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INVESTMENT BANKING
INDUSTRY STUDY IN THE PHILIPPINES
BA S A N T VE N U G O P A L
Washington SyCip Graduate School of Business
Asian Institute of Management
Manila, Philippines.
Electronic copy available at: http://ssrn.com/abstract=1233187Electronic copy available at: http://ssrn.com/abstract=1233187
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A B S T R A C T
The Philippines is dominated by large business conglomerates whose success has been largely
attributed to an underlying assumption that these business families had a financial institution
as the backbone for all their diverse business holdings. The lucrative nature of providing
financial services has been looked into with a view to understand whether the fundamental
assumption is correct. The study has focused especially on the investment banking services of
the Philippines to understand current trends, competitive structure and the government
support for such services. The study is a working paper that does not conclude on whether
there are enough factors to attribute the success of business conglomerates but rather is an
industry study on investment banking services and whether the environment is conducive for
other players to enter the Philippines investment banking sector.
Keywords: Philippines, Investment Banking, Performance, Current trends, Success factors.
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TABLE OF CONTENTS
C O U N T R Y A N A L Y S I S ( U S I N G S T E E P F R A M E W O R K ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
P O L I T I C A L F A C T O R S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 D O M E S T I C I S S U E S ..............................................................................................................................................4 P O L I C Y T R E N D S ..................................................................................................................................................4 G L O B A L I Z A T I O N B R O A D E N S M A R K E T H O R I Z O N S ...........................................................................................4 B A N K I N G R E F O R M S ............................................................................................................................................5 C A P I T A L M A R K E T R E F O R M ...............................................................................................................................6 I S S U E S A N D C O N C E R N S ......................................................................................................................................6
E C O N O M I C F A C T O R S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 C O U N T R Y P E R F O R M A N C E ..................................................................................................................................7 L I Q U I D I T Y A N D C U R R E N C Y I N D I C A T O R S ..........................................................................................................8 C O U N T R Y P R O S P E C T S ........................................................................................................................................9
E N V I R O N M E N T A L F A C T O R S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0 C O R P O R A T E S E C T O R S T R U C T U R E ...................................................................................................................10
F A M I L Y O W N E R S H I P D O M I N A N T ..................................................................................................................................10 C O N G L O M E R A T E S D I V E R S E ............................................................................................................................................11 S T A T E O W N E R S H I P S T I L L P R O M I N E N T .........................................................................................................................11 B A N K F I N A N C I N G ...........................................................................................................................................................11 D I R E C T F I N A N C I N G M A R K E T S I M M A T U R E ...................................................................................................................11
S O C I A L F A C T O R S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 P H I L I P P I N E S O C I A L C A P I T A L ...........................................................................................................................12
T H E I M P O R T A N C E O F R E C I P R O C I T Y A N D P A T R O N - C L I E N T R E L A T I O N S H I P S ................................................................13 T E C H N O L O G I C A L F A C T O R S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4
P R O F I T D R I V E R .................................................................................................................................................14 T E C H B R E A K T H R O U G H : O F F - S H O R I N G ..........................................................................................................15
I N V E S T M E N T B A N K I N G . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6
A B R I E F P A S S A G E T H R O U G H T I M E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 T H E G L O B A L I N D U S T R Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6
F U L L S E R V I C E F I R M S .......................................................................................................................................16 B O U T I Q U E F I R M S .............................................................................................................................................18
S T R U C T U R E F O R D E L I V E R Y O F F I N A N C I A L S E R V I C E S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 9 B E N E F I T S A N D C O S T S O F U N I V E R S A L B A N K I N G . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 0 R E A L I Z A T I O N O F T H E P O T E N T I A L B E N E F I T S A N D C O S T S ( T H R O U G H V A R I O U S
C O R P O R A T E S T R U C T U R E S ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 0 P H I L I P P I N E S I N V E S T M E N T B A N K I N G I N D U S T R Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2
I N V E S T M E N T H O U S E S - D E S C R I P T I O N ...........................................................................................................22 P R O F I L E O F I N V E S T M E N T H O U S E S .................................................................................................................22 R E G U L A T I O N S A N D T I M E L I N E .........................................................................................................................23
M A R K E T O U T L O O K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 5 G L O B A L D E A L S O U T L O O K ...............................................................................................................................25
H U N T F O R H I G H E R R E T U R N S I N E M E R G I N G M A R K E T S ................................................................................................25 G O I N G L O C A L .................................................................................................................................................................26 M & A A S A N A T T R A C T I V E O P T I O N T O I P O ...................................................................................................................26
P H I L I P P I N E D E A L S O U T L O O K ..........................................................................................................................26 D E A L A C T I V I T Y ...............................................................................................................................................................27
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D E A L S O U T L O O K ............................................................................................................................................................27 C O M P E T I T I V E E N V I R O N M E N T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 8 B A N K A F F I L I A T E D I - B A N K S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 8
P E R F O R M A N C E ..................................................................................................................................................28 S E R V I C E O F F E R I N G S & B E N E F I T S ...................................................................................................................29
I N D E P E N D E N T I - B A N K S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 9 F O R E I G N I N V E S T M E N T B A N K S .........................................................................................................................30 L O C A L I N V E S T M E N T B A N K S A N D T H E I R R O U T E T O W A R D S C A P T U R I N G D E A L S ...........................................31
I N D U S T R Y A N A L Y S I S ( 5 F O R C E S F R A M E W O R K ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2
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CO U N T RY AN ALYSI S (USI NG STEEP FR A M E WOR K )
P O L I T I C A L F A C T O R S
DO M E S T I C I S S U E S
The Philippine president, Gloria Macapagal Arroyo, is in a precarious position. In the past year
she has survived a coup attempt, allegations of vote-rigging and an opposition attempt to
unseat her. Restiveness within the lower ranks of the military also remains a concern, and
opposition-led demonstrations could yet lead to her ouster in a “people power” revolution.
Despite this, the president has retained the support of the top ranks of the military. The
possibility of her sudden overthrow cannot be ruled out, but unless a credible alternative
government emerges, Ms. Macapagal Arroyo should be able to survive as president until the
end of term in 2010.
PO L I C Y T R E N D S
Ms. Macapagal Arroyo has moved very determinedly on the reform agenda, but progress has
been faltering as a result of the administration’s need to deal with political problems. The most
important casualty of the political uncertainty in 2006 was the Budget Appropriations Bill (the
piece of legislation that authorizes the government to spend money). Although a
supplementary bill was eventually passed in late 2006, the delay highlighted the kind of
problems the government will continue to experience for as long as it lacks the congressional
support it needs to carry out all of its policies. However, it appears that progress in the
privatization agenda would continue with evidence coming in the form of the raising of US $
326 million by the sale of the energy company, PNOC-Energy Development Corporation in
December 2006. More progress is expected on a scheme to rationalize investment incentives,
which would reduce the amount of the tax revenue that the government foregoes from
investments that would have taken place regardless of whether or not incentives are in place.
G L O B A L I Z A T I O N BR O A D E N S MA R K E T H O R I Z O N S
The IMF’s involvement in the economy after financial crises in the 1980s, and lower growth due
to limited reforms helped Philippine authorities protect the financial sector from the worst of
East Asia’s mid 1990s excesses. However, more prudential reforms were needed to develop
financial markets so they are more active in corporate financing and disciplining corporate
entities. Although the Philippine banking sector needed less restructuring than elsewhere in the
region after the crisis, since then, bank led restructuring has converted many non performing
loans to equity. Sales of these shares have diversified corporate ownership and increased share
market liquidity.
The Securities and Exchange Commission (SEC) proposed and enacted four financial market
development bills: the Corporate Recovery Act to fast track the rehabilitation of distressed
companies, the Special Purpose Vehicles Act to create asset management companies and to
provide them incentives to buy banks’ non performing loans, the Revised Investment
Companies Act to stimulate mutual fund industry development, and the Securitization Act to
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encourage public and private companies to borrow against a pool of existing assets and/or
receivables.
BA N K I N G RE F O R M S
In the financial sector, the thrust is to preserve overall stability and resilience of the banking
system. This is important to manage the vulnerabilities highlighted by the Asian Financial crisis
and the challenges posed by the prevailing complex financial environment. This involves key
reforms risk management, stronger capital base and improved corporate governance standards
in the banking system.
The banking system remains resilient amid an ongoing economic recovery largely weathering
local and international shocks in the latter part of the year. Key financial indicators reflected
increasing capitalization, expansion in assets, double-digit growth in deposits and resumption of
lending. Capital adequacy ratio (CAR) of the banking system was at 18.8 percent, significantly
than the 10 percent statutory standard and certainly well above the international benchmark of
8 percent.
Banks also managed to enhance their asset quality. As of June 2007, the banking sector’s non-
performing loans (NPL) ratio stood at 5.7%. To sustain this positive momentum, banks will need
to stay vigilant while nurturing their competitive spirit. Banks need to intensify efforts to build
on reform initiatives for greater efficiency and increased viability.
