Philippine Banking Industry 101

In understanding an industry, one must take note of the following important details:

  1. How the industry generate revenues?
  2. What are the regulatory risk surrounding the industry?

How does the banking industry generate revenues?

It is common knowledge that the banking industry profits by extending the cash deposited by the depositors to willing borrowers. To illustrate:


However, it was least known that bank profits more through rediscounting loans extended to borrowers. It is in this picture that the Bangko Sentral ng Pilipinas (BSP) plays a major role in a bank’s profit. Rediscounting loans is like borrowing money from the BSP with the loans receivable from the borrower as collateral. To illustrate:bank1012

What are the regulatory risk surrounding the industry?

The regulatory body that greatly affects the banking industry is the Bangko Sentral ng Pilipinas (BSP). Every time news comes out like BSP maintains key interest at record lows, what was referred as “key interest rates” are overnight borrowing and lending rates. Overnight borrowing rates or reverse repurchase rates (RRP) are the rates used in rediscounting loans.[1]

Changes in overnight borrowing rates should be followed by bank investors since change on the rates will affect bank profits.

Is there a way to anticipate interest rate changes?

Definitely! Interest rate changes can be anticipated by watching the inflation rates. The BSP adopts the inflation targeting framework since 2002. In other words, should inflation go beyond their target, the BSP will certainly increase the interest rates. For 2014, the BSP targets inflation rates of  4 ± 1 percentage points.[2] Therefore, should inflation go beyond 5%, expect the BSP to increase interest rates.

Obtain the inflation rate information from the BSP through here.

Schedule of releases of key statistical information (includes inflation rates) are found here and exact dates here.



  1. Lending rates,
  2. Inflation Targeting: The BSP’s Approach to Monetary Policy,


Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.



Making Sense on TDY Consolidation

On July 31, 2012, Tanduay Holdings, Inc. (TDY) disclosed the following: [1]

Lucio Tan (LT) wishes to consolidate his assets to TDY by having TDY acquire/invest in the companies above.

In order to determine the value of TDY after the consolidation of the mentioned companies, we may approach the valuation in two ways: accretion in earnings per share or book value accretion.

The consolidation of LT group’s assets in TDY shares will actually diminish TDY’s earnings but it can increase TDY’s assets to 18.75 per share.

Additional considerations:

According to a disclosure in the PSE, some of PNB’s assets require regulatory approvals which may delay TDY’s investment in the bank. [2]

TDY application for increase of authorized capital stock from 5 billion shares to 25 billion shares is approved by the SEC. Although the increase does not mean that all the 25 billion will be issued, it still suggests a possible dilution thus in effect may distort our computations above. [3]

Computation of 32%:


  1. Change in corporate name to LT Group, Inc.; investment in companies; Special Stockholders’ Meeting on September 18, 2012; resignation/election of directors; Lifting of trading suspension,
  2. Filing of application with SEC for amendments to Articles of Incorporation and By-Laws; Update on investments in companies under the Lucio Tan group,
  3. SEC approval of increase in authorized capital stock,

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.