Interview: “Establishing a business with FDI is what we want to grow”

In the Philippines, there is a popular negotiation among buyers and sellers called “tingi’, which is the opposite of bulk sales. Think shampoos and condiments in sachets rather than liter bottles; think per-piece rather than by the dozen. Remarkably, for a seller, these little items taken all together make up a formidable mass. And that is the story of Metrobank, which counts small and medium-sized business as its main customers, who have delivered for the bank the award of Strongest Bank by Balance Sheet for 2014—strongest in the Philippines and among the top 10 strongest in the region comprised mostly of Chinese banks.

Metrobank president Fabian Dee sat down with the Asian Banker’s Managing Editor after winning the award, and shared his visions for the bank in an economy that is the second-best performer in the region after China.

Foo Boon Ping, The Asian Banker (TAB): What is your view of the world economy and Metrobank’s position in the current economic landscape?

Fabian Dee (FD): The outlook for the world economy remains modest given downside risks. European governments are doing their own quantitative easing and Japan will most likely follow with the recession it is experiencing, as well as China. With technological advancement, productivity has improved and capacity is being built. There’s oversupply now as factories and capacity have increased substantially to provide for the world's growing appetite especially in the past five years. It will take a while for the rest of the world to basically start growing again to absorb all this excess capacity.

The strengthening United States (US) economy and its direction in terms of rates could help change the equilibrium, as the US interest rate hike will make the dollar even stronger and give competitive advantage back to the rest of the world in terms of exporting to the US. It's good that the US is showing a stronger economy because it is still the largest consumer-based economy in the world.

In my opinion, rates could possibly stay low in the next 2–3 years. In that scenario, and given the changing sentiment in the different continents, I think banking regulations will tighten further. All the recent regulations are basically focused on strengthening the foundation of banks, so that in the event of a crisis, they'll be able to weather the storm and remain stable. And when the economy needs banks to pump-prime growth again, they will be in a position to respond.

Regulations right now have made a lot of banks more prudent in the way they do business. For the banking industry in other countries, this may be something new, but with the Philippines having gone through several crises, we have accepted this as a basic principle in running a bank. The government has been, some people say, quite advanced in terms of implementing a lot of these regulations. This does not come as a surprise to us because the whole industry—the bankers, the regulators—have all gone through the (Asian financial) crisis and have learned valuable lessons from that experience.

The challenge for banks now will be limited growth, coupled with the fact that you have to increase capital requirements in a situation where generating higher returns have become more challenging.

TAB: You’re talking of heightened risk.

FD: Correct. Heightened risk will result to slower movement of funds. This may cause some liquidity issues, what with all the transfers. So this can slow things down a bit until the system gets used to the tighter rules before they loosen again. But that will also take time to happen because significant automation and fraud detection are necessary. A bank needs systems and programs to be able to detect potential fraud issues for all transactions going through its channels. Establishing those systems, creating that consciousness, will also cost money.

TAB: As you mentioned, in the Philippines, you are operating in an environment where regulations are designed to make banks bigger, stronger, so that they are in a position of strength when the big challenges comes. At the same time, the country is a market that continues to grow because of the young population. It has plenty of growth opportunities like China, which is an emerging market. Are you looking to focus on small and medium enterprises and retail businesses, and how do you see the prospect for those segments?

FD: First of all, we go to the core of Metrobank’s DNA, which is basically supporting the growth of businesses. The largest component of our local portfolio is still the middle market, the entrepreneurs. We call them middle market but some of these are quite large, run by families and family corporations.

Most businesses in the Philippines are still very much powered by the growth that the whole economy is experiencing, including agriculture, basically the traders and rice millers who support the farmers by buying their products.

Consumption is quite strong, with retail business in the countryside still growing and spreading. A lot of businesses are located in cities outside of Metro Manila, as investors learn that safety and access to cheaper, well-educated labour can also be found in the provinces. Hence, we are seeing a lot of development on that side. We also see considerable construction activities in the countryside to put up all those retail spaces, warehouses, offices, and logistical support.