Towards this motive, banks have started to reinforce their asset cleanup and strengthen the
capital base. These gained initial momentum when the SPV Act of 2002 became fully effective
on 9 April 2003 and its implementing rules and regulations came into force. The SPV law
provides tax incentives for the sale of NPAS to special purpose corporations. Since then, several
banks have taken decisive steps to dispose of their NPAS through the availment of incentives
under the law.
The urgency to clean up NPAS which eat up on the banks’ capital position got further
underscored with the move towards compliance with the shift to risk-based capital
requirements under Basel II by the start of 2007. These initiatives are in accordance with our
agenda to help banks strengthen their capital base and sufficiently align capital standards with
international norms.
The Bangko Sentral ng Pilipinas (BSP) has also started to implement measures to enhance
prudential and regulatory standards and improve the quality of corporate governance and risk
management practices across the financial system. A process of fully implementing a
consolidated and risk-based approach to bank supervision is being put in place. The shift to a
consolidated and risk-based approach to bank supervision is consistent with the overarching
goal of ensuring the smooth and orderly functioning of the entire financial system.
To create a sound banking environment, it is important that cognizance of the need to foster an
effective regulatory environment is taken. In July 2004, the BSP teamed up with the SEC, the
Insurance Commission (IC), and the Philippine Deposit Insurance Corporation (PDIC) to form the
Financial Sector Forum (FSF). The FSF serves as a venue for bringing into line sector efforts to
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enhance the financial system reform agenda, particularly in addressing harmonization and
coordination of supervisory and regulatory methods and policies, reporting and information
exchange and dissemination, and consumer protection and education. Considerably, this
initiate aligns the Philippines with the international practice to adopt a system-wide
consolidated approach to supervision.
CA P I T A L MA R K E T RE F O R M
The emergence of highly interconnected financial systems transcending national boarders
encouraged BSP to take an activist stance to develop the domestic capital market and to
optimize the country’s access to international capital.
One fundamental step toward this goal is the shift to inflation targeting and the higher level of
policy transparency it requires, as basis for the conduct of our monetary policy in achieving
price stability. Price stability is the key to macro-economic stability, which is a necessary pre-
condition to capital market development. Policy wise, there has been a commitment to
mitigate supply side inflationary pressures but with some degree of flexibility so as not to
sacrifice economic growth.
Another corollary initiative is to broaden the array of available capital market instruments such
as tier 2 paper, LTNCDS, documented repos, structured debt, collateralized debt obligations,
and credit derivatives. BSP has supported this with regulatory changes giving some incentive to
financial innovation but under appropriate risk management standards.
On the demand side, BSP has reformed the trust business with the conversion of the common
trust funds into a better product called the unit investment trust fund or UITF. BSP is also
looking at other managed funds to further expand the domestic investor base for sophisticated
and unsophisticated investors under adequate safeguards.
Also, the entry of more high quality rating agencies is being encouraged as they are crucial in
discovering fair prices commensurate to risk. Another reform initiative is to institutionalize an
independent securities custody system to improve investor protection, to defeat market
malpractices like multiple selling of securities and undocumented transactions, and to reduce
systemic risks.
I S S U E S A N D CO N C E R N S
Despite a number of policy reforms and recent good news, the Philippines continues to face
important challenges and must sustain the reform momentum to catch up with its regional
neighbors and to translate the current cautious optimism into the long-term confidence
required to spur investments, achieve higher growth, generate employment, and alleviate
poverty for a rapidly expanding population. Absent new revenue measures, sustained fiscal
stability will require more aggressive tax collection efficiency to address the severe under-
spending in infrastructure and social services in recent years of tight budgets. Addressing delays
in power sector privatization remains critical to the long-term stability of public sector finances,
ensuring reliable electricity supply, and to bringing down the high cost of power.
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Potential foreign investors, as well as tourists, continue to be concerned about law and order,
inadequate infrastructure, policy and regulatory instability, and governance issues. While trade
liberalization presents significant opportunities, intensifying global competition and the
emergence of low-wage export economies also pose challenges. Competition from other
Southeast Asian countries and from China for investment underlines the need for sustained
progress on structural reforms to remove bottlenecks to growth, to lower costs of doing
business, and to promote good public and private sector governance. The government has been
working to reinvigorate its anti-corruption drive, and the Office of the Ombudsman has
reported improved conviction rates. Nevertheless, the Philippines will need to do more to
improve international perception of its anti-corruption campaign—an effort that will require
strong political will and significantly greater financial and human resources.
E C O N O M I C F A C T O R S
CO U N T R Y PE R F O R M A N C E
GDP growth accelerated to 7.3% in the first half of 2007
from 5.6% in the first half of 20061 (See attached figure
for Growth of GDP demand components). The sharp rise
was due to robust growth of net exports and private
consumption, and higher government expenditure.
Private consumption, accounting for more than three
quarters of GDP, grew by 6.0% in the period,
underpinned by an 18.1% rise (to $7.0 billion) in
remittances from overseas workers. Government
consumption rose by a sharp 11.8% and public sector construction investment surged by 33.8%.
Both were boosted by some nonrecurring factors: recovery expenditures for typhoon-damaged
areas and accelerated spending ahead of legislative & local government elections in May 2007.
GDP had risen by 5.4% in 2006, maintaining its slight
upward trend of the past 5 years (see attached figure for
GDP growth)2. Personal consumption expenditures and
net exports were the main contributors in 2006. The
substantial remittances and low interest rates supported
private consumption.
However, gross fixed capital formation continued to
decline as a share of GDP to the lowest level in 20 years 3
(refer to attached figure for Gross fixed capital formation),
reflecting a deficient investment environment and
restraints on the public capital spending required to
buttress the Government’s fiscal position.
1 Asian Development Outlook database; National Statistical Coordination Board, available: http://www.nscb.gov.ph.
2 Asian Development Outlook, ibid.
3 CEIC Data Company Ltd., downloaded from http://www.adb.org/Documents/Books/ADO/2007/figs/f2-26-2.xls.
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On the supply side, services recorded particularly strong growth of 8.6%. Retail trade, a major
sub-sector, expanded by 10.5% on the robust private consumption. Industry grew by 7.2%:
construction and mining performed well,
manufacturing less so (See attached figure for growth
of industry sub-sectors). Construction was strongly
supported by the jump in public sector investment.
Private sector construction also grew, by 8.5%, a
turnaround from a decline in the year earlier period.
Mining output (up by 24.3% in the first half)
benefited from high global prices for minerals and
startups of new projects. Production of coal, natural
gas, and nickel increased, although from low bases.
Quarrying surged with the higher levels of construction activity. Manufacturing grew by just
3.9% in the first half, the lowest rate of expansion in several years, in part because of weakness
in global demand for electronic products, a major export category.
The outlook for the full year has improved with the stronger than expected first-half
performance and lower than projected inflation. Private consumption spending will continue to
be boosted by remittances. On the other hand, with elections out of the way, government
spending is unlikely to be as strong in the second half. The contribution of net exports is
projected to decline, too, because imports were unusually weak in the first half. Still, taking into
account the higher than expected private consumption and government-led investment, the
GDP forecast for this year has been revised up to 6.6% from 5.4% by various organizations
monitoring economic activity in the region especially the Philippines.
L I Q U I D I T Y A N D CU R R E N C Y I N D I C A T O R S
Broad money (M3) rose by about 20% on average in
the first 6 months of 2007, double the rate of a year
earlier, driven mainly by foreign exchange inflows and,
to a lesser extent, by the growth of credit to the public
and private sectors. Reflecting ample liquidity in the
banking system, interest rates on domestic treasury
bills eased: the nominal yield on 91-day bills declined
below comparable US treasuries in November 2006, for
the first time in 25 years, and this relationship has been maintained this year (See attached
figure for the Treasury bill rates).4
Gross international reserves increased to $30.3 billion
as at end- August 2007, equivalent to 5.6 months of
imports. Strong demand for pesos for current and
capital account transactions led to a 5.2% appreciation
4 BSP, http://www.bsp.gov.ph; Board of Governors of the Federal Reserve System, http://www.federalreserve.gov.
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against the US dollar in the 8 months to August.5 (See figure attached in the previous page). The
real effective exchange rate appreciated by 5.1% in that period.
BSP, the central bank, concerned that the strong growth in money supply posed inflation risks,
in May moved to drain surplus liquidity. It encouraged government-controlled corporations to
deposit funds with the central bank and made available a special deposit account facility to a
wider range of financial institutions. In July, the monetary authorities ended a tier system on
rates paid to banks on overnight deposits, an arrangement that encouraged banks to lend. BSP
has described the overall impact on monetary policy of these July changes as neutral.
