MANILA/SINGAPORE Singapore's DBS Group (DBSM.SI) has agreed to sell more than half its stake in Bank of Philippine Islands (BPI) (BPI.PS) to partner Ayala Corp (AC.PS), a deal that locks in profit on the holding by Southeast Asia's largest bank and boosts its cash reserve to meet new industry regulations.
DBS Group's move - raising $616 million - is also part of Chief Executive Piyush Gupta's broader strategy to focus on larger, controlling stakes in other lenders.
"The transaction is in line with DBS' disciplined capital management and strengthens its capital position ahead of Basel III on Jan 1, 2013," DBS said in a statement.
On Friday, shares of Ayala Corp rose briefly by 2 percent in early trade while both DBS and BPI were flat a day after the announcement.
Banks around the world have been shedding minority stakes in financial institutions to satisfy Basel III rules that require them to have additional capital buffers.
Under regulations to be phased in from January under the Basel III rules - drafted after the 2007/08 financial crisis - banks will have to raise their capital base to reduce lending risks.
DBS invested S$1.2 billion ($976 million) for a 19.7 percent stake in BPI in December 1999. It has written down part of that investment over the past few years, sources said.
With the transaction, DBS will realize a gain of about S$450 million, but it is not expected to have a material financial effect on 2012 net asset value and earnings, the Singapore lender said.
DBS's sale of the 10.4 percent stake in BPI leaves it with 9.9 percent, although it will continue to be represented on the bank's board.
DBS is selling the stake at a time when the Philippines stock market is among the best performers in Southeast Asia.
"The valuation that they are getting may have accelerated their decision to sell the partial stake," said Andrew Chow, head of research at UOB Kay Hian in Singapore. "I think there's also a global trend for banks to want to shed non-core assets to comply with Basel III rules."
The Philippines main index .PSI has gained nearly 23 percent this year, with BPI surging 42 percent. Last week, the shares hit a record high of 81 pesos.
"While there are strong merits of larger exposure to the Philippines given its potential growth prospects, we understand DBS' position in the divestment of BPI given stricter capital rules under Basel III," Melissa Kuang, a banking analyst at Goldman Sachs, said in a note to clients.
Ayala, the Philippines' oldest conglomerate, is already the biggest shareholder in BPI and will increase its stake in the country's largest bank by market value to 44 percent after the acquisition.
"This reflects our confidence in the growth potential of BPI particularly amidst the projected expansion of the Philippine economy over the next few years," Fernando Zobel de Ayala, Ayala president and chief operating officer said in a statement.
Delfin Gonzalez, Ayala group's chief finance officer, said the group's low gearing level allows it room to invest in expanding its existing portfolio and in new growth markets.
Ayala ended the second quarter with gross debt of 49 billion pesos ($1.18 billion) and 23 billion pesos in cash.
It plans to issue 10 billion pesos worth of bonds after a similar issue of the same amount in May, part of the company's efforts to gear up for its planned investments of around $1 billion over the next five years in the power and transport infrastructure sectors.
BPI grew its net income in first half by 52 percent from last year on strong net interest income and trading gains. ($1 = 41.5900 Philippine pesos)
(Additional Reporting by Eveline Danubrata; Editing by Ken Wills)