The study of money, above all other fields in economics, is the one in which complexity is used to disguise truth or to evade truth, not to reveal it. –John Kenneth Galbraith Chapter I, Money, p. 5Money: Whence It Came, Where It Went (1975)
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In this issue
BPI and MetroBank Stock Rights Offering (SRO): Symptoms of the Unseen Predicaments of the Banking Industry
-Banks have Frantically Been Scrambling for Cash From Stock Rights, LTNCTD and Senior Notes, Why?
-The Biggest Paradox: Free-Wheeling Lenders Are Short of Funds!
-The Banking System’s Balance Sheet Transformation (Business Model Overhaul)
-Something Changed in 2013: As Banks Shifted to Held-To-Maturity Assets, Industry Illiquidity Emerged
-Stock Rights Offering: BPI Zoomed While MBT Crashed, What Gives?
BPI and MetroBank Stock Rights Offering (SRO): Symptoms of the Unseen Predicaments of the Banking Industry
Banks have Frantically Been Scrambling for Cash From Stock Rights, LTNCTD and Senior Notes, Why?
Just what is going on with the banking system?
Last week, two major banks announced that as part of their respective expansion programs, they would soon hold a stock rights offering (SRO). BPI is slated to raise up to Php 50 billion, while rival Metro Bank will likewise solicit up to Php 82 billion of funding from existing shareholders.
In 2014, BPI also succeeded to obtain Php 25 billion through fresh equity issuance along with PNB which also implemented a Php 11.6 billion SRO. In April 2015, Metrobank completed a Php 32 billion SRO.
So both banks will conduct equity fund-raising that signifies TWICE or more the size of their previous offering about 3-4 years ago.
Last year, Sy owned banks China Banking and BDO Unibank likewise also raised funds, Php 15 billion and Php 60 billion respectively, through their existing and eligible shareholders. China Banking also exercised a Php 8 billion SRO in April 2014.
Equities have not been the only source of banking system’s quest to tap savings.
2017 saw a flurry of borrowing by the banking system.
Bank of the Philippine Island and Metrobank obtained public funding via Long Term Negotiable Certificates of Time Deposit (LTNCTD) to the tune of “record” Php 12.24 billion and Php 3.75 billion respectively.
The PDS has a list of recent bank issuance of LTNCTDs covering only the second semester of 2017: East West Bank Php 2.59 billion in May, Php1.07834 billion in July and Php 10 billion in August, China Banking Php 6.348 billion, Robinsons Bank PhP 4.18232 billion, RCBC Php 2.502 billion, BDO Php 11.8 billion, PNB Php 6.350 Billion, and Security Bank Php 8.6 Billion.
LTNCTD debt raised by these banks during the second semester tallied Php 53.448 billion.
Union bank reported that it would offer Php 20 billion of LTNCTDs. But this hasn’t been registered yet with the PDS.
The Bangko Sentral ng Pilipinas defines Long Term Negotiable Certificates of Time Deposit as Unsecured Subordinated Debt. In the hierarchy of creditors, subordinated debt ranks below other loans or securities with regard to claims on assets or earnings.
Domestic banks have similarly borrowed humungous amounts of foreign currencies.
In October 2017, Union Bank said that it would raise $1 billion euro medium-term note program. In November 2017 the same bank reported that it would “upsize” its Senior Notes to US $500 million. Meanwhile, in September 2017, BDO was also reported to have offered a “historic” US $700 million of offshore medium-term senior debt notes.
The Biggest Paradox: Free-Wheeling Lenders Are Short of Funds!
Had non-finance companies been engaged in these fund-raising activities, I would bear little skepticism
The banking industry, which is the primary source of liquidity of the domestic financial system, has been consistently short of funding. That for me would be the biggest paradox!
Hardly any of bank’s disclosures on SROs, LTNCTDs and or Senior Notes have mentioned about boosting capital structure for the reason of such activities.
And outside the echo chamber of how supposedly "sound" the banking system has been, such shortfall in funding is the reason why banks have consistently been issuing high-risk debt to the public (sold to the public as “investments”) and have repeatedly offered SROs to its shareholders.
That’s not all. More important is that the banks are even competing to secure access to the public’s savings with non-financial entities and the aggressive build, build and build National Government (NG)!
By the same token, with debt as an insufficient source of funding, banks have resorted to SROs! And the time interval of SROs conducted by the same banks have interestingly been narrowing (3-4 years) and have been expanding (about twice or more the original size)!
The Banking System’s Balance Sheet Transformation (Business Model Overhaul)
And here’s the rub.
With interest rates at historic “emergency level” lows, bank lending has grown at a torrid pace for successive years. Since January 2012, bank lending growth CAGR has been at 16.41% to more than double the debt levels. The aggregate debt level doesn’t tell the entire picture becausethe distribution of debt matters. A few industries have effectively corralled bank debt.
For the first 9 months, the combined income statement of the PSEi 30 banks (BDO, BPI, MBT and SECB) showed that gross interest rate income grew by 18.17% year-on-year compared to 11.13% in 2016. The topline growth reflected the rate of growth exhibited by the general banking system as reported by the BSP. November bank credit growth (production + consumer loans) came at a blistering pace of 18.66%.
Because of the zero bound rate regime from the inflation targeting policy, the BSP has blessed these banks with graces of high gross interest margins (76.83%) and net (of provision for impairments) interest margins (69.72%). However, those high margins apparently had not been enough to boost aggregate net income, which grew by only 4.62% in 2017 as against 10.06% in 9 months of 2016. (But nevertheless bank stocks soared!)