Later, BSP on Oct 4, 2007 unexpectedly cut its key policy rates by 25bps, taking the borrowing
and lending rates to 5.75% and 7.75% respectively. The scope for further cuts beyond that
appears limited, however, given the expectation that the US Fed will not cut rates below 4.50%.
Importantly, inflationary risks also lie to the upside in 2008, with the output gap set to widen
and this year’s rate cuts coming ahead of a projected rise in budget spending in 2008. Given
these factors, there are signals that one more 25bp cut by the year-end is in the offing taking
the overnight borrowing rate to 5.50%.
CO U N T R Y P R O S P E C T S
Robust growth is expected to be sustained in 2008,
though not at the pace of this year. Services will
continue to be the main driver, supported by growth
in remittances and therefore in consumption. Retail
trade and transport, residential real estate, and
communications services are expected to expand
strongly. Services as a whole are projected to grow by
7.4% next year.
In industry, export-oriented manufacturing will do better if global demand for electronic
products picks up as projected, but mining and quarrying is likely to decelerate from the rapid
expansion seen in 2007. Government expenditures on infrastructure will support growth of
construction. However, the expected softening of the global electronics market and the
slowdown in overall external demand will crimp manufacturing output. Industry as a whole is
expected to grow at around 5.0%.
Investment will likely recover to 4–6% growth, compared
with 2.0% in 2006 and an average annual increase of just
0.4% in 2002–2006. It will be supported by higher
government expenditures and low real interest rates.
Bank balance sheets have strengthened (see attached
figure), and so banks’ willingness to lend may rise,
especially as the lending–deposit spread is at the top of
the range seen over recent years.
5 A point above zero indicates an appreciation of the peso. CEIC Data Company Ltd.
10
E N V I R O N M E N T A L F A C T O R S
(The environment assessed here is the business or corporate environment of the Philippines)
CO R P O R A T E SE C T O R ST R U C T U R E
The Philippines market lack competition with diverse, family controlled conglomerates
operating alongside large government owned firms. Private individuals own most firms and rely
almost exclusively on private and bank debt financing. Even listed firms retain close to 70 per
cent of their equity in private hands and draw their finance mostly from banks. Relatively weak
competition in finance, goods and services markets shelters managers from external discipline.
Conglomerates form cartels, which guarantee high profit rates in many markets, despite often
poor management.6
FA M I LY OW N E R S HI P DO M I N A N T
The Philippines’ top five families control almost 43% of total listed corporate assets, the highest
proportion in East Asia7. In total, families control 48 per cent of publicly listed firms, where
control is defined as 20 per cent of equity; this is the second highest rate of family ownership in
East Asia after Hong Kong. Families tightly control most boards, minimizing outside minority
shareholders’ influence. Business groups often comprise a complex mix of listed and private
companies, producing opaque ownership structures8. Of the major banks, each one is owned by
a family, a single firm or the Government.
% of Total Market Capitalization That Families Control
Top Family Top 5 Families Top 15 Families
Hong Kong 6.50 26.20 34.40
Indonesia 16.60 40.70 61.70
Korea 11.40 29.70 38.40
Malaysia 7.40 17.30 28.30
Philippines 17.10 42.80 55.10
Singapore 6.40 19.50 29.90
Taiwan 4.00 14.50 20.10
Thailand 9.40 32.20 53.30
Source: International Monetary Fund
6 ‘Changing Corporate Asia: What Business Needs to Know’, March 2005, Economic Analytical Unit, Department of Foreign Affairs and Trade.
7 Claessens, S., Djankov, S. and Lang, L.H.P., 2000, ‘East Asian Corporations: Heroes or Villains?’, World Bank Discussion Paper No 409, World
Bank, Washington DC and Mueller, Holger M., and Philippon, Thomas, September 2006, ‘Family Firms, Paternalism, and Labor Relations’
8 Naughton, T., 2001, Consultancy prepared for the Economic Analytical Unit, August.
11
CO N G LO M E R A T E S D I V E R S E
More than many other corporations in any East Asian economy (except maybe Japan),
Philippine corporations cross-hold equity in large portions thereby creating larger
conglomerates. They operate in a wide range of sectors, including real estate, services, banking,
infrastructure supply, manufacturing, retail, telecommunications and mass media. While this
can often reduce their economies of scale and raise costs, entry barriers maintain high profits at
consumers’ expense. Corporate groups with affiliated banks and finance companies can access
cheap finance, reducing their need for direct financing.9
ST A T E OWN E R S HI P ST I L L PR O M I N E N T
Despite more than a decade of privatization, the Government still owns and manages more
than a 100 state owned enterprises in the power, agriculture, railways, high technology and
financial sectors. The government owned Development Bank of the Philippines is a significant
source of concession finance. The government pension fund also holds equity in private banks
and other firms, potentially influencing their lending decisions and other outcomes affecting
outside investors.10 The Government can direct private banks to lend to state owned firms,
providing implicit guarantees for state firms to borrow, increasing the risk of unviable
investment.
BA N K F I N A N CI N G
Commercial banks largely finance firms, especially those belonging to the same industrial group.
However, banks’ roles in corporate governance are much less clear than, for example, in Japan,
under the ‘main bank’ system. Philippine banks are not represented in management positions,
nor do they monitor corporate activity in the way Japanese ‘main banks’ do.11
Like elsewhere in East Asia, firms prefer bank financing to equity financing, as it does not dilute
ownership. Close bank-corporate connections remove the need for managers to compete for
equity market finance; only 200 of the Philippines’ top 1 000 companies are publicly listed. Bank
ownership also is concentrated amongst powerful family shareholders, hindering prudential
supervisors’ regulatory capacity.12
D I R E CT F I N A N CI N G MA R K E T S IM M A T U R E
Banks and corporate entities are reluctant to dilute ownership by issuing equity; this inhibits
share market development. Companies often issue minimal shares to secure a listing.13 Large
blocs of controlling shareholders hold tightly most shares in most Philippine companies and
9 De Ocampo, R.F., 2000, Corporate Ownership and Corporate Governance: Issues and Concerns in the Philippines, paper presented at Asian
Development Bank—OECD-World Bank ‘2nd Asian Roundtable on Corporate Governance’, Hong Kong, 31 May-2 June. 10 Cruz, S., 2001, Economic Analytical Unit interview with Director, Corporate Affairs, Department of Finance, Manila, February.
11 Naughton, ibid.
12 De Ocampo, ibid.
13 De Ocampo, ibid.
12
often dominate decision making in public companies. Regulations require firms to list a certain
minimum of their equity in initial public offers, deterring private companies from listing.
Central bank regulations also deter securitization, with reserve requirements preventing banks
from selling commercial paper. However, with the enactment of the new Securitization Act,
there appears to be intent to bring in more liquidity and leverage to the financing market. On
the demand side, the middle class mostly prefers to hold US dollar deposits, which represent 60
per cent of all bank deposits, rather than local shares, also inhibiting the share market
developing. Hence, share market capitalization is a relatively modest 60 per cent of GDP;
furthermore low share market turnover increases price volatility and deters investors.
Outside the banking sector, mergers and acquisitions, hostile takeovers and corporate raiders
are rare, limiting discipline on management by protecting managers from the consequences of
poor decisions. When corporate entities change owners, they normally do so behind closed
doors.
However, with the advent of globalization and a heightened sense of corporate governance, the
corporate structure has been in a state of flux. These factors combined with a lot of developed
countries looking for countries that would diversify their business portfolios has led to
reshaping the business structure alongside the practices that have always dogged the country.
S O C I A L F A C T O R S
Traditional macro-economic models considered several factors contributing to the production
process: land, labor and capital. As technology, corporate ownership, and governance and
societal models themselves evolved, the differences among these factors have diminished and
their importance relative to each other has changed. In the advanced economies of today, it
would be more accurate to simply distinguish between “natural capital” and “human capital”.
The latter has metamorphosed into various buzzwords like “knowledge capital”, “intellectual
capital” and to some extent with reference to specific countries into “cultural capital”. One
such reference point in the development of human resources has been the notion of “social
capital” that has come to be defined as “the ability of people to work together for common
purposes in groups and organizations” or “the ability to associate with each other” which in
turn depends on “the degree to which a community shares norms and values and subordinates
individual interests to those larger groups”.
PH I L I P P I N E S O C I A L CA P I T A L
Despite the absence of any convincing and scientifically established account in defense of a
distinctively Filipino philosopher or of a distinctively Filipino philosophical school, it would be
erroneous to infer that no distinctively Filipino “political culture” – one that identifies with
Filipino people and the Filipino nation – exists. Philippine society is characterized by a rich
spatial (rural and urban, multiplicity of regional and ethnic groups, etc.) and temporal or
historical diversity. The plurality of languages (111 in all including dialects), ethnicities, religions
together with geographic fragmentation (7,107 islands) and its relatively short experience as a
sovereign nation, all account for the constitution of peculiar political culture.