A lot of these businesses have sent their children abroad to study so that they can improve the way they do business. And that is where we start partnering with them. Aside from extending the basic loan products, we help them in their operational side, in cash management, in hedging their risk through interest rate derivatives, and in preserving trading and manufacturing margins.

We are also helping a lot of these SMEs professionalise the way they do things. We provide financial advisory so they can be prepared when they go to the market and issue an IPO. We also help these families by advising them on the transition from the primary entrepreneur, to professionalising management, to transferring power from the first generation to the next. Moreover, from the learning that we have gained in dealing with many multinational companies, we are able to impart to this SME segment new knowledge so they can improve the way they do business especially using new technology.

On a larger scale, we see that the country needs logistical support, transportation, and infrastructure financing. So we are participating in many of these projects and are seeing some come onstream already.

TAB: For a long time, developing Asia was focused on foreign direct investment, and was basically export-oriented. The Philippine economy is slightly different. Apart from agriculture there are a lot of overseas Filipino workers. How do you see the structure of the economy changing over time? Today, banks are still the primary provider of finance to SMEs. At the same time, the Bangko Sentral is talking of developing the bond market or capital market. How would that impact the financial system over time and how are you making provisions for them in terms of first, economic reform and transformation of the economy; and second, in terms of the makeup of the entire financial system?

FD: The anchor of the Philippine economy is consumption, which is, in turn, powered by overseas Filipino workers or OFWs; and business process outsourcing or BPOs. These will remain very, very strong. Especially for BPOs, it is projected that in two years, BPOs are expected to be worth over $25 billion, overtaking the share of OFWs in terms of dollar contribution. That’s fantastic. And the good thing about that is BPOs are spreading to the countryside—to Iloilo, Cebu, Davao, Cagayan. Where the good schools are, you see a lot of BPOs coming up.

Structurally, the basic component in our economy is manufacturing. The challenges we have are in regard to the cost of power; cost of labour and productivity; the registration process for these businesses; and to a certain extent, some tax issues for investors, including logistics.

In terms of logistics and infrastructure, the government is doing something about that: by 2016, it is projected that we will have more than enough power supply. On the registration process, the Board of Investments will be enhancing its processes to fasttrack any foreign direct investment or FDI coming in. In terms of labour, the BPO sector is showing that the Philippines can have quality output that can match international standards because of the educational level of our people.

Finally, as to tax, the government is already trying to review that. Some of our Japanese investors opine that the tax incentive for exporters has to be clarified, and the government is also working on that.

If these foundations are properly laid, I believe the Philippines is in a very good position to attract more FDI. We have an advantage over Indonesia and Vietnam in terms of communication. So, establishing a business with FDI is what we want to grow. For one, Metrobank has a Japan desk, a unit that is fully dedicated to help welcome and help Japanese investors.

Previously, a lot of Japanese SME manufacturers that comprise the supply chain of some of the biggest companies only see what they read in the papers. But when they finally come here, they are surprised. They've been going around looking at other Japanese companies that have already set up shop here, and they're seeing how big these guys have grown.

So there is much opportunity here, although it will probably be five years down the road before you see any significant growth or improvement in terms of economic contribution from foreign SMEs.

TAB: Some of the things we look at in strongest banks are increasing capital requirements and regional competitiveness. In terms of the ASEAN banking integration framework, of which the BSP talks a lot about, how do you see consolidation, and where you today in terms of scale as the strongest bank in the Philippines? What will be your other strategies going forward? Any potential for consolidation, mergers, and acquisitions?

FD: We have one of the highest, if not the highest capital ratios in this industry. We increased our capital in early 2015 to position ourselves and have the capacity to grow. Growth takes two forms: organic or acquisition. We are always open to acquisition, which is a good co-implementation and opportunity, especially if there is rationality in terms of the pricing. In terms of co-implementation, for any institution that we acquire, the customer base has to be value-adding for us. In terms of people and culture, the fit should be good, because whenever you make an acquisition, you take with it the people. If there's a good cultural fit, the probability of retaining these people would be high.

