The Philippines: Consing takes BPI in a new direction
Bank of the Philippine Islands is already one of the top corporate and investment banks in the archipelago; now CEO Cezar Consing wants the bank to focus on financial inclusion by expanding its microfinance, SME and consumer lending businesses.
By Ben Davies
Cezar ‘Bong’ Consing can still recall the bunker mentality that gripped Bank of the Philippine Islands (BPI) in the early 1980s, when he was just starting out as a young corporate banker: under former president Ferdinand Marcos, the economy was a mess, interest rates ran as high as 60% and many companies were forced out of business.
“On one occasion, I had to seek approval from the president of BPI to sell $10,000 to a major hotel operator,” he says, with a look of disbelief.
The Philippines had stopped repayment of its crippling foreign loans and the country’s foreign exchange reserves had dwindled to almost nothing.
“That is what you had to do to survive,” Consing says. “The crisis virtually wiped out the savings of an entire generation.”
The dark days of dictatorship and martial law under the Marcoses are long gone, and the former sick man of Asia – as it was known – now ranks among the fastest-growing economies in the region.
And BPI, one of the leading corporate and investment banks in the Philippines, has been among the main beneficiaries.
These days BPI has assets of P2.2 trillion ($42 billion), up from P900 billion back in 2013 when Consing returned to BPI as president and chief executive. It may be ever harder to push up profits, yet the bank’s net earnings of P23.1 billion in 2018, up from P22.4 billion the previous year, are not to be sniffed at. Only BDO Unibank, by far the biggest lender in the Philippines, has outgunned BPI by aggressively expanding into new areas such as private banking and asset management.
BPI, which ranks as the country’s third-largest by assets, is about to move into new headquarters, having outgrown its old offices. The bank employs close to 19,000 people and has the full spectrum of businesses – the savings and mortgages of a thrift bank (services launched in the middle of the 1980s), microfinance, top-end retail banking, as well as the corporate and investment banking operation that has long been the bank’s bread-and-butter business.
The opportunities are so much greater in the Philippines precisely because the base is so low. The penetration rate of banks is low. You would be crazy not to put your resources here - Cezar Consing, BPI
But Consing, a relaxed 59-year-old Filipino with an easy-going charm and a broad smile, has clearly not forgotten how the vast majority of the population missed out on more than a decade of economic opportunities. He plans to correct this by switching the bank’s focus to microfinance, small and medium-sized businesses and consumer banking.
“We have reached an inflexion point,” Consing says. “BPI has traditionally been a corporate bank and an upmarket retail bank. But when you realize that only about a quarter of Filipinos have a bank account, then you can see how it makes sense to become much more financially inclusive.”
As the Philippines undergoes rapid change, BPI has to keep pace, he says.
“The honest truth is that it is the way the country is going. What you have been seeing over the last few years is the emergence of a new middle class. The process is being driven by overseas money coming home. It is being driven by business process outsourcing and people doing all sorts of new things. And finally on the government side, it is being driven by infrastructure.
“There is a whole new world out there and we have to be a part of it.”
BPI’s move towards greater financial inclusion reflects long-standing government policy. Nestor Espenilla Jr stressed the need for this during his term as central bank governor, as did his predecessor Amando Tetangco.
“If you look at the bank as a whole, 80% of our loan assets are corporate and only 20% are consumer or retail,” Consing says. “In future, BPI will continue to grow, but the retail business has to grow faster than the corporate business. That means more consumer lending, mortgages, personal loans, credit cards and, most important of all, microfinance or more specifically the granting of small loans to micro-entrepreneurs, which is an area that the commercial banks typically have not touched.”
Founded in August 1851 with the grandiose title El Banco Español Filipino de Isabel II, in honour of the reigning Queen of Spain, BPI claims to be the oldest bank in the Philippines and one of the oldest in southeast Asia.
Before the foundation of the Central Bank of the Philippines in 1949, BPI even carried out many of the functions of a central bank, providing credit to the national treasury and printing and issuing currency in its own name.