13
The contemporary Philippine political culture has the following hallmarks: the primacy of
kinship ties, the importance of reciprocity and patron-client relationships, the emphasis on
smooth interpersonal relationships and a pervasive poverty.14
THE I M P O R T A N CE O F R E CI P R O CI T Y A N D P A T R O N - CL I E N T R E LA T I O N S HI P S
Reciprocity means that favors or gifts received now should be returned in the future. There is
no clear distinction between a gift or a personal favor and whatever one receives as due
because of a legal or moral right. The patron-client relationship is a kind of reciprocity
between persons of unequal socioeconomic status and it is modeled after the paternal-
filial relationship. The obligations arising from the patron-client relationship are almost
unilaterally determined by the patron. Thus, this relationship can very easily degenerate into
an exploitative one.
Reciprocity, and in particular, patron-client relationships, are governed by the traditional value
of "utang ng loob" (literally, "inner debt" in the sense of "debt of self", or better still, a
deep and practically non-repayable "debt of gratitude"). This custom is perhaps the strongest
agent of vertical integration in society, outside of kinship ties. Whoever fails to honor his
“utang ng loob" is considered a social outcast or "walang hiya" ("without shame, honor or
credibility", public "loss of face"), which is the worst opprobrium possible in Philippine society.15
After the principle of kinship, the second most powerful force in the shaping of Filipino
society -and of business organizations within it- is that of patronage. Patronage is the
preferential treatment extended towards one's workers or the members of one's town,
province or linguistic group, eliciting in return a deep sense of indebtedness (utang ng
loob). Its influence is most keenly felt in the realms of government and politics. The success of
a business venture in the Philippines heavily depends on having a powerful and influential
patron in government. Oftentimes, government officials are favorable to a person
because they have received financial support from him for their political campaigns or they
somehow expect to benefit from his wealth and good business fortune. Thus patronage,
which theoretically could have been exercised for altruistic ends, becomes a mode of rent-
seeking and a catalyst for corruption. A person that forms part of the elected officials'
"cronies", receives preferential treatment from government and his business flourishes.
From the favored person's perspective, it does not really matter that the financing for
the advantageous government projects comes from the public treasury. Such deeds will
always be remembered as "personal" favors that sometime, somehow will have to be repaid. In
the opposite case, when the political climate is perceived to be adverse to a prominent business
person, he may very well decide to close shop, liquidate his interests and migrate elsewhere. As
the Philippines evolves from an agricultural society to a more industrial one, the
14
Timbermann, David (1995): A Changeless Land. Continuity and Change in Philippine Politics. Singapore:
Institute of Southeast Asian Studies.
15
Sison, Alejo Jose G., “Business and Culture in the Philippines: A Story of Gradual Progress”, Instituto Empresa y
Humanismo, Universidad de Navarra.
14
patronage formerly exercised by the landlords has been passed on to the state, more
concretely, to government officials, be they elected, appointed or bureaucrats.
These two unwritten factors combine to form a strong social context to understand the
business dynamics in Philippines as they form a base on which investment banking business is
created.
T E C H N O L O G I C A L F A C T O R S
Many forces, internally and externally, could force a country and its organizations to change.
Researchers in the 1990s program at MIT had developed a framework called the ‘Dynamic
Tension between External and Internal Dimensions of the Organization’16 that is still very
relevant in understanding the importance of technology in its impact on the country and
organization. The framework and research recognized the importance of the external
technological environment and with the extraordinary growth of internet use, the force of
technological impact has assumed even more significance. To stay ahead of the game, countries
and organizations have started to work tirelessly to stay ahead of the curve and to enhance
finally the experience of the users – customers and investors.
PR O F I T DR I V E R
Technology has been identified as a top profit driver over the next three to five years especially
the technology required to build strategic alliances with customers, partners and other
stakeholders. 17 One of the key emerging technology trends lies in navigation and
personalization. Customers are increasingly choosing for themselves how they communicate
with providers. At HSBC, for instance, more customers interact with the bank online and by
phone than enter its branches. Elaborate, technical functionality becomes less important than
ease of use, navigability and personalization. Successful firms will balance personal contact and
technology to provide personalized service at a reasonable cost.
Financial services firms must also look to technology to strengthen relationships with partners
and intermediaries. Working together in a joint IT exercise to deliver a product or service can be
challenging but spreads the cost burden. Similarly, intermediaries welcome technology that
helps them operate more efficiently, reduces their costs and maximizes their profits.
For institutional clients, sell-side firms have flocked to offer multi-product electronic trading
platforms, featuring direct market access (DMA) and algorithmic trading. Lower commissions,
anonymity, faster execution and improved communication have made DMA attractive to hedge
funds and other buy-side institutions. Over the next three to five years, these platforms will
evolve further, becoming more robust and providing sophisticated post-trade analysis, risk
modeling and performance management reporting. Even on the institutional side, technology
should play a central role in client service and client communication. Clients’ portfolios have
16
Scott Morton, M.S., “The Corporation of the 1990s: Information Technology and Organizational Transformation”,
New York: Oxford University Press. 1991. 17
Deloitte Financial Services, “Global Financial Services Industry Outlook: Shaping Your Strategy in a Changing
World”, Survey conducted to identify the key transformative issues in the industry, 2007.
15
become accessible 24 hours a day, seven days a week. If somebody is up at 3:00 a.m. and
visiting somebody in Japan and a story comes across the wire that a company goes bankrupt,
then they can go into a password-protected website and see if they own the stock or bonds of
that company.
T E C H BR E A K T H R O U G H : O F F - S H O R I N G
Off-shoring has become a competitive fact of life for financial institutions and the boom has
expanded into many countries, perhaps most prominently India, the Philippines, Malaysia and
China. The industry as a whole could triple the cost savings from its offshore operations and
there have been estimates that off-shoring institutions could reduce their annual cost base by
up to $16 billion – tripling current savings of around $5 billion. The additional benefits would
come from two key sources. First, scaling headcount from around 3.5% of total headcount
offshore with average cost savings of 38% to the current best practice of 6.7% of total
headcount could yield 60% cost savings. Second, efficiency gains could be created by expanding
the scope of operations to “full service,” which means relocating all types of functions from IT
and back office, to middle and front office activities.
Though some institutions have retreated from offshore call centers, companies generally add
more functions, often full-service, after several years of off-shoring a single function. Large
institutions are naming heads of global off-shoring or outsourcing, a sign that off-shoring is
maturing. Increasingly, the industry is moving away from outsourcing toward captive
operations or a hybrid approach of captive and outsourced functions.18
The Philippines, for instance, is the third largest English-speaking nation in the world (after the
US and the UK). Filipino IT professionals are highly trainable with a typical learning curve of six
to eight weeks. The Philippines also has the largest pool of high quality accountants in Asia.
There are about 115,000 licensed accountants in the country, recognized as ‘among the best in
the world’.19 Schools in the Philippines produce more than 100,000 graduates in Finance,
accounting and management every year, and that number is rising.20
18
Deloitte Financial Services, “Global Financial Services Offshoring: Scaling the Heights”, 2005. 19
Deloitte Global Financial Services Industry survey: EU firms show keen interest in the Philippines financial
professionals, 2007 survey of CEO, CIO etc. 20
Taing, Anna, “The times are a-changing”, August 8, 2006, The Edge.
16
IN V EST M E N T BA NK I N G
A B R I E F PA S S A G E T H R O U G H T I M E
The story begins with the remedial intention of the legislation through the Glass-Steagall Act21
to separate the commercial banking activities from investment banking activities. The
legislation of the 1930s was motivated with a need to protect bank depositors from the risks
inherent in securities transactions. The act placed restrictions on the commercial banks from
engaging in securities underwriting, from taking positions for their own accounts in certain
types of securities and from acting as agents in securities transactions. Also, investment banks
were barred from taking deposits and corporate lending as these were inside the domain of the
commercial banks.
Investment banking has been narrowly defined as those financial services associated with the
issuance of corporate securities or primary markets maker for securities and broking and
dealing services in securities (secondary market). This was the traditional view of investment
banking after the passing of the Glass-Steagall Act. In recent times, investment banking has
been come to view on the basis of purely functional terms such as cash-generating activities
and support activities. The cash-generating activities include primary and secondary market
making, trading, corporate restructuring, financial modeling, advisory services, merchant
banking, investment management and consulting. The support services include clearing,
research, internal financing and information services.
However, on November 12, 1999, President Bill Clinton signed into law the Gramm-Leach-Bliley
Act (GLBA) that repealed the Glass-Steagall Act of 1933. The GLBA allowed commercial and
investment banks to consolidate and the combined industry came to be known as the “financial
services” industry.22
T H E G L O B A L IN D U S T R Y
The global investment banking industry is often described as an oligopoly as a relatively few
firms dominate the industry. The largest firms are the ones who find their names in the largest
size in the tombstones of the public offering announcements also known as the “Special
bracket” or “bulge bracket”. The second-tier of firms are known as “Major bracket” and then
come the “Regional” or “Sub-major”. The industry though denominated by a small number of
players is characterized by intense competition.