Having said that, we don't see any M&A opportunity at this time. As it is, our portfolio growth each year is almost the size of a medium-sized bank’s asset base. What we need to work on is growing organically, pushing our growth to higher levels, which means having more sales people and relationship officers, and equipping them with the proper tools so that they can perform more effective relationship management with customers. In terms of service delivery, we have to rationalise the way we do things so that we can scale the business and do more with our existing resources.

We are undertaking significant internal changes, such as changing the core banking platform, reengineering our processes, and improving our training and development so that we can be more effective and productive.

In terms of regional presence, Metrobank is one of the banks in the Philippines that has been present in Japan for over 15 years; same as in Taiwan. We also we have presence in China. We are trying to leverage the trade flows among those three countries. Hence, in terms of having regional experience, we're one of the pioneers among the local banks, and we are preserving that. Our presence in Japan has been quite fruitful in terms of remittances. And now, there's interest from mid-sized Japanese businesses, and Metrobank is becoming a very strong contact point because we are in Japan.

TAB: So, in terms of upscaling, the focus would still be very much on the domestic business?

FD: Yes, we will focus on organic growth and how our international presence can help supplement that because the growth area is still very much here in the Philippines.

TAB: On some of your regional businesses you do have a strategic working relationship, such as with ANZ. Are you expanding opportunities there as well?

FD: Yes, we are constantly in search of partners who can help us carry out our business better. From our partnership with ANZ, we have become the number one card company in the Philippines. Our partnership with AXA is also quite good, given the expanding consumer base that we have. The numbers we expect from those businesses are really optimistic.

TAB: How do you see that in terms of annual growth in customers, can that be lifted overall by the current good economy, by increasing enrollment and others?

FD: Our consumer business is growing and we expect that to continue. One of the things that we are looking into is maximising synergy within the Metrobank Group, its relationship with AXA, with ANZ, even our own savings bank, PSBank. We are trying to leverage on the strength of each and every unit, on what they bring to the whole Metrobank Group.

Another synergy is with GT Capital, Federal Land, and the other businesses within the Ty Group. Growth prospects for the general economy will be fueled continuously by the consumer sector. As a brand that people recognise—and Metrobank is a very strong brand in this country—we are hopeful that we can further propel growth in our consumer business.

In the past two years, we've been trying to integrate the efforts of all these units so that they can become a very cohesive and powerful proposition to customers. While this may take some time, I am very optimistic as we get the groups to become better aligned in covering customers and in offering them a powerful value proposition.

TAB: So, in the midst of these challenges and opportunities, as you focus on your own leadership, what are some of your personal priorities for the next 3–5 years?

FD: In terms of priorities, we have to look at the markets that we'll be covering and how we can position the bank to capitalise on the opportunities that each segment offers—the multinationals and conglomerates who will be at the forefront of big infrastructure and capacity-building projects; the middle market and entrepreneurs who are our life blood; and the emerging retail customer base who offer very good potential in the coming years. Given those areas of focus, we're organising ourselves so that we have the right people in the organisation to meet the different demands of each customer segment.

As it strengthens its customer focus and as customers increasingly go digital in their bank transactions, Metrobank will increasingly use technology to engage.

“We are designing an IT platform and a process workflow that would be able to support the demands of customers in those respective segments,” Dee said. “For multinational conglomerates and the middle market, we will continue to improve on current processes, capitalise on technologies, as well as enhance the training and the development of our people, and increase their numbers so they can accomplish better coverage.”

“The retail side is the new, exciting emerging market for this country,” he continued. “It is the challenging segment because whatever age customers may be (but especially among the younger ones), many are focused on instant gratification, instant fulfilment, on being heard if they have complaints.”

He acknowledged that building an infrastructure that would be well-attuned to the retail market segment is a very exciting challenge.

“In our country, none of the industries has really risen to that standard of being able to anticipate and respond to customers the way they should be serviced. There is definitely a big opportunity for Metrobank, which will require a different approach in the way we do business. We cannot do it one-by-one on a person-to-person basis because our costs will blow up. Yet we also cannot treat them like a mass market because these customers want to be known by the company that they deal with.”

“This is a 5-year journey for us, and it’s an evolving process,” the Metrobank president said in closing. “We started last season. So we are actually two years into this transition. There’s both excitement and optimism as we face this very interesting challenge.”