Japan’s MUFG is buying a 20% stake in the Philippine regional lender Security Bank for $773 million, marking an acceleration of its shift overseas.
The purchase by Bank of Tokyo-Mitsubishi UFJ, the main lending arm of MUFG, is also the largest equity investment in a Philippine financial institution by a foreign investor.
BTMU will acquire Security Bank’s common shares and preferred shares with voting rights through a private placement of newly issued shares, the banks said in separate statements on Thursday.
MUFG, Japan’s biggest bank, has been steadily ramping up across the Asean region in recent years as it searches for growth outside of its moribund domestic economy.
It bought Thailand’s Bank of Ayudhya (Krungsri) in 2013 and a 20% stake in Vietnamese state-owned commercial bank VietinBank in 2012, and also opened a branch in Yangon, one of the first foreign banks to do so in the wake of Myanmar's transition to civilian rule.
Security Bank is the seventh largest commercial bank in the Philippines in terms of assets, with operations spanning corporate finance, consumer lending, investment, and asset management. CLSA acted as its sole financial adviser on the transaction, Morgan Stanley advised MUFG.
BTMU said the tie-up was the start of a broad business engagement in the Philippines, including retail finance and SME lending.
MUFG is not alone among its Japanese peers in hunting for deals in faster-growing markets. As Japanese prime minister Shinzo Abe’s economic stimulus package loses steam the country's two other megabanks SMFG and Mizuho are also redeploying record profits and ample yen liquidity into Asia.
However, MUFG has made the fastest inroads so far and has maintained relatively greater price discipline.
MUFG acquired 72% of Thailand’s Bank of Ayudhya for $5.3 billion, about two times book value compared with rival SMFG’s acquisition of a 40% stake in Indonesia’s BTPN at about 4.5 times book value. However the acquisition price for the common stock of Security Bank looks at little high at 1.8 times the latest share price of P144.
Security Bank, the Philippines's fifth-largest bank by market value, is not part of any local conglomerate, which is rare to find across Southeast Asia.
Mizuho was looking at acquiring Australian bank ANZ’s 39.2% stake in Indonesian lender Panin but the Japanese bank baulked at the asking price and at sharing control with a powerful local family with wide-ranging interests.
BTMU will become the second-largest shareholder in Security Bank after Dy Group, which is led by Frederick Dy, the Philippine bank's chairman emeritus.
Analyst reaction
Analysts greeted MUFG’s latest acquisition with cautious enthusiasm.
“We would see the move as not bad for MUFG in terms of establishing business foundations in the Philippines, where we anticipate economic growth over the longer term,” Ken Takamiya, an equity analyst at Nomura, said.
The Philippines, with a population of about 100 million people, is the 10-nation Asean bloc’s second-most populous country after Indonesia. Annual real economic growth is trending at about 6%, backed by robust private consumption and the development of a business process outsourcing sector.
To be sure, investors generally look negatively on business and loan exposure to emerging markets, including Southeast Asia, especially considering recent concerns over the economic slowdown in China.
MUFG said it expects the demand for financial services to accelerate as the Philippines economy expands further, since its credit and deposit penetration rate, as a proportion of GDP, still remain one of the lowest in Asean.
Analysts at Mizuho noted that Security Bank’s balance sheet shows a higher ROE compared to other regional banks in the Philippines, at 16.1% as of end-September 2015 and a relatively
high CET1 ratio of 12.7% also as of end-September. That said, its capital ratio has been trending downward in tandem with the near tripling of lending since 2010.
Analysts weren’t surprised by the deal as MUFG has indicated previously that its focus is on the US and Asia and has mentioned at various briefings the particular appeal of the Indonesian and Philippine markets.
Although the deal will involve goodwill and other expenses, the cost is small relative to MUFG's massive capital base and profits attributable to parent company shareholders and would not constrain the company's capital policies, analysts said.
At Goldman Sachs they estimate the impact of a ¥100 billion ($847 million) investment on MUFG's tier-1 capital ratio of around 0.1 to 0.2 percentage points.
“We assume this deal would have a relatively minor capital impact in terms of maintaining a balance with shareholder returns,” Katsunori Tanaka, an equity analyst at Goldman Sachs in Tokyo said, noting the bank's plans for share buybacks of ¥200 billion for the fiscal year ending March 2016.
Given MUFG's accumulated experience in executing and managing investments overseas, Nomura’s Takamiya for one was not particularly worried about execution risk.
The deal will raise P36.9 billion in capital for Security Bank, increasing its shareholder capital from P52.4 billion as of September to P89.3 billion on a pro-forma post-transaction basis.
“The additional capital will help us execute faster and with more scale our strategy to build our retail banking business,” Alfonso Salcedo, chief executive officer of Security Bank, said in a statement.
However making sure Security Bank hits its very aggressive targets of branches hitting 500 to 600 by 2020 from 258 this year and net income of P22.6 billion will be tough given stiff competition on loan pricing.
Deep roots
MUFG has deep roots across Asia dating back decades. The Bank of Tokyo, which merged with Mitsubishi Bank in 1996, was a particularly international organisation among Japanese banks and had an extensive client roster in the region.
BTMU first opened a representative office in Manila in 1953.
Credit rating agencies have flagged that overseas operations are growing in importance for Japanese megabanks but do entail greater risk-taking.
To help mitigate risk MUFG has been hiring more foreigners such as Hong Kong-born Augusto King with knowledge of markets in Asia.
Randy Chafetz was also made executive officer of MUFG's main banking arm BTMU in 2013, the first ever foreigner to take such a high-ranking role at the firm.
BTMU will acquire its 20% after dilution by buying newly issued primary shares of Security Bank consisting of 150,707,778 common shares at 245 pesos per share and 200,000,000 preferred shares at P0.10 per share for a total investment of P36.9 billion.
BTMU will appoint two directors on Security Bank’s board and the Philippine bank will become an equity affiliate of BTMU.
BTMU expects to complete the deal within the first half of this year subject to regulatory approval in the Philippines.
