Legal basis and targeted amendments
- BSP Circular No. 237 is issued pursuant to Monetary Board Resolution No. 384 dated 10 March 2000, as amended by Monetary Board Resolution No. 573 dated 7 April 2000.
- BSP Circular No. 237 amends the Manual of Regulations for Banks and the Manual of Regulations for Non-Bank Financial Institutions.
- Section 1 transfers the merger and consolidation definitions found in Sec. X112 and Sec. 4112Q into Subsecs. X111.3 and Subsecs. 4111Q.1, respectively.
- Section 2 amends Secs. X112 and 4112Q and their corresponding subsections to provide “Merger or Consolidation Incentives” and related guidelines.
Definitions: merger and consolidation
- Merger is defined as the absorption of one or more corporations by another existing corporation, where:
- the absorbing corporation retains its identity and takes over the rights, privileges, franchises, and properties of the absorbed corporation(s); and
- the absorbing corporation assumes all liabilities and obligations of the absorbed corporation(s as if it had itself incurred those liabilities or obligations.
- In a merger, the absorbing corporation continues its existence while the life or lives of the other corporation(s) are terminated.
- Consolidation is defined as the union of two or more corporations into a single new corporation called the consolidated corporation, where:
- the constituent corporations cease to exist as separate entities; and
- the consolidated corporation thereafter possesses the rights, privileges, immunities, franchises, and properties of each constituent corporation and assumes all liabilities and obligations of each constituent corporation as if it had itself incurred those liabilities or obligations.
- These definitions govern the purposes of the relevant Manual sections covering mergers and consolidations.
Scope: who may get merger incentives
- Constituent entities may avail of the listed merger or consolidation incentives if they are subject to Bangko Sentral approval.
- Incentives apply to mergers and consolidations among banks and other financial intermediaries.
- The incentives may also be granted in cases of purchases or acquisitions of majority or all of the outstanding shares of stocks of a bank/NBQB.
- Merger/consolidation incentives regarding revaluation and valuation reserves operate through category-based eligibility rules and Bangko Sentral examination-based adjustments.
Merger or consolidation incentives allowed
- Merger or Consolidation Incentives may be availed of “any or all of the following” subject to Bangko Sentral approval and subject to the specific conditions of each incentive.
- Revaluation of bank premises, improvements and bank equipment is allowed if:
- revaluation is based on fair valuation conducted by a reputable appraisal company; and
- the appraisal is subject to review and approval by the Bangko Sentral.
- Unbooked valuation reserves may be booked on a staggered basis over a maximum period of five (5) years, where the reserves are based on Bangko Sentral examination and other capital adjustments resulting from the merger or consolidation.
- Exemption from the 20% and 30% limitations on voting stockholdings in the new or surviving institution is allowed only if:
- the persons are related to each other within the third degree of consanguinity or affinity, or the corporations are similarly related; and
- the bank being merged is distressed as determined by the Monetary Board; and
- once stockholders exceed the 20% and/or 30% ceilings, their holdings shall not be increased, but may be reduced, and once reduced shall not thereafter be increased beyond the 20% and/or 30% ceilings.
- The Monetary Board may temporarily relieve a resulting bank from full compliance with the prescribed net worth to risk assets ratio if the resulting bank is unable to comply fully because of the merger or consolidation, under conditions the Monetary Board prescribes.
- Amortization of goodwill is allowed up to a maximum of forty (40) years only if there are compelling reasons; otherwise the amortization period shall not be longer than ten (10) years.
- Conversion or upgrading is allowed where the head offices, branches, and/or other offices of merged or absorbed institutions are converted/upgraded into branches of the new or surviving financial institutions.
- Relocation of branches/offices may be allowed within one (1) year from the date of merger or consolidation if:
- the merger or consolidation resulted in duplication of branches/offices in a service area; or
- in other cases/circumstances as the Monetary Board prescribes.
- Outstanding penalties in legal reserve deficiencies and interest on overdrafts with the BSP as of the merger or consolidation date may be paid in installments over one (1) year.
- A rediscount ceiling of 150% of adjusted capital accounts may apply for one (1) year, reckoned from the merger or consolidation date, if the merged/consolidated bank meets the required net worth to risk assets ratio and other requirements for rediscounting.
- Commercial banks with total outstanding real estate loans exceeding 20% of total loan portfolio may be granted one (1) year to comply with the prescribed 20% ratio, reckoned from the merger or consolidation date.
- Restructuring/plan of payment of past due obligations of the proponents with the BSP as of the merger/consolidation date may be allowed over a period not exceeding ten (10) years.
- For rural banks, access to the BSP rediscounting window for two (2) years is granted even if the past due ratio exceeds 25% of loan portfolio but is not exceeding 30%, provided the merged/consolidated bank meets all other requirements.
- During the two (2) years, the rural bank’s rediscounting limit per application may be increased to an amount equivalent to the total of the rediscounting limit per application of each constituent bank before merger or consolidation.
