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Finance

Philippine lender RCBC to set up digital bank after SMBC investment

Lender aims to 'radically' cut costs as fintech startups mount challenge

Rizal Commercial Banking Corp., the Philippines' sixth-biggest private lender, says it is going digital to "radically" cut costs.   © Reuters

MANILA -- Philippine lender Rizal Commercial Banking Corp. plans to set up a digital banking arm and ramp up tech investments after securing $93.9 million in fresh capital from Japan's Sumitomo Mitsui Banking Corp.

The move comes as traditional lenders like RCBC face rising competition from nimble, digital-savvy startups that are launching mobile-based financial services with the backing of Philippine regulators.

RCBC is incubating "at least one" business that may be spun off to apply for a digital bank license with the central bank, President and CEO Eugene Acevedo told reporters on Tuesday, without disclosing a timetable. One of those units is DiskarTech, which operates a banking app launched last year, he said.

RCBC's charge into digital banking follows an announcement that SMBC, Japan's second-largest megabank, is taking a 4.99% stake in the Philippine lender. The deal was first reported by Nikkei on Monday.

The fresh capital will help bankroll tech initiatives as more people turn to their mobile phones, especially during the coronavirus pandemic, for financial services.

In a sign of where the industry is headed, RCBC closed 70 of its 500 or so branches last year, and not only because of COVID-19, according to Acevedo. "What really happened was customer behavior forced us to follow them," the CEO said, citing a similar trend in Europe.

The RCBC chief also said the low interest rate environment that has squeezed lenders' margins is prompting banks to make drastic cost cuts.

"The only way we can survive is to cut operating expenses by a significant percentage, cut them radically in fact," Acevedo said. "The way to do that is to use the mobile apps as our main factory for servicing [and] engaging customers because the cost of the mobile app is much less than brick-and-mortar business."

The Philippines' central bank wants more Filipinos to be included in the formal financial sector through fintech. Around two-thirds of the Philippine population does not have a bank account, and a third of municipalities have no banking presence.

Since introducing the new category late last year, the central bank has so far issued licenses to three digital banks, which are required to have at least 1 billion pesos ($20 million) in capitalization but are barred from opening physical branches.

Local fintech company Voyager Innovations -- which on Monday raised $167 million from shareholders that include KKR, Tencent and telecom PLDT for its entry into digital banking -- and South African digital bank Tyme -- in partnership with local conglomerate JG Summit Holdings -- have said they will apply for licenses. Philippine lender Union Bank has said it is also keen on a license.

Apart from bolstering its capital base, RCBC, the sixth-largest Philippine private bank by assets, intends to find synergies with SMBC, such as in consumer and corporate banking. Among Philippine banks, RCBC already has a robust number of relationships with Japanese clients.

SMBC has made larger investments in Vietnamese and Indonesian financial institutions, as it turns to Southeast Asia amid slowing growth in Japan. RCBC, which is controlled by the Yuchengco Group and is 22% owned by Taiwan's Cathay Financial Holdings, said it could approach its new Japanese partner for future funding needs.

"Right now, both sides are happy with the 5% stake but ... what is significant about this transaction is that if there's future need for capital, we now have an extra shareholder that we can approach to discuss," Senior Executive Vice President Jomi Deveras said.

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