UP JPIA Case Challenge 2015

Manila Commercial Bank

Reynaldo Rey Cruz, President of Manila Commercial Bank, was concerned. Three
months into the year, the banks profit for the year was trending below that of the previous
year. Operating costs kept increasing year-on-year and loan volumes had not grown as fast as
expected. Worse, the bank struggled to acquire new customers, something that they were
previously good at. Something was wrong but he couldn't pinpoint what the exact problem
was.
Rey has served as president of the bank for over a decade now and is one of the earliest
employees who built the bank together with its owners, the Prado family. Now in his late
fifties, Reynaldo was only a few years away from retirement and wanted to ensure that he left
a lasting legacy at the bank. The bank was not going to go down under his watch. He was
going to do everything he could to turn things around.

Overview of Manila Commercial Bank

MCB is one of the early pioneer banks in the Philippines and one of the first banks to get a
universal banking license. They have over 500 branches nationwide with most of their
branches in metropolitan areas like Metro Manila and Cebu.
Like most banks, MCB derives most of its revenues from loans and other consumer
products. They make the bulk of their money through their retail business (e.g., consumer
loans) although their commercial business is similarly healthy. Trading income for the bank
was limited compared to its peers. This was a conscious decision on the part of the bank to
limit its reliance on market changes, but with the recent market rallies, the bank has decided
to reevaluate their trading position and is setting up a stronger Treasury department, but that
will take a few years to truly be competitive.
MCB stuck to their retail banking roots and built their brand around being simple, hasslefree, and affordable. Opening a bank account with MCB was simple and easy-to-do. You can
be in and out one of their banks in twenty minutes or less when setting up a new account
compared to other banks which could take up to an hour. They even had a commercial a few
years back that showed a lola easily opening a bank account with them Kung kaya ni lola,
kaya mo din. To this day, they try to make sure that their customers do not spend more
than 30 minutes in their bank for any basic transaction. They also try to offer all their
customers the same level of service regardless of how much assets they have with the bank.
In terms of rates and affordability, MCB is competitive. The minimum balance to maintain a
savings or checking account is comparable to its competitors and the bank makes it easy for
people to make transactions at its branches. Furthermore, they have one of the lowest loan
rates for their auto and home loans and have a loan approval time of 1-5 days depending on
the type of loan. They manage to do this using their superior credit rating model and credit
records of their large base of customers, which allows them to minimize their risk and
identify low risk individuals. As such, they have a much lower % of bad debts and a healthy
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UP JPIA Case Challenge 2015

loan portfolio. With this, MCB managed to become the #1 top-of-mind bank for auto and
housing loans for the past five years.
Through the strength of their value proposition, the bank grew in terms of customers and
depositors and is probably the largest bank in terms of depositors. They are known for their
ability to get first time bankers into their network and are particularly strong in the more
traditional family segments (i.e. professionals in their mid to late 30s with families). Most of
their customers have at least two products with the bank (bank average = 2.4 products per
customer), a current account and usually either a loan, a checking account, or a credit card.

Challenges
First of all, the banks large and growing base of customers and the banks desire to maintain
high levels of service are causing severe stress to the operations of the banks branches.
Branch staff are overworked and stretched thin as they struggled to meet the 30-minute
guideline of the bank. Turnover at the branch staff level was high, leading to even more
operational stress as new staff members need time to be properly trained for branch
operations.
Moreover, since most of the banks processes were still primarily manual, a lot of staff time
needed to be blocked for paper work. As their customer base increased, transactions and the
paperwork required to document these transactions also grew exponentially. Given such a
high volume of paperwork, human error and rework has become a norm at the bank. Several
operational initiatives have been put into place to try and limit these issues but performance
of these initiatives has been mixed.
Second, the bank has struggled to get new customers recently. Last year, they managed to get
around 800k new accounts opened. In stark comparison, in the first quarter of the year, they
only managed to get around 120k new accounts opened, much lower than the 180k new
accounts that they had budgeted in their financial and operational plan. Getting new
customers is a core part of the banks business model as they rely on scale and network
effects to profitability serve their large base of users.
The bankable population of the Philippines was still growing and was currently at 26%,
leaving a large majority still unbankable. However, demographics have been seen to be
shifting with bank customers getting younger and more technologically savvy. Increasing
penetration of mobile devices has also led to the development of different online banking
platforms that cater more to these digitally-connected banking consumers.
Furthermore, customers are becoming more sophisticated and increasingly have needs
beyond basic CASA (i.e. Current Account / Savings Account) products. In recent years,
insurance and investment (e.g., UITFs) have become more popular as peoples financial
literacy improved. At present, most banks in the industry have an average of 3.2 products per
customer.
Lastly, MCB is also concerned about the impending ASEAN integration plan. Foreign banks
will be allowed entry into and be able to freely compete in Philippines. The Philippine
Government has also removed limits on foreign ownership of local banks, increasing the
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UP JPIA Case Challenge 2015

theoretical limit from 60% to 100%. With this in place, competition is expected to increase
over the next few years. All local banks need to strengthen their propositions in order to
survive in this new, more competitive environment.

