and medium enterprise] guarantees of PhilGuarantee have increased by almost a factor of five or six times in this short period of time. You get the most bang of your buck that way,” Dominguez added.

Last week, PhilGuarantee president and chief executive Alberto Pascual told the Inquirer that the DOF will release end-2021 guarantee figures soon.

PhilGuarantee had said it extended a total of P195 billion in credit guarantees as of end-November 2021 across the MSME, agriculture and housing sectors during the pandemic.

Pascual had said PhilGuarantee anticipates a further increase in guarantee volumes this year after bank loans recovered last year to reverse the recession-induced slump when both lenders and borrowers were risk-averse due to the COVID-19 crisis.

Moving forward, Pascual had said PhilGuarantee will offer facilities supporting energy and energy-efficiency projects, fintech firms, as well as qualified activities under the government’s strategic investment priorities plan (SIPP).

TSB