FU L L SE R V I C E F I R M S
Investment banks range from being full-service providers to boutique-firms. The latter are
known as specialty banks and only cater to certain industry segments or provide specific
services in which they have a core competence. The full range of services that an investment
bank can provide is as follows:
21
As mentioned in an early interview with Mr, Norman T. Pe (SVP- Controller, Penta Capital Investment
Corporation) and further researched on by the student-researcher-MRR writer. 22
Gramm-Leach-Bliley Act, available in Wikipedia (http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act)
17
1. Primary and Secondary market making
These would include underwriting and issue management, dealing and trading
(speculation and brokerage) and private placement
2. Treasury and Financing
The services provided would include among others loan syndication, fixed income
instruments (like Treasury bills, asset-backed securities etc.) investment etc.
3. Financial Engineering or Structured Finance
The general services provided would be way of complex financial modeling, structuring
of mortgage-backed securities or providing securitization functions, structuring and
dealing with derivative products and receivables discounting, promissory note lines,
leasing etc.
4. Advisory Services
The many types of advisory services that can be provided would be in areas of
investment management, venture capital seeking and sourcing, consulting on general
business & strategy.
5. Support Activities
These are miscellaneous services like research (support during issues or generally as
industry analysis or company analysis), funding or internal financing and information
services or brokering
While the above is more of a services view of an investment bank, many are distinguished by
way of desks that revolve around presenting and executing new investment opportunities to
the clients like:
1. Sales – Offering of trading strategies through liaising with the traders and researchers
on what they have in their books and their knowledge of the market. Sales is also
responsible for raising capital on behalf of companies and governments by placing
bonds and shares with investors
2. Trading - Traders make prices, book trades and manage risk on behalf of clients. They
generally liaise with the sales team on their desk to understand what clients want, what
ideas Sales and Research are pushing to clients and whether these are realistic
according to market prices.
3. Research - Depending on the desk, researchers are often client facing with Sales,
presenting their research and ideas on how different markets will perform. This might
include analysis of a company or industry sector’s financial performance, or an opinion
on the GDP growth prospects of a particular country.
18
4. Structuring - These are the people who create the more complex, over-the-counter
instruments, they have their own desks and interface with clients. There are hundreds
of trading desks globally in large investment banks, but they can be split into some key
areas:
a. EQUITY - These desks handle investments in various companies across the world.
Investors typically buy and sell equity in companies based on expectations of
future profitability. The Research function plays an important part:
i. Analysts examine company performance, investigate industry trends and
scrutinize any issues impacting the companies’ finances.
ii. Traders pay close attention to results statements, but any information
that could affect future financial performance of a company will result in
swift buying or selling activity.
b. DEBT - Also known as fixed income, many banks buy and sell debt (typically
bonds) issued by governments, institutions and corporate entities. Organizations
issue debt instruments in order to secure funds for a fixed term, perhaps 5-10
years. Investors buy bonds for the regular interest payments they receive before
an instrument matures and the debt is repaid. Debt is sometimes considered less
fast-paced than equities due to a higher proportion of longer-term investors.
c. MONEY MARKETS & FOREIGN EXCHANGE - Money market desks typically lend
and borrow large amounts for very short-term periods (usually from a day to
three months).
d. DERIVATIVES - These are complex instruments based on the performance of an
underlying asset, e.g. debt or equity. Derivatives are a way of dealing in a
particular financial instrument in the future under specific circumstances, so they
are often used to manage risk. More complex still are structured products –
derivatives based on multiple, market factors. These instruments are often
tailored to very specific needs and as such require a detailed knowledge of
market dynamics and risk modeling to make the structured product attractive to
the client and profitable for the bank.
BO U T I Q U E F I R M S
Boutique firms require that they maintain a close relationship with the big banks as they would
be called upon a regular basis to provide the expertise that they have gained or have a core
competence on. By employing boutique firms, the major firms get access to the special
knowledge that a boutique firm possesses. Such an arrangement is not a rarity in the
investment banking industry as it is better always to slice the pie and give some small pieces
rather than keep the whole.
19
S T R U C T U R E F O R D E L I V E R Y O F F I N A N C I A L SE R V I C E S
The figure below presents three alternative structures for the undertaking of nontraditional
activities by commercial banks: the universal bank, in which the nontraditional activity is
consolidated within the same corporate unit as the bank; the holding company affiliate, in
which the bank is in one subsidiary of a holding company and the nontraditional activity is in
another subsidiary of the holding company; and the operating subsidiary, in which the
nontraditional activity is located in a subsidiary of the bank. 23
A pure universal bank is one that manufactures and distributes all financial services within a
single corporate structure, while the German variant combines commercial and investment
banking in a single corporation but conducts other financial activities through separately
capitalized subsidiaries. A universal bank can also be considered a financial conglomerate. The
Joint Forum on Financial Conglomerates24 defines financial conglomerates as “any group of
companies under common control whose exclusive or predominant activities consist of
providing significant services in at least two different financial sectors (banking, securities,
insurance)” (Joint Forum, 1995: 1). Bancassurance, a marketing arrangement wherein banks sell
insurance products, that involves affiliated firms also meets the definition of a financial
conglomerate.
The structure that a bank adopts in delivering integrated financial services is influenced
primarily by regulation. There are also other factors, including the historical development of a
country’s financial markets, market power, and economies of scale and scope.25
Figure: Three Alternative Structures
Source: Shull and White, 1998
23
Shull, Bernard, and Lawrence White. 1998. Of Firewalls and Subsidiaries: The Right Stuff for Expanded Bank
Activities. (extracted from the SSRN archives - http://papers.ssrn.com/sol3/papers.cfm?abstract_id=164498) 24
The Joint Forum was established in 1996 under the aegis of the Basel Committee on Banking Supervision, the
International Organization of Securities Commissions (IOSCO), and the International Association of Insurance
Supervisors (IAIS), in order to take forward the work of the Tripartite Group on a range of issues relating to the
supervision of financial conglomerates. 25
Skipper, Harold. 2000. Financial Services Integration Worldwide: Promises and Pitfalls. (extracted from the World
Bank website - http://www.worldbank.org.cn/English/content/skipper.pdf)
20
B E N E F I T S A N D C O S T S O F UN I V E R S A L B A N K I N G
BENEFITS COSTS
1. Informational Advantages
a. More information from clients via
various products offered
b. Developing of long-term relationships
and offer better terms to the clients
2. Economies of scope
a. Information access, distribution and
marketing economies, risk mgmt.
b. Lower transaction costs, negotiating
better deals, potential for lower
product prices for customers in
competitive environment
3. Economies of scale
a. Overhead reduction in administration,
back office operation, IT & investment
banking style operations
b. Also allows exploitation of scope
economies
4. Risk diversification
a. Stable revenue streams
b. Higher profits in periods of
disintermediation
5. Increase in revenue generation
a. Cross-selling of different services &
products
1. Conflicts of interest
a. Abuse of trust – sell low-quality
securities without explaining risks
2. Reduction in competition
a. Reduce scope of competition.
Tradeoff between safety & soundness
3. Concentration of Economic & Political
power
4. Monitoring
a. More difficult to supervise
b. More difficult for the market to
monitor
5. Expansion of safety net
a. Safety net of deposit taking
institutions maybe extended to
investment banking activities of banks
R E A L I Z A T I O N O F T H E PO T E N T I A L B E N E F I T S A N D C O S T S ( t h r o u g h v a r i o u s c o r p o r a t e s t r u c t u r e s )
The extent to which the potential benefits of integrated banking can be realized depends
largely on the organizational model that is permitted to adopt for the commercial banking and
securities activities. Three models can be distinguished:
(i) the universal banking model;
(ii) the bank-parent model; and
(iii) the holding company model.
21
Benefits/ Costs Universal Banking Bank - Parent Holding Company
Informational
Advantage
Realization to the full
extent
Maybe reduced if
bank-parent do not
share information
Severely reduced as
units are restricted
from exchange of
information
Economies of scale and
scope
Realization to the full
extent
Somewhat reduced
due to introduction of
operational separate-
ness & activities not
fully integrated
Reduced as operational
separateness requires
development and
operation of separate
units – increased costs
of operation
Diversification of
sources of revenue
Realization to the full
extent
As profits accrue to
the bank, impact of
diversification can be
realized at bank level
Limited as revenues
generated by securities
activities accrue to that
unit
Cross-selling benefits &
revenue increase
Realization to the full
extent
Can only be realized to
the extent that bank
can use its outlets to
cross-sell products
Limited
Competition reduction Potentially Potentially Potentially
Conflicts of interest Limited safeguards Potential reduction in
conflict of interests
Potential reduction in
conflict of interests
Extension of
government safety net
Limited safeguards Dependent on the
existence of firewalls
and requirements of
arm’s length trans-
actions.