The bank is controlled by the Ayala Corp, which in turn is owned by one of the most powerful families in the Philippines: as of the end of 2018, Zobel de Ayala family interests owned a combined 48.6% stake in BPI, while the Roman Catholic archbishop of Manila held a 7.3% stake. Of the remainder, 39.1% is owned by public investors.
Ayala Corp is considered to be the biggest landowner in the Philippines, although in recent years it has diversified into retail, telecommunications, renewable energy and the healthcare business.
Alfred Dy, CLSA
Both the Ayala family and the Catholic Church support BPI’s goal of financial inclusion. Consing says that Jaime Augusto Zobel de Ayala, chairman of the board at BPI, and his brother Fernando Zobel de Ayala, vice-chairman, help to shape strategy at the bank.
“They are very professional, very sharp, and they help to formulate strategy. Knowing how most regional banks are managed, this is quite unique.”
However BPI owes much of its success to its customer base.
“Bank of the Philippine Islands’ DNA is corporate banking,” says Alfred Dy, head of Philippines research at CLSA. “It is really strong with the top 100 listed companies, and has been a blue-chip bank in the Philippines for the longest period of time. But with the economy changing, they are trying to reposition themselves in the mid market.”
Certainly BPI’s timing looks good. The Philippines economy is humming along nicely with growth of about 6.5% a year, making it one of the fastest-expanding countries in Asia.
With the economy changing, BPI are trying to reposition themselves in the mid market - Alfred Dy, CLSA
Higher private consumption, continued job creation and steady growth in remittances will continue to support the economy, according to the latest country update from the World Bank.
Better still, investment in infrastructure – one of the cornerstone policies of president Rodrigo Duterte’s administration – could prove to be the big leveller, opening up far-flung corners of the country. That in turn could create the conditions for a new generation of entrepreneurs to access markets and spread their wings.
If that happens, BPI wants to be in a position to benefit.
“In the 1990s, there wasn’t any money left for infrastructure because the entire budget was going to pay down debt,” explains Consing. “That is no longer the case. And guess what? Infrastructure makes things that were not financeable years ago financeable today. It is big news for us.”
Of course there is another, far less altruistic reason. Net interest margins on corporate loans are about 2.2%, thanks to stiff competition from local and foreign banks as well as easy access to the local capital markets. By comparison, margins on microloans are generally between 4% and 5%. Added to that is the fear that if BPI does not make the transition to the retail market now, it risks losing out to rivals.
The vehicle for BPI’s microfinance ambitions is BanKo, the country’s first mobile-phone-based savings bank. Back in August 2015, BPI assumed full control of BanKo after buying out partner Globe Telecom Inc, one of the big full-service telecommunications companies in the Philippines; at that point, BPI’s microfinance operations took off.
Last year, BanKo’s network doubled in size, from 100 to 200 branches. By the end of this year, it will have 300 branches serving about 100,000 borrowers. Typically loans are in the range of P60,000 to P70,000 ($1,150 to $1,340), with a maximum size of P200,000, and a one-year term.
“The typical customer might be a self-employed operator in a market place,” says Consing. “He or she probably doesn’t have all the official papers. But it’s a real business. There is cashflow, but no access to bank financing. He or she probably gets the financing not from relatives, but from informal money lenders at exorbitant rates.”
Do such micro-entrepreneurs pay back their loans?
“So far, so good,” says Consing.
“You would be surprised, but people do pay back their loans because they know they are making huge savings,” he adds. “Suddenly they can afford to send their kids to school. As far as I can tell, we are the only commercial bank granting small loans to micro-entrepreneurs.
“BanKo is BPI’s smallest business. But it is almost doubling in size every year. Can you imagine what it would be like if we were known as much for BanKo as for everything else that we do?”
The big question is how can a bank such as BPI make money operating over a vast archipelago (the Philippines has more than 7,000 islands, of which 2,000 are inhabited) where per-capita income is just $3,100 and the costs of running a branch network are relatively high.
“We think the business has to be driven by technology,” says Consing. “Because as far as we can tell, only by digitalizing the entire operation can you reduce costs to make it work.”
There is a whole segment of the population that may never come to banks unless we lower our costs and digitalize and make ourselves more convenient - Cezar Consing, BPI
Consing gives an example. If a customer withdraws cash over the counter, the cost to the bank is at least four times higher than if the cash were withdrawn from an ATM, and 20 times higher than in the case of a mobile phone transaction.