Root cause
To combat declining profits, Cruz wants to launch a holistic transformation program to turn
things around. However, he also understands that the bank does not have an unlimited
amount of resources and/or time to have a large program. He needs to prioritize and he was
not sure where to focus his attention.
The members of Reynaldos leadership team had different ideas regarding what the
underlying root cause of their problem was:
Gerry Pena, Reynaldos right hand man, who oversees operations for the bank believes
that the drop in sales is related to the recent cost cutting measures adopted by the bank.
Part of the cost cuts involved shifting administrative and compliance tasks to the branch
instead of doing it centrally. Like Reynaldo, Gerry believes the people at the branch are
flooded with admin work. Thus, they no longer have the time or willingness to sell.
Elizabeth Tan who heads the banks Retail Business believes that the banks slump is
driven mainly by a lack of new, innovative products. She argues that her team has
constantly pushed for new products as she believes MCBs products are seen as inferior
to their competitions equivalents.
Ryan So, the banks head of consumer banking, who has just transferred from one of
MCBs major competitors, feels that the bank does a poor job of understanding the
different types of customer segments it has. With his previous bank, Ryan noted that they
had dedicated teams and products for serving high net worth individuals (HNWI),
entrepreneurs, young urban professionals, etc.
Mylene Perez, who handles countryside operations (i.e. outside Metro Manila) believes
that there is an untapped opportunity in the provinces. Retail banking competition is
fierce in Metro Manila, and that the market is over saturated. She believes provincial
clients are under served and are a source of untapped revenue for MCB.
After hearing his team talk, Rey acknowledges that they all raised valid points and could all
potentially be the way forward for the bank.

Way forward
Mulling it over, Rey combined his and his teams thoughts into 3 independent options (i.e.
not mutually exclusive). The bank could choose to do one or a subset of them or all of them.
However, Rey knew that doing all at the same time usually did not work out the bank
would be stretched in doing all 3 and would not be able to do any of the initiatives well. He
thinks that focus is key in implementation.
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UP JPIA Case Challenge 2015

Option 1: Improve sales force effectiveness

Building on Gerrys point, Rey felt that a fundamental problem with the bank was indeed
the staffs lack of time to sell and the reactive sales culture that has permeated in the
bank. From his discussions with Gerry, Rey realized that most of their sales have been
reactive sales staff would sell products to customers who ask for them. Cross-selling of
products was not being done well in their banks.
Rey believed that a revamp in branch admin operations by cutting out redundant tasks
and centralizing where possible could free up staff time. Meanwhile, in terms of sales
culture, Rey believed that the reactive sales culture might be due to their incentive
schemes. The bank places high importance compliance and audit. There must be some
way for them to change their incentives to encourage proactive sales without negatively
affecting their compliance concerns. This was important to Rey as he knew how much
compliance meant to the Prado family. Whatever changes the bank would implement
should not negatively impact the banks compliance and audit needs.
Option 2: Improve customer understanding
Building on Elizabeths and Ryans points, Rey acknowledged that the bank might have
been slipping behind other banks in properly segmenting their customers and has also
fallen behind other banks in terms of product offerings
Last month, Elizabeth visited several branches and had informal conversations with
customers. From there, a few disappointing themes had emerged. Many customers were
asking for products that the bank did not actually have. For instance, a commonly
requested product was a combination current and savings account, which the bank
unfortunately did not offer. Another common piece of feedback was that MCB had a
weak digital banking offering with less functionality than its main competitors.
Moreover, other customers wanted a wider variety of investment products, a segment
where MCB was not traditionally strong.
Ryan and Elizabeth argued that the bank was stuck in an old retail banking paradigm and
pointed out that the one size fits all mentality just did not work anymore. The bank
needed develop a better understanding of who their customers were.
Ryan believed that the bank had the resources and branch network to reach its
customers, but needed to understand what their needs were. He felt that as part of
developing a new suite of products as proposed by Elizabeth, the bank should undertake
a consumer knowledge project to get a broad and deep view of the Philippine retail bank
market, and what segments its customers fit in. For instance, he argued that MCB was
losing customers in the very valuable HNWI (i.e. High Net Worth Individual) segment to
competitors who had product offerings catering to their needs such as a more robust set
of investment products and services. Understanding who their customers are and what
they want was key for Ryan.
Option 3: Expand footprint
An idea that piqued Reys interest was Mylenes suggestion to expand their branch
footprint. As head of countryside operations, Mylene raised the fact that based on MCBs
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UP JPIA Case Challenge 2015