Bank unit is insulated to
a certain degree from
failure of securities
business and holding
company is limited to
the extent of capital
infusion it can provide
to securities subsidiary
22
P H I L I P P I N E S IN V E S T M E N T B A N K I N G IN D U S T R Y
I N V E S T M E N T HO U S E S - DE S C R I P T I O N
These are enterprises that are engaged in underwriting securities of other corporations,
dealership and brokering of securities that are not authorized to perform commercial banking
activities. Therefore, these enterprises cannot take in deposits or draw funds from the public
unless granted a Quasi-banking (QB) license. Also, such enterprises may perform trust and
fiduciary functions subject to BSP approval.
From the above description, the investment houses in Philippines can be divided into sub-
categories:
� Investment houses with Quasi Banking Licenses
o These entities with a minimum capitalization of Php 300 million are regulated by
BSP and SEC, allowed to source funds from more than 19 lenders or investors at
any time through deposit substitutes.
� Investment houses without Quasi-Banking Licenses
o These entities also have a minimum capitalization of Php 300 million and are
regulated by the BSP. However, they are allowed to source their funds from not
more than 19 lenders or investors at any time through deposit substitutes
unlike banks and other corporate issuers.
Of the above investment houses there can be another categorization i.e., being either bank-
affiliated (as part of universal bank or commercial bank) or independent house.
PR O F I L E O F I N V E S T M E N T HO U S E S
The investment houses profile of the Philippines can be described in the context of the above
categories. Currently, there are 35 investment houses in the Philippines out of which 6 possess
a QB license and account for approximately 53% of total resources of the sector.26 There are 11
bank-affiliated investment houses among the total number of firms in the country. The total
assets of the investment houses as of 2006 were Php 72.372 Billion and the total net-worth as
of the same year of all the investment houses was Php 29.922 Billion. The average ROA stood at
approx. 3% while the ROE was 7% for the year 2006.
The other salient features of the investment houses to understand the dynamics of the industry
are that about 50% of the assets under the management of the investment houses are held in
Trading Account Securities and as investments in bonds & other debt instruments.27
26
‘Role of Investment Houses as Catalysts of the Capital Markets’, IHAP, December 2006. 27
‘Role of… Capital Markets’, ibid
23
RE G U L A T I O N S A N D T I M E L I N E
Presidential Decree No. 129 (PD No. 129 or Investment Houses Law)
The decree was promulgated in 1973 vesting upon the investment houses the franchise to
underwrite, on a firm basis, the distribution of any and all securities. It formalized the scope
and powers of Investment Houses:
� Arrange to underwrite, on a firm basis, the securities of other corporations or the
Government;
� Act as financial consultant, advisor, or broker;
� Promote, sponsor, or otherwise assist and implement venture projects, and
programs that contribute to the economy’s development;
� Encourage companies to go public, and initiate and/or promote the formation,
merger, consolidation, reorganization, expansion or recapitalization of productive
enterprises;
� Subject to prior approval by the Monetary Board, to engage in foreign exchange
operations.
Regulatory Timeline
The Philippines went through its own set of regulatory changes in the financial sector over the
years that had its impact on the investment banking industry also. A timeline of such changes is
given below for understanding the evolvement of the investment banking regulations in
Philippines.
The timeline and the implications are tabulated below:
24
Year Regulation Implications
1949 RA No. 337
General Banking Law
Shares the fundamental philosophy underlying the Glass-Steagall
Act of 1933 segregating the functions and allowable
undertakings of a commercial bank vis-à-vis an investment bank.
1960 Investment Company
Act
Served as a predecessor of PD 129
1973 PD 129
Investment Houses
Law
Envisioned the creation of a class of financial intermediaries
which served the function of actively promoting the securities or
capital markets through underwriting, brokering/dealing,
financial advisory, and portfolio management.
1980s RA No. 337
(amended)
Creation of a category known as Expanded Commercial Banks or
Universal Banks
� Grants commercial banks with expanded banking functions
(i.e., “Universal Banks”) to engage in activities outside the
traditional and allied functions of banks
� Essentially allows “universal banks” to perform the functions
of an Investment House in addition to their regular
commercial banking functions
1977 RA No. 8366 Sets the Investment Banking industry more in line with global
standards
� Foreign ownership of up to 60% of the voting stock of any
investment house
� Increased paid-up capital requirement to Php 300 million for
new investment houses
o Existing houses given two years to comply with
minimum paid-up capital requirement
� Promotes foreign investment and participation, endorsing
global competitiveness
2002 SEC Omnibus Rules &
Regulations for Uni-
banks and
Investment houses
with QB licenses
Provides supporting legislation for Investment Houses’ primary
function of underwriting through the establishment of risk
management requirements
� Investment houses are made to comply with the capital
adequacy requirements prescribed by the Monetary Board
of the BSP
� Prohibits investment houses from undertaking underwriting
commitments in an amount exceeding twenty (20) times its
net worth
2006 BSP Circular The Monetary Board –reopened window for granting QB licenses
25
M A R K E T O U T L O O K
G L O B A L DE A L S O U T L O O K 28
The rapid globalization of capital continues to propel global Initial Public Offering (IPO) markets
forward with powerful momentum, as new issuances raised the greatest amount of capital ever
in 2006 and the first quarter of 2007 saw several large IPOs. The emerging markets remain the
wellspring of the world’s most vibrant growth stories, with China fueling Asian markets, and
Russia driving European markets. Chinese companies raised the most capital, including the
world’s largest IPO ever, thanks to its headline-grabbing IPOs. Regionally, European exchanges
hosted the most IPOs, sparked by the popularity of London as the top listings destination for
cross-border issuers, especially from Russia. Among countries, the US, which still has the most
sophisticated and mature capital market, launched the highest number of IPOs in 2006 and in
the first quarter of 2007.
Heated rivalry among the world’s exchanges for cross-border listings has led to many attempts
at bourse partnerships, including the NYSE Euronext merger, successfully completed in 2007. At
the same time, with the vast surge in liquidity on local exchanges, most of the world’s largest
IPOs are now listing at home. Finally, in the past 18 months, private equity firms have been
powerhouse players behind many of the world’s large IPOs, as financial sponsors buy
companies, add shareholder value, and take them public.
Trends in IPO activity can be difficult to predict. However, as long as conditions remain
favorable, the packed IPO pipelines in 2007 indicate a diverse range of large, but not super-
sized, profitable companies ready to come to the market on the world’s exchanges in the
months to come. In the past 18 months, key IPO trends reflect the effects of globalization:
flourishing stock markets awash in liquidity, vibrant growth in the emerging markets, escalating
rivalry between the world’s stock exchanges, the rise of more world-class financial centers, the
boom in large listings on local exchanges, and the proliferation of capital-raising options,
especially private equity’s emergence as a key player behind so many large IPOs. In 2007,
globalizing capital and a surge in IPO ready companies worldwide are broadening the horizons
of the world’s financial markets.
HU N T FO R HI G HE R R E T U R N S I N EM E R G I N G MA R K E T S
Eager investors seeking high-growth stories are heating up the fast-growing emerging markets.
In 2006, IPOs coming from BRIC countries (Brazil, Russia, India, and China) raised US$86.5 billion
in 279 deals. Emerging market IPOs raised US$20.6 billion on foreign exchanges, mostly in
London reflecting the belief that more institutional investors could be tapped abroad than on
the domestic exchange. From 2001 to 2003, emerging market economies began growing rapidly
which in turn began the migration of capital from the developed economies into the emerging
economies, leading to global rebound in IPO activity that continues into 2007. The bottom line
is that in recent years emerging markets have outperformed developed markets. Emerging
28
Ernst & Young, Transaction Advisory Services, Strategic Growth Markets, “Global IPO Trends Report, 2007”
26
markets as an asset class are up 30-40% in 2006 as opposed to global markets that were up 15-
19%. 29
GO I N G LO CA L
Even as capital becomes more global, there’s no place like home for most companies going
public as evidenced by the fact that the vast majority of the IPOs stay local. Around the world,
companies still prefer to list where they live. The growth of local liquidity and international
investor interest has enabled even the largest of companies to list at home. If at all a company
does a dual listing, the primary reason usually is that the domestic market is not big enough for
doing a transaction.
Most pre-listed companies prefer to stay local for their IPOs since their customer base is usually
local, and it is local investors who best understand their business. For most companies, the local
markets are where infrastructure, investors and liquidity can most easily be found, and where
investor relations, regulatory framework, and market expectations are the most familiar.
Deepening worldwide liquidity is making the trend towards localization possible. Global growth
in institutional and retail markets and the localization of global asset managers in the emerging
markets are producing greater liquidity. Analysts point to the Asian capital markets as a good
example of the localization trend—global asset managers have relocated people, capital and
resources to the region in order better manage larger and dedicated pools of capital focused on
Asia. As a result, most global asset managers can now invest directly in emerging markets.
