This article first appeared in The Edge Malaysia Weekly on April 4, 2022 - April 10, 2022

REGIONAL private equity (PE) firm Ikhlas Capital is investing about US$21 million (RM88.4 million) in a stake in Bank of Commerce (BOC) in the Philippines, sources say. BOC is the banking arm and affiliate of San Miguel Corporation, which is one of the largest conglomerates in the archipelago.

Last Thursday, BOC underwent a regulatory initial public offering to meet central bank Monetary Board of the Bangko Sentral ng Pilipinas’ (BSP) regulatory requirements so that it can be upgraded to a universal bank.

Sources familiar with the matter say Ikhlas was invited to participate in the PHP3.37 billion (RM275 million) IPO exercise, which would see the private equity firm holding a stake in BOC. The stock ended 1.83% higher from its IPO price, closing at PHP12.22 on opening day.

When contacted, Ikhlas chairman and founding partner Tan Sri Nazir Razak says: “We are delighted to have this opportunity to invest in BOC. Banking is one of our core strengths, and this opportunity brings us into partnership with San Miguel, which has arguably the largest consumer and business ecosystems in the Philippines.”

While Ikhas’ stake in the Filipino lender is unknown, a back-of-the-envelope calculation shows that US$21 million is equivalent to about 6.5% equity interest, based on BOC’s market capitalisation at its IPO price of PHP12.

This latest investment is the third that Ikhlas has made in the banking space since its inception. The private equity firm is also invested in AMMB Holdings Bhd and Silverlake Group, the holding company of Singapore Exchange-listed banking systems solutions company Silverlake Axis Ltd.

Its other investments consist of a 30% stake in Glacier Megafridge Inc (GMI), a leading integrated cold chain service provider in the Philippines, and a 10% stake in Pelikan International Corp Bhd.

BOC was founded in 1962 and has a network of 140 branches and 257 ATMs nationwide in the Philippines. The Philippines central bank recently awarded BOC a universal bank licence, which allows it to provide a much broader range of products and services. BOC is now able to offer the full suite of banking products.

Commenting on the licence in December, BOC president and CEO Michelangelo Aguilar said: “Our expanded banking services will allow us to fortify our presence in the domestic market and deepen relationships with clients and unlock cross-sell opportunities, which we intend to convert into additional revenue streams.”

It was reported that the bank is also looking to provide clients with access to whole-life and investment-based insurance products through a bancassurance offering.

According to BOC’s prospectus, with a universal banking licence, the bank will have more opportunities to generate and warehouse interest-bearing assets like marketable securities, generate more fee-based income, and manage the risk of securities underwritten and held for trading.

The group also highlights that it sees “digital banking as a cornerstone of its long-term strategy and a key enabler of long-term growth”. “In the near term, the bank intends to continue to advance its technological capabilities to support business growth across multiple channels. The bank expects to utilise digital technology as a major tool, particularly in the areas of fund transfer, deposits, payments, and other transactions.”

BOC adds that as at June 30, 2021, it ranked 16th in terms of total assets among the universal and commercial bank groups, based on published balance sheets submitted to the BSP.

According to the group’s latest publicly available annual report (FY2020 ended Dec 31, 2021), 46% of the bank’s total income comes from corporate banking, 32% from treasury management, 13% from consumer, 4% credit card, 3% branch banking, 1% trust services and 1% transaction banking.

For FY2020, BOC registered net income of PHP784.4 million, a 20% increase from FY2019’s PHP652.7 million. This is due to the increase in the bank’s net interest income (NII) to PHP5.1 billion, which was brought about by a 51.9% drop in interest expense on deposits and a sizeable increase in trading and investment securities gains, which offset the larger non-performing loans (NPL) loss provisioning of PHP962.5 million.

Return on equity improved to 4.77% in FY2020 from 4.13% in FY2019. Total assets grew 18% year on year to PHP170.92 billion in FY2020 from PHP145.03 billion in FY2019.

According to its nine-month results ended Sept 30, 2021, BOC’s net income rose 26% to PHP625.7 million from PHP495.3 million in the previous corresponding period. The increase was mainly due to higher net interest income brought about by lower interest expense and service charges, fees and commissions, notes the company’s prospectus.

Its nine-month earnings of PHP625.7 million are already near FY2019’s earnings of PHP652.7 million.

The bank’s total assets as at Sept 30, 2021, stood at PHP195.28 billion, about 14.25% higher than PHP170.92 billion as at Dec 31, 2020. The significant improvement was due to an increase in investment securities, according to the prospectus.

Total NPL to total gross loans stood at 3% as at Sept 30, 2021, similar to the figure reported as at Dec 31, 2020.

Tier-1 capital and total capital ratios in September 2021 improved to 20% and 20.9% respectively from 15.58% and 16.60% in FY2020, while return on equity fell to 4.2%.

Interestingly, in 2012, CIMB Group Holdings Bhd — under Nazir’s leadership — had announced its intention to acquire 60% of BOC as part of its regional expansion but the deal was called off in 2013 as the parties involved could not agree on long-term partnership arrangements.

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