LANDBANK Management Training Program (MTP) Batch 6

NEIL D. AMMEN May 22, 2017

Land Bank of the Philippines and the ASEAN Economic Community:

Risks and Risk Management Strategies

The signing into law of Republic Act No. 10641 also known as an Act Allowing the Full
Entry of Foreign Banks in the Philippines presents a step toward the promise of further
integrating the Philippines into the global economy and benefiting from it. The act is an
amendment to Republic Act No. 7721 that was passed in May 1994, which allowed foreign
ownership of up to sixty percent (60%) of an existing bank or subsidiary but limited the entry to
a single entity.

The new law, however, specifies that the Monetary Board may authorize foreign banks
to operate in the Philippine banking system through any one of the following modes of entry: (i)
by acquiring, purchasing, or owning up to one hundred percent (100%) of the voting of an
existing bank; (ii) by investing in up to one hundred percent (100%) of the voting stock of a new
banking subsidiary incorporated under the laws of the Philippines; or (iii) by establishing
branches with full banking authority, (Sec. 2, R.A. 10641, Modes of Entry).

The provision for foreign banks full entry to the Philippine economy is also viewed as
a means to boost investment because foreigners will be more comfortable in bringing capital
into the Philippines through banks which are more familiar to them. The new law is consistent
with the vision of the ASEAN Economic Community (AEC) which took effect in 2015.

Financial integration is a key component of the AEC blueprint, which envisages

integrated financial and capital markets in the region. The blueprints road map for monetary
and financial integration includes the following initiatives: (1) financial services liberalization or
the progressive liberalization of financial services; (2) capital account liberalization or the
removal of capital controls and restrictions to facilitate freer flow of capital within the region; and
(3) capital market development or the construction of long-term infrastructure for the
development of ASEAN capital markets that aims to achieve cross-border collaboration
between various markets in the region. However, despite the many benefits the AEC promises
to the member countries in the region, a lot of business leaders remain skeptical on the
readiness of the Philippine banking industry to the ASEAN integration.

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 LANDBANK Management Training Program (MTP) Batch 6

NEIL D. AMMEN May 22, 2017

This paper aims to identify risks that confront a banking institution, in particular, the
Land Bank of the Philippines. In addition, risk management strategies are presented to mitigate
the identified risks and reduce its impacts to the organization.

1. Risk Factor: People Risk Recruitment and Retention

1.1. Risk Driver: Free flow of skilled labor. The integration allows cross-recognition of
qualification and licenses which provides a wider talent pool for organizations to tap from. It also
provides more available jobs to choose from across the regions. In effect, an accelerated brain
drain might take place since labor will quickly flock to higher-paying member countries in the
region. Moreover, attrition and retention cost will increase, which will challenge the growth of
Landbank and foreign banks will tend to dominate employment trends.

1.2. Risk Management Strategy: The Human Resource Management Group should
develop a more competitive compensation package along with the continuous training and
development for the personnel so that employees will not seek job opportunities from other
organizations. Moreover, in consideration of the banks investments for the human resource
compensation package and trainings, the recruitment and selection unit must ensure that the
hired employees possess the required competencies to effectively deliver the expected output
for the job. The proper reward system for employees contribution through product innovations
and process improvements should be strengthened.

2. Risk Factor: Operational Risk Client Relationship Management

2.1. Risk Driver: Technology utilization. Unlike the other private banks especially the
foreign banks, Landbank has not maximized the use of technology for digital banking. With
increased competition among the foreign banks that utilizes and maximizes various channels of
digital banking, Landbank may not be able to respond to the growing needs of its clients on a
timely manner. In effect, customers might find interest in availing products and services of the
other banks that provide more convenience in terms of responsiveness.

2.2. Risk Management Strategy: Landbank should invest in the use of advance
technology to provide product innovation that will maximize the benefits of the digital banking.
With the adoption of the digital transformation, Landbank will not just be able to realize
operational efficiencies through the automation of services and less reliance on physical

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 LANDBANK Management Training Program (MTP) Batch 6

NEIL D. AMMEN May 22, 2017

locations. The convenience of online and mobile banking will also be a major differentiator for
customers in their preference for banking services that Landbank provides.

3. Risk Factor: Market Risk Foreign Exchange

3.1. Risk Driver: Balance of Payments and Volatility of the Peso/Dollar. The impact of
an increase in interest rates on the current account balance of payments is uncertain, thus,
poses risks for any banking institution. For instance, an increase in interest rate may reduce
consumer spending (more attractive to save, less incentive to borrow, lower disposable income
after paying increased mortgage costs). In effect, this will negatively impact the lending
operations of Landbank.

3.2. Risk Management Strategy: Generally, banks manage their foreign currency
exposures by maintaining within the existing and acceptable regulatory guidelines and
standards. However, the Bangko Sentral ng Pilipinas (BSP) suggests that the best way to
control foreign exchange risk is by hedging a risk management strategy that is used in limiting
or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or
securities. Thus, Landbank should minimize and control its daily foreign exchange transactions
with their clients to reduce the exposure of the bank to unfavorable trends in the money market.

As regards the volatility of the peso/dollar, Landbank should prepare gap analysis to
measure the sensitivity of its resources, liabilities and off-book items to interest rate fluctuations.
This analysis would give management a glimpse of maturity and re-pricing profile of its interest
sensitive resources and liabilities.

These are only few of the many risks that confront Landbank with the implementation
of the ASEAN Economic Community.

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