M&A A S A N A T T R A CT I V E O P T I O N T O IPO
Many global companies view a trade sale through M&A as an appealing alternative to a
traditional IPO, especially if there’s a buyer willing to pay a premium. In 2006, global M&A
volumes rose to their highest peaks ever at US$3.8 trillion. The frenetic deal-making pace looks
unlikely to slow down this year. With M&A’s significant deal activity last year, many companies
which were IPO candidates chose the M&A track instead. A strategic sale becomes a top option,
because there is certainty and realization of cash is much quicker than through an IPO. Fueling
the M&A activity is the unprecedented eagerness of banks and hedge funds to lend money to
deal-makers, cash-rich private equity funds, lower interest rates, cheap credit, an “eat-or-be-
eaten” pressure felt by CEOs, and the vigorous worldwide economy.
PH I L I P P I N E DE A L S O U T L O O K
Investors renewed sense of optimism in the Philippine economy is being reflected in the
buoyant stock market. The Philippine Stock Exchange index reached new highs, closing at 3,665
at the end of June 2007, an 18% growth from December 2006. Companies are actively engaged
in stock rights offerings and initial public offerings. These include the US $370 million stock
rights offering of the Alliance Global Group, and the IPOs of National Reinsurance Corporation
and Pacific Online Systems Corporation, raising US $52.3 million and US $7.6 million
respectively. This positive sentiment is also being mirrored in higher foreign portfolio
29
Goldman Sachs International, Equity Capital Markets, “Understanding New Markets: Beyond the BRICs”, April
2007.
27
investments of US $1,673 million for the first 5 months of 2007, which was 152% higher for the
same period in 2006. 30
DE A L ACT I V I T Y
The value of money raised in IPOs in comparison to the rest of the countries in the Asia Pacific
region has not been much in Philippines. However, the outlook for the IPO market is bullish
given the fact that approx. US $ 1 billion was raised in the year 2006. 31
The value of announced deals was up by 42% to US $2.3 billion for the first half of 2007, with
deal volume increasing to 88 as compared to the 59 for the first half of 2006. The increase in
deal volume, specifically in inbound investments, can be attributed to the increased optimism
with respect to the economic and political environment of the country.
DE A LS OU T LO O K
The Philippine macroeconomic fundamentals has been showing strength as evidenced by the
higher than expected 2007 half-year growth, low interest rates and a strong Peso. Investors
remain bullish on the economy, with the mining and BPO sectors expected to spearhead the
growth.
Mining Sector
The Philippines being one of the world’s largest deposits of metallic and non-metallic mineral
sources, mining is expected to grow significantly. It has reported in various national and local
dailies that some 300 firms have already positioned themselves for the mining boom. In
retrospect, the Supreme Court of the Philippines ruled that the 1995 Mining Act was
constitutional, thus confirming the permissibility of 100% foreign-owned mining contracts.
Property Sector
There is also renewed confidence in the property sector. Property demand is seen to be driven
by BPOs, tourism and housing demand from OFWs. This is reflected in the consolidation of the
property companies of Villar-owned Vista Land, Lifescapes and C&P Homes.
The President’s trip to China in April 2007 resulted in the property development deal of the Fort
Bonifacio property estimated at US $2-4 billion. The proponents of this project are the Shimao
Group of China and the Bases Conversion Development Authority. Alliance Global Group
likewise consolidated its interest in Megaworld, another major property firm in the Philippines
specializing in office spaces for BPOs by increasing the stake in the latter by 25% in February 07.
Privatization of Government Assets
Given the Philippine fiscal situation, the main thrust of the government is to raise money via
selling government assets. The government-owned National Power Corporation was a major
contributor to the deficit and thus was put up for sale. The government is expected to raise at
30
PricewaterhouseCoopers, Asia Pacific M&A Bulletin, Mid-year 2007. 31
Source: Dealogic, Thomson Financial.
28
least US $ 1,081 million from the privatization of power plants. Also, the country’s major
seaports and airports have been up for auction. These include the Laguindingan airport in
Misamis Oriental, the North Harbor in Tondo and the Batangas port, all of which have been
expressed interests upon by both foreign companies (mainly Korean like Daewoo, Samsung etc)
and other local listed companies. The government is also including for sale its 29% stake in
Meralco and the Lopez group is readying itself for the purchase.
Despite the deficit target, the government will continue its spending, allocating US $ 3.1 billion
for infrastructure projects in 2007. These government-led activities, coupled with the promising
outlook for the economy as a whole, will continue to feed the increased M&A trend for the
foreseeable future.
C O M P E T I T I V E E N V I R O N M E N T
The best way to understand the competition that the target company is part of is by scanning
the environment along the lines that the industry has segregated investment banks viz. Full
service firms and Boutique firms. However, in the Philippines context and the structure for
delivery of the financial services that these investment banks offer, it is easier to segregate the
competition along the lines of being universal bank affiliated and being independent
investment houses. The target company falls in the latter category which incidentally would
also include the global investment banks like UBS, ATR Kim-Eng, Deutsche Bank etc.
BAN K AF FI L I A T E D I -BAN K S
PE R F O R M A N C E
The PSE website offers a link that provides a list of companies that have taken themselves
public through IPO or have offered a secondary IPO in the past 18 months. The same link also
has a list of companies that have applied with the PSE for listing of their shares in the exchange.
These two lists in many ways offer the first and the most compelling market insight into the
performance and the market share of the bank affiliated investment houses.
An approximate total of Php 41 billion has been raised from the market in the past 18 months
via 11 companies that have got listed. Of the total amount of money raised approx. Php 39
billion has been underwritten by BDO Capital – lead underwriter, an affiliate of the universal
bank, Banco de Oro (the 2nd largest bank in the Philippines with total assets of Php 650 billion).
That alone accounts for almost 96% of the total deals in value of money that has been raised. In
terms of number of deals, BDO Capital has been the lead underwriter in 7 out of a total of 11
companies. There was one issue that had a secondary foreign underwriter among the 7
companies that BDO Capital took public. Also, an interesting subtext to be followed is the
presence of BDO Uni Bank as the receiving bank for the proceeds in 3 of the 7 IPOs that BDO
Capital underwrote.
The above statistics show the market dominance of BDO Capital. Such a dominance translates
itself into visibility and most importantly, towards the creation of a reputation. With accolades
such as the “Best Investment Bank of the Philippines 2006- 2007” by FinanceAsia.com, “Best
29
Domestic Investment Bank in Philippines – 2006” by the Asset Magazine or “Best Debt House of
the Philippines – 2006 -2007” or “Best Equity House of the Philippines – 2006-2007” by
AsiaMoney 32, BDO Capital leaves almost all of its competitors far behind in a country that still is
developing the finance and capital market.
At the same time, the other bank affiliated investment houses are also picking up deals albeit of
small value. However, the intensity of the competition is best understood in the recent case of
bids for underwriting Splash Corporation who have chosen First Metro Investment Corporation,
the investment banking arm of the Metrobank Group, the largest Uni-bank in the Philippines as
their lead underwriter for their approx. Php 2 Billion offering.
While the IPO market dynamics give an indication of the market power of the bank-affiliated
investment houses, the outlook in the M&A market and the importance of reputation and
brand-building should also be taken into consideration. The question that lingers is – Can an
independent bank survive in this environment and the answer goes back to the Porter’s
framework where it was concluded that independent players can survive by offering niche
services that the big guns of bank-affiliated investment houses would gladly outsource.
SE R V I C E O F F E R I N G S & BE N E F I T S
Most of the bank-affiliated investment houses are full service firms offering a wide array of
services ranging from equity and debt underwriting, loan syndication, financial advisory/
mergers and acquisitions, project finance, direct equity investments, off-balance sheet facilities,
private placement and securities trading.
Also, the affiliation to the bank gives the investment house access to a distribution network
that is simply not available with an independent firm. Also, the uni-bank gives the investment
house a certain amount of “bragging” rights about how the investment house is attached to a
bank that occupies market leading positions in the core business lines of corporate and middle-
market banking, consumer banking, credit cards, asset management, remittances, leasing and
finance.
The presence and geographic reach of the uni-bank also places the investment house in a
unique position of gaining market intelligence and information which is the key success factor
for an investment house.
IN DE P EN D EN T I -BAN K S
The assessment of independent investment banks’ performance can be done by way of
understanding their service offerings:
32
Information sourced from BDO Capital & Investment Corporation, Presentation of Credentials. October 2007.
30
FO R E I G N I N V E S T M E N T B A N K S
Strategic focus areas
� One Stop Shopping The investment banking arms of major foreign banks and financial
conglomerates have begun making inroads by offering themselves as a one-stop shop
for the total financing and advisory needs of Filipino companies. They offer a diverse
range of services by bringing in their expertise in risk management practices coupled
with their access to global markets. These investment banks offer not just their core
service but also securities, asset management, consumer finance and insurance (or
sometimes reinsurance).
