Philippines Deposit Insurance Corporation (PDIC) says it has chosen Bank of Commerce (Bancommerce) to buy and rejuvenate Urban Bank, the biggest local lender to have been taken over by regulators since the 1997-98 financial crisis. The move was subsequently rubber stamped by the Philippines' central bank. The acquisition is the first of three Bancommerce is trying to pull off; it is currently in talks to buy two other local banks.

"We are proceeding with Bank of Commerce," PDIC president Noberto Nazareno is quoted as saying by Bloomberg. "The Monetary Board has approved that in principle." Bancommerce trumped Asia United Bank, the only other bidder, because it proposed to honour all Urban Bank's liabilities to depositors within three years. Asia United Bank, in contrast, proposed a seven-year time frame.

The government shut down Urban Bank in April after it was unable to meet a deposit run, triggered by speculation that the bank's exposure to its investment unit was threatening its viability. PDIC has been the caretaker of the bank ever since.

As well as Urban Bank, Bancommerce is negotiating to take over Tan Yu group's Pan Asia Banking Inc and Royal Traders Bank (RTB). Like Urban  Bank, Pan Asia Banking and RTB will require capital infusions. If Bancommerce can pull off all three acquisitions, it would be well-placed to compete with some of the PhilippinesÆ leading lenders in five yearsÆ time, analysts say.

 ôIf you look at the industry, banks need to grow through acquisitions or establish a niche for themselves with the entry of more foreign banks and bigger local banks. Bancommerce is getting aggressive because management needs to compete,ö says Bradford Ti, analyst at Salomon Smith Barney in Manila.

The Philippines granted licences to 11 foreign banks to carry out full commercial banking activities last year. That led to a wave of merger and acquisition activity among local banks. The Philippines' largest banks û BPI-Far East Bank, Metrobank and Equitable-PCI Bank û have all been formed through mergers in the last 12 months.

ôBank of Commerce can count on cash from its major shareholder, the Cojuangco family. That side of the family still has a cash hoard from selling its stake in Philippines Long Distance Telephone [PLDT] to Hong KongÆs First Pacific," says SalomonÆs Ti. Antonio Cojuangco, ex-chairman of PLDT and major shareholder of Bancommerce, sold a 17.2% stake in PLDT to First Pacific for $750 million in November 1998, earning an estimated $450 million in the process.

The Cojuangco factor

The Cojuangco family that owns Bancommerce is from a different side of the family that owns San Miguel, the Philippines largest brewery. But their fortunes in Urban Bank could be closely linked. San Miguel, as one of the bank's major depositors, has a lot of money trapped there. Bancommerce wants the brewery and Urban Bank's other major depositors to lend it the funds to recapitalize the bank.

Under the terms proposed, San Miguel, which has an estimated Ps1.3 billion ($29.78 million) of depsoits locked up in Urban Bank, and the latter's two other biggest depositors, Petron Corp and Manila Electric Company, each of which have some Ps673 million tied up, will take some Bancommerce shares in respect of part of their deposits.

Bancommerce is offering to inject Ps1.65 billion in new funds into Urban Bank. Of that amount, the bidder will put up Ps300 million, Ps750 million will effectively come from the three major depositors (through the debt-for-equity swap) and the remaining Ps600 million will come from the Social Security System, the mandatory fund for the Philippines private sector.

According to the local newspaper BusinessWorld, Bancommerce president Raul B De Mesa said the three corporations have agreed to the plan. That agreement is likely to have tipped the balance in Bancommerce's favour. The PDIC is also thought to have welcomed Bancommerce's proposal to rehabilitate Urban BankÆs investment unit, Urbancorp Investments Incorporation. Regulators are hoping to sell the bank off before 26 July, when a 90-day receivership period, mandated by law, comes to an end.

Royal Traders Bank next?

Bancommerce may find it easier to close a deal with PanAsia Bank than RTB, which has been in negotiations with Bancommerce for over a year. The Marcos family is against any deal that will dilute its interest in RTB. According to BusinessWorld, the Marcos family claims to command at least a third of the voting shares, enough votes to block any merger proposal. Bancommerce will need 75% of votes for the merger to succeed.

RTB has a bad loan problem and needs new capital. Although Bancommerce has the funds to recapitalize the bank, it has turned to the central bank for help. Bancommerce wants the central bank to take over the bad loans, and exchange them for Treasury bills, cleaning up RTBÆs balance sheet. In return, Bancommerce is prepared to repurchase the non-performing assets at face value after more than five years. The central bank has the power to give the bank to Bancommerce, the question is whether it will.

Says Edgar Bancod, analyst at BNP Prime Paribas: ôHeÆs [Antonio Cojuangco] got money to burn. Before he was chairman of PLDT, he had experience in banking. I would imagine that he has a fairly good idea of what he is doing."