own performance indicators, the MCBs Visayas regional group was outperforming every
other region including MCBs own HQ of Metro Manila. A native of Cebu, Mylene
believed that customers outside Metro Manila were underserved by both MCB and their
competitors, and that this was an untapped opportunity for the bank. She believed that it
would be a good idea to increase the number of branches in the province starting with
the bigger provincial cities (i.e. Davao, Cebu) but also expanding to further provinces like
Palawan. By doing this, she said MCB could flank its competitors and benefit from the
growing bankable population outside Metro Manila.
However, in order to do this, MCB has to rationalize and close down some of their
current branches or get new banking licenses from the regulator. They have already used
up all their current licenses and cannot build new branches without regulatory approval.
The bank could also opt to acquire a regional bank to expand its footprint but that comes
with its own issues.

Whats next?
Reynaldo knew he had to think carefully to make the best use of the banks resources to turn
around the banks profitability by year end. As he arrived in the office on Monday morning,
Reynaldo knew he had a few decisions to make about the future of MCB. It was going to be
tough but he knew that the bank could turn things around. Now, it was all about prioritizing
which initiatives to do and detailing out their immediate next steps.

UP JPIA Case Challenge 2015

Exhibit 1
Comparison of revenue streams by bank
2014 Revenues

100%
50
54

58
Retail banking

67

20
22

Corporate banking

38

26

14
10

Trading
Other

8
5
2

10

MCB

Bank A

12

Bank B

Bank C

Exhibit 2
Average time spent by a branch staff per day
Hours

1.6

8.0

2.4

0.8
3.2

Handle
transactions

Sell products

Paperwork

Review
transactions
and close-up

Total

UP JPIA Case Challenge 2015

Exhibit 3

Initial customer segmentation by Eric

% of base

Average
CASA

Products /
customer

4%
24%
20%
48%
4%

>P500k
P100K-500K
P30k-P100k
~P10-20k
Varies

4.0
2.8
2.1
2.1
2.8

High net worth

Emerging class
Upper mass
Mass
Digital savvy

# of txns per % txns online

month
or thru ATM
20
12
8
16
12

45%
40%
35%
20%
80%

Exhibit 4
Revenue contribution by geographic location
Indexed to 2010
146
135
126
116
108

70

100

66
61
57

Metro Manila

50

54

27

30

32

35

38

Rest of Luzon

25
15

17

18

20

22

24

Visayas
Mindanao

10

11

11

12

13

13

2010

11

12

13

14

2015

UP JPIA Case Challenge 2015

Exhibit 5
Reasons for visiting a branch for transactions
%

Exhibit 6
Elizabeths proposal of developing products for each life stage

12

Life events

Young
Student

18

Senior
Student

Go to school Attend
Receive first university/

pocket
money
Start going
out
Buy a
bicycle,
motorcycle

Young
professional
25
30

higher

education

Pay the rent

Manage
monthly
expenses

Begin career
Get together
Get installed
Buy a car
Save for a
house

Early
family

40

Mature
family

Retired
55

75

Buy a house Have a

Pay off
Get married good career mortgage
Have
Start
Receive first
children

investing

future (e.g.,
after
retirement)

start studies

Save for the Children

inheritance

Buy a second

The purpose of a value proposition is to

offer a solution for the different present
needs of the client, both currently and in
future over different life stages

residence
abroad
Children leave
the house
Have
grandchildren

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UP JPIA Case Challenge 2015

CASE CHALLENGE
Please write a 1-page analysis for this case in Situation-Resolution-Complication format. You
are not limited to the details stated in the case to develop your recommendations. You are
allowed to use real world data of the Philippines as well.

#1 Situation (Suggested length: 40% of essay)

Summarize the overall situation stated in the case, highlighting pertinent
information and details that are pertinent in your final recommendation. Do not
repeat all the details in the case, only highlight the case details that will help justify
your recommendation.

#2 Resolution (Suggested length: 40% of essay)

Elaborate on your proposed solution for the bank: What should they do? What
should they prioritize? In the next 100 days, what should Rey do?
Please be as specific as possible when detailing out your proposed recommendation.

#3 Complication (Suggested length: 20% of essay)

Highlight any risks or issues that the bank needs to mitigate if it adopts your
proposed recommendation. Propose possible mitigation plans for any significant
issues.

Appendix
You are allowed to have a one-page appendix of charts and analysis that you can refer to in
your main case analysis. The appendix will not be read as part of the case analysis so keep
text there to a minimum.