� Economic Globalization These banks are only making the Filipino corporations respond
to economic globalization by making them aware of the progress made in financial
technology and development of the infrastructure that allows for greater cross-border
movements of funds and information.
� Developing a Brand Strategy In addition these banks are leveraging on their
reputation and their historical performance to influence and impress their Filipino
clients. It is a proven marketing theory that when a company wins the trust of its
customers and maintains ongoing relations with them, the company’s brand has a
positive impact on customers when they purchase products or services; in other words,
the foreign investment banks have gained a competitive advantage by leveraging on
their past performance outside Philippines.
Foreign Investment Banks’ Performance
The foreign banks that are operating their investment banking division in Philippines
include among others UBS, Deutsche Bank, ATR Kim-Eng etc. The last mentioned firm is
even a publicly listed company that is ranking fourth (the top 3 banks being bank affiliated)
in the country among all investment banks in terms of Total Assets. The company focuses
primarily on corporate finance (capital raising (equity & debt), debt restructuring, financial
advisory and direct equity investments. However, one of the firm’s greatest strength is
their presence in an array of financial services viz. Broking securities through its 100%
subsidiary ATRKE Securities which in 2006, it was awarded the Best Broker in Philippines by
Finance Asia, insuring through its subsidiary companies ALGA (a lead insurer in the group
benefits market) and ALFA, a provider of quality life products for individuals) and property
development through its subsidiary ATRKE Land which currently is jointly developing a
property in a JV with Landco Pacific Corporation.33
As for UBS and Deutsche Bank, they are leveraging on their research and access of capital
in other markets in approaching corporations that do not have access to foreign/ global
markets but have large financing needs. However, in July 2007, two IPO offerings had both
these banks play the role of co-lead underwriter. UBS underwrote jointly with BDO, the
Aboitiz Power Corporation IPO offering of Php 1 billion and is being increasingly seen as a
33
Source: ATR Kim-Eng Annual and Quarterly SEC filings of December 2006 and June 2007.
31
partner in bringing the foreign exchange portion in any large equity or debt offering.34
Similarly, Deutsche Bank co-underwrote the GMA Network offering of Php 776 million with
ATR Kim-Eng. These two deals illustrate the major inroads that the foreign players have
started to make into the investment banking industry in Philippines.
In addition to the above banks, there are other foreign banks that have specific focus
industries like Macquarie Bank (Metals and Mining industry), Standard Bank (Mining),
Banca Intesa (Oil & Gas), ABN Amro Bank (energy deals) etc who are positioning
themselves as experts in their industry.
LO C A L I N V E S T M E N T B A N K S A N D T H E I R R O U T E T O W A R D S C A P T U R I N G D E A L S
Services Offered
� Focus on traditional areas of strength Most of the local investment houses have gone
through their own cycle of growth while at the same time the ones who have survived
also have faced their moment of truth – Asian Financial Crisis. However, most of the
successful firms have renewed their focus by looking at what they were good at
initially and returning to the same.
� Focus on clientele, offer broad array of services From being “everything to everyone”,
the more successful investment houses are focusing on being “everything to someone”.
The focus has changed to acquiring and retaining clients i.e. each investment house
have in their clientele at the least one conglomerate which is on a growth stage of its
business cycle.
� Personalized and Tailored services The products and the people handling the deals are
structured as a “partnership” where there is an emphasis on a “pledge” of personal
time and commitment that would lead to the delivery of timely and accurate research
products and investment advice, the timely execution as well as efficient and reliable
settlement of all deals.
� Claim Local Knowledge Provide services that are broad in their array and which are
rooted on expert knowledge of Philippine market.
Local Investment Banks’ Performance
The focused nature of the local investment houses has enabled them a positioning of being
niche players and therefore making them a sought-after partner when it comes to specific
transactions. For instance, AB Capital generally is a preferred partner in capital raising activity
due to its strong focus on capital markets and in the past 18 months has been involved in a
couple of IPOs including the Php 658 million offering by i-Remit Inc where AB Capital was the
co-underwriter. Also, it has established itself as a leading player in the area of fund
management and offering investment management services to high net-worth individuals.
34
Information gleaned from interviews with equity and debt managers of a large bank-affiliated investment bank
32
Similarly, while Asian Alliance has been involved in equity fund raising activities, its focus has
shifted to being an investment house that has become an outsourcing arm for US equity
research. The Multinational Group has primarily become a merchant banking firm and financing
company in developing local enterprises. It has a QB license also which it uses to borrow funds
from more than 20 lenders for re-lending purposes.
I N D U S T R Y A N A L Y S I S (5 F O R C E S F R A M E W O R K )
1. INTERNAL RIVALRY - HIGH
The structure of the investment banking industry in Philippines is somewhat puzzling – some
elements point towards collusion, others towards intense marketplace competition. The
industry seems to have low barriers to entry for small, upstart players but very high barriers to
catapulting firms into bulge bracket status. No wonder, then, that historically, the industry has
resembled a pyramidal structure, with the “bulge bracket” firms at the top and “boutique”
banks at the bottom. The existence of relatively few competitors in the bulge bracket reduces
rivalry. There appears to be cooperation among the major banks, and except for distribution,
concerted efforts have been made to prevent the business from being a commodity-like
business especially since the clientele itself appears very limited. However, times are changing,
and since the various amendments in the regulations in the Philippines and the repealing of the
Glass-Steagall Act, which effectively prevented commercial banks from being in the investment
banking business, competition has grown fiercer.
2. SUPPLIER BARGAINING POWER - HIGH
Supplier bargaining power has traditionally been high, but it might diminish in the face of new
competitive challenges. Investment banking is essentially a relationships business, and stronger
the network of critical investors a bank has, the more supplier power it has, and the more rents
it can extract. In addition, some banks are more specialized in some industries than other banks,
and this gives them additional supplier power in that particular industry.
There is also a need for specific talent which is also manifested by the large number of
independents who are trying desperately to differentiate by providing specific services like
securitization or research support. Also, there appears to exist a private pool of capital suppliers
who keep deals private and in-house instead of approaching capital markets for their funding
needs.
3. BUYER BARGAINING POWER - HIGH
Buyer bargaining power is considerable on the surface. Switching from one investment bank to
another seems to entail few costs. In spite of this, statistical studies show that investment
banks enjoy significant client-base loyalty. Buyer bargaining power should be on the rise owing
to the increase in the number of suppliers of investment banking services and also because of
innovations such as Internet IPOs and online brokerages. The reduced spreads should reduce
industry profits. However, a closer look at the industry has convinced us that the typical users
of the major investment banks are quality-conscious and relatively price-insensitive.
33
4. SUBSTITUTES - LOW
Historically, there were no clear substitutes for services such as IPOs, underwriting, distribution,
M&A advisory, etc. Technology, however, is changing that. Though still at a germinal stage, it is
generating unprecedented alternatives that go towards reducing setup costs of investment
banks thereby attracting more entry and further driving profits down. However, the Philippines
market is not appearing to be moving towards such a substitute. But the attraction of emerging
markets ever increasing, such threats cannot be totally ignored.
5. THREAT OF NEW ENTRANTS - LOW
Securities firms and commercial banks without a substantial history of involvement in classic
investment banking have long eyed the investment banking being the profitable end of the
business with envy. After the repealing of the Glass-Steagall Act, commercial banks and other
financial service organizations are making a determined effort to edge their way into
investment banking services. This is true not only of domestic banks, but also of foreign banks
with merchant banking competence developed in other markets around the world. However,
the capitalization requirement of Php 300 Million combined with the importance of
institutional reputation and brand equity makes it high barrier to entry. Refer also the issues
raised under ‘Internal Rivalry’.
Complementary Services: An important issue to consider is whether it is wiser for an
investment bank to merge with a commercial bank or an insurance company and form a
financial conglomerate, a “universal bank”, or operate as a stand-alone investment bank. The
recent trend has certainly been towards consolidation or bundling of services.
CONCLUSION
The Philippines investment banking industry behaves almost like the global investment banking
industry by locking out any potential new entrants by creating high barriers of entry via an
informal collusion or alliance while at the same time being fiercely competitive with each other.
The established players charge a premium for their services due to the high quality
recommendations that they provide due to their market experience and expertise. However,
they also outsource the services that they do not have a competence in to the niche firms
thereby playing a bridge-role that in some ways keep the niche players from aspiring for bigger
deals. All this leads to the closed boys club that places a high rating on the quality of
relationships and networks which in turn lead to word-of-mouth knowledge on viable and
potential deals within large Philippine conglomerates.
The niche players also play a very important role by studying the market and providing research
support to the large deals. This places them in a position of gaining market intelligence and this
puts them in a unique position of being able to gauge trends from a distance and even create or
make trends. Most foreign players have taken a niche route of penetrating the market.
In conclusion, the industry is unattractive for new entrants while remaining viable and
favorable for entrenched players.