- Concurrent officerships may be allowed between a merged or consolidated bank/financial institution and another bank/financial institution subject to approval of the Monetary Board.
- Concurrent directorships may be allowed where a bank acquires shares of stock of another bank for the purpose of merging or consolidating the two (2) banks, subject to prior approval of the Monetary Board, regardless of whether the banks belong to the same category or both have quasi-banking functions.
- A merged/consolidated rural bank may establish a branch each in Cebu City and Davao City if it puts up the minimum capital requirement for these places, subject to other requirements on the establishment of branches.
- Automatic extension of five (5) years is granted for retirement of government preferred shares, reckoned from the date of merger/consolidation.
- Training of officers and staff of the merging or consolidating rural banks by the BSP is granted.
- Any right or privilege granted to a merging bank under a rehabilitation program previously approved by the Monetary Board or under any special authority granted by the Monetary Board continues to be in effect.
- Incentives also extend to cases of purchases or acquisitions of majority or all of the outstanding shares of stock of a bank/NBQB.
Eligibility and conditions for key incentives
- Revaluation of premises, improvements, and equipment is allowed only to institutions participating in a merger or consolidation if:
- all of them belong to the same category, or at least two (2) of them belong to the highest category among the participating institutions.
- Where participating institutions do not belong to the same category or only one falls under the highest category:
- all participating institutions may revalue; and
- the amount of appraisal increment is limited to the amount of the total resources of the institution(s) belonging to the lower category or categories.
- Staggered booking of unbooked valuation reserves over a maximum of five (5) years based on BSP examination is allowed to institutions participating in a merger or consolidation if:
- all belong to the same category, or at least two (2) belong to the highest category among the participating institutions.
- Where participating institutions do not belong to the same category or only one falls under the highest category:
- all may book valuation reserves on a staggered basis over a maximum of five (5) years; and
- the aggregate amount of required valuation reserves is limited to the amount of the total resources of the institution(s) belonging to the lower category or categories, with the reserves “BASED UPON EXAMINATION BY THE BANGKO SENTRAL.”
- Where revaluation and staggered valuation reserves apply to purchases or acquisitions of majority or all outstanding shares of a bank/NBQB for rehabilitating the former bank/NBQB:
- revaluation and staggered booking over five (5) years are allowed only if the purpose is rehabilitating the former bank/NBQB;
- full allowance of revaluation and staggered booking is allowed only if both banks/NBQBs belong to the same category; otherwise:
- the bank/NBQB being acquired/rehabilitated may recognize the appraisal increment in full and book valuation reserves on a staggered basis; and
- the acquiring bank/NBQB’s appraisal increment and staggered booking privilege are each limited to the total resources of the bank/NBQB being acquired/rehabilitated.
- Availability timelines for revaluation and reserves:
- revaluation of assets and staggered booking of valuation reserves are available for two (2) years from 19 February 1999;
- the rest of the enumerated incentives are available for three (3) years from 31 August 1998.
- Conditions for revaluation and goodwill recognition require both:
- the surviving or consolidated entity meets existing capital requirements after all adjustments are taken up in the books of accounts but before considering appraisal increments and goodwill, or there is infusion of fresh capital to meet existing capital requirements; and
- the merger or consolidation results in a more viable financial institution due to cost savings and improved competitive position.
- For purchases or acquisitions of majority or all outstanding shares of a bank:
- the same conditions apply.
- Distressed-bank requirement for stockholding exemption in acquisitions:
- exemption from the 20% and 30% limitations on existing stockholdings as an incentive to purchase or acquisition of majority or all outstanding shares of a bank applies only if the bank being purchased or acquired is distressed as determined by the Monetary Board, and the purchase or acquisition is for purposes of rehabilitating the bank.
How appraisal increment and goodwill affect capital and dividends
- The appraisal increment resulting from revaluation forms part of:
- capital for purposes of determining single borrower’s limit; and
- capital to risk assets ratio.
- The use of appraisal increment for cash dividend is governed by the Corporation Code.
Transitory and continuation rules
- The circular provides fixed availability periods:
- two (2) years from 19 February 1999 for revaluation of assets and staggered booking of valuation reserves; and
- three (3) years from 31 August 1998 for the rest of the incentives enumerated under Secs. X112 and 4112Q.
- A right or privilege granted under a rehabilitation program previously approved by the Monetary Board or under special authority granted by the Monetary Board continues to be in effect after merger/consolidation.
Administrative structure: approvals and BSP examination
- Bangko Sentral approval is required for availing of merger/consolidation incentives.
- BSP examination is the basis for unbooked valuation reserves that may be booked on a staggered basis.
- The Monetary Board determines:
- whether a bank is distressed for purposes of stockholding exemption; and
- whether and under what conditions temporary relief from full net worth to risk assets ratio compliance will apply; and
- approval-related matters such as concurrent officerships and the conditions for relocation other than duplication scenarios.
Repeal, separability, or sunset
- BSP Circular No. 237 contains specific time-limited availability provisions for incentives, including two (2) years from 19 February 1999 and three (3) years from 31 August 1998.