“When you look at those numbers you say: ‘My god, we have to digitalize fast’. Right. Because that is the only way. There is a whole segment of the population that may never come to banks unless we lower our costs and digitalize and make ourselves more convenient.”
Consing estimates that technology spending is about 7% to 8% of revenues or about 15% to 16% of total operating expenses. Analysts for the most part remain upbeat on the prospects for the bank, despite the extraordinarily high costs associated with its digital transformation programme.
For the first quarter of 2019, BPI reported earnings of P6.72 billion, up 7.6% year on year on the back of an improvement in net interest margins and loan growth of 11.5%.
While this was partly offset by provisioning for BPI’s exposure to South Korean-owned Hanjin Heavy Industries and Construction Philippines which filed a petition for rehabilitation last January, the results were at the higher end of expectations.
Abigail Chiw, head of research at BDO Nomura Securities, expects BPI’s return on equity to improve as the bank “continues to build up the higher-margin consumer business and implement its digital strategy.”
This should support earnings growth of 22% on average in the next three years, she says.
Of course the big unknown is the extent to which investment costs on digitalizing branch networks will be offset further down the line by increased revenues and lower costs. The bank had a bad brush with technology only a couple of years ago.
Back in June 2017, a glitch in the bank’s internal systems meant that as many as 1.5 million of BPI’s eight million accounts showed incorrect balances. Some account holders claimed they had mysteriously gained millions of pesos, although this was later disputed by the bank. Others said that their entire savings had been wiped out.
Had BPI been hacked by some shadowy group of Russian techies or was this simply a straightforward breach of data privacy? The truth was more mundane, but nonetheless alarming. A bank employee had mistakenly keyed in the wrong information while the systems were still online. By the time anyone noticed the error, it was too late.
“This was not an issue of cybersecurity,” admits Consing who, to his credit, does not attempt to shy away from the subject. “It was human error.”
It was certainly a costly one for the bank’s reputation.
If there was a lesson, it was that having the right systems and protocols in place is not always enough. Consing says the bank has now ringfenced its internal systems.
Before taking up his current post, Consing spent more than 25 years working in investment banking, commercial banking, and private equity.
His started his career with BPI, which he joined in December 1980 as the youngest management trainee in the corporate planning and corporate banking department. In 1985, he was seconded to JPMorgan, which at the time had a 20% shareholding in BPI.
Consing expected the posting to last two years, but in the end he spent close to two decades working for the US investment bank, based out of Hong Kong and Singapore.
“The JPMorgan I joined was seeing India and China coming through the global markets,” Consing says. “With the tremendous growth, there was innovation and all the things that go with it.”
Yet both organizations had similar values.
“BPI prides itself as being very professional and having high quality people,” he says. “JPMorgan was much the same.”
After working his way up through the ranks to become president of JPMorgan Securities (Asia Pacific) and then head of Asia Pacific investment banking, Consing left in 2004 to become a partner at The Rohatyn Group, the $3 billion emerging-markets hedge fund and private equity firm.
He returned to head up BPI in 2013, beefing up the investment banking side of the business and using it to feed the corporate side.
“Traditional corporate banking in this country is very much along the lines of working capital loans and the occasional term loans,” he says. “What investment banking does is it allows the corporate bank to do well by adding project financing, leveraged buyouts, financing mergers and acquisitions – that kind of stuff.”
The strategy paid off handsomely, with BPI becoming an investment banking powerhouse in the Philippines, a position that it has maintained to this day.
“I am very proud of our investment bank,” says Consing. “On a standalone basis it does as well or better than any other in the Philippines.”
So why, given all his international experience, did the bank not set up offices around the region? That question could just as well be asked of all the top-tier local banks, with the exception of BDO Unibank.
But it turns out there is a very sound reason.
“The opportunities are so much greater in the Philippines precisely because the base is so low,” Consing replies. “The economy is growing at 6% or 7% a year with a young population. The penetration rate of banks is low. You would be crazy not to put your resources here.”