THE ONB CONSOLIDATION EXPERIENCE

by:Alex V. Buenaventura

presented to: RBAP ANNUAL ANNIVERSARY SYMPOSIUM

November 10, 2011Manila Hotel

PRESENTATION OUTLINE

• RB PANABO BEFORE• APEX BANKING PROJECT FAILURE• RB PANABO NOW• “3 BANKS, 1 SYSTEM” HISTORY • WHY GIVE UP CONTROL ? • KEY INGREDIENTS FOR REPLICATION

RB PANABO BEFORE

• P 25 Million in Assets• P 5 Million in Networth• Average ROI of 30 % per annum• Good BSP Audit Rating• Micro Deposits & Loan Products• Low Level of Computerization• “Small Capital“ Image • Profitable & Sustainable• 85 % Buenaventura Family Group Control

APEX BANKING PROJECT FAILURE

RBAP-INITIATED APEX BANKING PROJECT FAILED BECAUSE THE 75 JOINING BIG RBs

REFUSE TO GIVE UP EQUITY CONTROL

RB PANABO NOW

• SHOW “THE BIG BANK” SLIDE

BIG CAPITAL OF

P 2.1 BILLION

BIG BANK SERVICES• PCHC Direct Clearing• MegaLink ATMs• P 500 M SBL• INTERNET BANKING ON PILOT• POS DEBIT PAYMENTS • FOREIGN REMITTANCE TIE-UPS

SMALL ACCOUNTS BANKING

• 520,000 ACTIVE DEPOSITORS WITH AVE. DEPOSIT SIZE OF BELOW P 15,000 ONLY• 80,000 ACTIVE BORROWERS WITH

AVE. LOAN SIZE OF BELOW P 80,000 ONLY

DepED-APDS Loans P 3.6 Billion Salary Loans to DepEd tru APDS (Auto Payroll Deduction System)

BIG ACCOUNTS BANKING

• PREMIUM PRICING OVER COMMERCIAL BANKS ON TIME DEPOSITS• BIG SBL OF P 500 Million &

COMPETITIVE PRICING VS COMMERCIAL BANKS ON LOANS

RB PANABO NOW IS…ONB…….THE WIDEST RURAL BANKING NETWORK

IN THE PHILIPPINES PROVIDING MODERN BANKING SERVICES TO SMALL & BIG ACCOUNTS

IN PROGRESSIVE RURAL AREASUNSERVED BY COMMERCIAL BANKS

“3 BANKS, 1 SYSTEM” HISTORY

The RB Panabo Expansion Problem

Cannot branch out due to absence of P 100Million Allowable CAPEX needed to create aCentral Office with complete support services :-Accounting -ICT & Data Center & DRC -Internal Audit -Product Dev. & Marketing-HR & Training -Legal & Collection-Treasury -ATM-PCHC Clearing -Credit Packaging

The “2 Banks, 1 System” Solution From Network Rural Bank

• 5 % stock swap between RB Panabo & big capital Network Rural Bank in July 1993

• Both banks shared a common Central Office hosted in Network Rural Bank

• Result: RB Panabo put up 6 new branches without putting up its own Central Office

The “3 Banks, 1 System” Tru Franchise Banking with ProBank

• In Nov 1997, Network Rural Bank invested 51 % and Diocese of Kidapawan invested 49 % in putting up Provident Rural Bank---the first “franchise bank”

• ProBank grew into a 7-branch operation in without putting up its own Central Office

• By end 2000, the “3-banks, 1 System” operation became a network of 39 branches

WHY CONSOLIDATE ?

• TO BECOME BIGGER --- FROM 3 BANKS ALL IN THE TOP 10 RANKING, TO BIGGEST RURAL BANK IN ASSETS & CAPITAL

• ELIMINATE DUPLICATION OF BOARD MEETINGS AND HEAD OFFICES AND REPORTS

• TAX EXEMPTION Under RB Act• INCENTIVES for CONSOLIDATION: BRANCHES

& APPRAISAL INCREMENT (NOW WITH SPRB)

The ONB Consolidation

In April 2004, or after 7 years of “3 banks, 1 system” operation, the 3 Banks were dissolved and consolidated into One Network Rural Bank, Inc. and became the largest Rural Bank in all aspects.

TRIGGER FOR CONSOLIDATION

“After 7 years of living in, why not get married ?”

Benefits/Incentives for Consolidation

• Tax Exemption from GRT for 5 years• Booking of Appraisal Increment on bank premises and

improvements ( P 127 Million )• Participation in PCHC Direct Clearing• 6 Branch Licenses• Money Changer License• Surplus Reserves Became Paid-Up Capital ( P 357

Million )• Authorized Capital Increased from P 648 Million to P

1.4 Billion without fresh capital infusion

CONTROL PROBLEM & SOLUTION

• PREVIOUS DOMINANT CONTROL WILL BECOME SMALL MINORITY COMMON STOCK IN THE CONSOLIDATED BANK (I.E. FROM 80 % CONTROL BY BUENAVENTURAS IN RB PANABO TO JUST 14 % VOTING STOCK IN CONSOLIDATED BANK)

• SOLUTION: MAJORITY-MINORITY STOCKHOLDERS AGREEMENT TO REQUIRE MAJOR DECISIONS TO BE MADE TOGETHER AS ONE BLOCK (74 % CONSUNJI GROUP + 14 % BUENAVENTURA GROUP + 4 % DIOCESE OF KIDAPAWAN GROUP = 92 % SOLID BLOCK )

KEY INGREDIENTS FOR REPLICATION

• Big Capital: At least P 500 Million Networth • Management Control by One Group: 51 % minimum voting stock control of one RB group

who will nominate the management team especially the President

• Majority-Minority Agreement : covering at least 67 % of the voting stock

• Consolidation of Equals: Net Asset Valuation Without Premium

• Like Minded Rural Bankers

What should not have been done ?

The “multiple banks, one system” preliminary phase of getting to know each other is not necessary because it just prolongs the consolidation process and delays the achievement of consolidation benefits/incentives especially Big Capital leveraging .

2nd CONSOLIDATION“ONE NETWORK RURAL BANK, INC.”

CONSOLIDATED WITH “RB NEW CORELLA, INC.” STARTING SEPT. 1, 2011

UNDER THE NEW BANK NAME “ONE NETWORK BANK, INC. ( A RURAL BANK)“

FRANCHISE BANKING CHALLENGE TO FEDERATIONS

CONSOLIDATE MANY FEDERATION MEMBERS AND FORM A BIG RURAL BANK (FRANCHISEE) AND INVITE A NEW BIG INVESTOR BANK (FRANCHISER) TO PROVIDE 49 % FRESH CAPITAL AND INSTALL COMPLETE MODERN BANKING PRODUCTS & SUPPORT SYSTEMS.

THANK YOU