Bear in mind that if delinquency and non-performing loans have been low, as popularly touted, the banking system should be flushed with liquidity enough to sustain their expansion requirements. But the raft of fund-raising activities has hardly been consistent with this logic
And curiously, though loans have been surging, the PSEi bank’s net income as % share of net interest income has dropped substantially. (See upper pane)
In that context, the BSP’s data on the banking system’s balance sheet reveals a radical transformation in the distribution of the banking system’s assets. BSP data on Bank Balance sheets available here.
Since the trough of 2013, the share of bank loans or Total Loan Portfolio (TLP) inclusive of Interbank Loans Receivable (IBL) and Reverse Repurchase (RRP) has steadily captured a larger portfolio of the banking system’s asset. As of November 2017, TLP’s has a 56.71% share of the banking system’s assets. Total asset grew 12.36% over the same period. Total asset growth has rebounded from the bottom of 2015 (see lower pane above window)
The fantastic outgrowth of the loan portfolio came at the considerable expense of investments and cash.
Total Net Investments (TNI) grew by only 9.08% while Cash and Due from Banks (CDB) registered an incremental 6.22% in November.
The share of TNI and CDB on total banks continue to fall. As of November, TBD accounted for 20.73% while CBD comprised 18.24%. TNI’s share peaked at 30.1% in October 2010 and ever since has been on a cascade. On the other hand, CBD climaxed at 26.01% in November 2013 but has steadily headed south
TLP, TNI and CBD constituted 95.69% share or the gist of the Banking system’s assets. The other banking assets are Real estate and other Properties Acquired (ROPA) and other assets.
That’s just three quarters of the story.
Something Changed in 2013: As Banks Shifted to Held-To-Maturity Assets, Industry Illiquidity Emerged
A change in the asset mix contributed to the sustained decline in TNI.
As previously mentioned here, Available-For-Sale assets (AFS) which used to dominate the banking system’s portfolio investments have substantially declined. On the other hand, Held-to-Maturity Assets (HTM) has now become the dominant investment class. [See Newly Inaugurated BSP Chief Warns On The End of Global Easy Money July 9, 2017]
As of November 2017, HTMs consisted 52.57% of the gross financial assets while AFS and Held For Trading (HFT) assets took up 35.07% and 8.25% share.
Something materially changed in 2013. It can’t be the Special Deposit Accounts (SDA). SDAs were substantially reduced in 2013 and tenderly increased in 2014. Policy rates were temporarily raised in 2014 but had been chopped to its lowest level in history in 2016.
The likely influence could be Ben Bernanke’s Taper Tantrum which caused a temporary spike in ROP bond yields. A steep rise in domestic inflation, due to 10 consecutive months of 30%+++ money supply growth, exacerbated bond rout.
The yield spike may have caused substantial unreported mark-to-market losses in the bank balance sheets. And deficits from such may have prompted banks to metastasize AFS accounts into HTM accounts through accounting acrobatics.
DBP’s hand was caught in the cookie jar in 2014, but the Ombudsman cleared the state bank on technicalities. Would an arraignment have caused grounds for the persecution of many in the industry? DBP’s misadventure dovetails with the changes in the asset composition of the banking system.
And since HTMs are illiquid, its buildup prompted the banking system to suffer from liquidity drought, thus the spate of fund-raising in 2014 through today.
And the earnings vacuum caused by the shift to HTMs impelled banks to undertake aggressive and massive loan issuance.
Also, spurred by artificially low-interest rates, expanding loan portfolio emerged as the core of the earnings growth of the industry. Thus, TLP has seized a significant share of bank assets at the expense of TNI and CBD.
Other than HTMs, bank reserves and capital requirements could have played minor roles in the banking system’s curious drive to raise funds. The BSP’s reluctant tightening of the financial system may have aggravated such conditions.
Moreover, the BSP deserves accolades for liberalizing the banking system through RA 10641 This move is a crucial step in the right direction. Though the timing of the liberalization in 2014, I see with suspicion. In my mind, the BSP may have prodded the Congress and the NG to allow the entry of banks to help ease the system’s predicament. It may be a coincidence. Or, it may have designed. Nevertheless, the industry’s liberalization should be welcomed.
However, if my suspicions are on point, most of the banking industry earnings have been a mirage.
Finally, some attribute the record PSEi bank stocks to possible exposure or expansion abroad. This would be fitting in a story to explain the ticker tape.
Local banks foraging for opportunities abroad are not a guarantee of success.
Such bank/s will not only have to deal with resident counterparts but compete with other foreign entities too. Furthermore, a neophyte bank in foreign territory would have to engage with entrenched banks who are more familiar with market, regulations, institutions and the operating environment.
And if there are too many banks in a system then adding to a saturated industry would only increase its risk exposure
Stock Rights Offering: BPI Zoomed While MBT Crashed, What Gives?
And another thing.
BPI and MBT’s announcement of SRO’s produced radically different reactions in their share prices.
Because of an arbitrage opportunity, typically issues which offer SROs suffer from a selloff. The gap between existing market prices and the SRO price are usually narrowed or closed as arbitrageurs sell at current market to buy back near or at the record date of SROs. In so many words, why fund SROs? Why not buy them when they are near or at the SRO level?
BPI and MBT’s initial reaction had been natural. But two brokers had second thoughts on BPI. They must have believed that SROs could be a source of huge demand, so they bought the bank’s shares hands over fists.
BPI which was down by a nasty 9.0+% flew to close Thursday on a slightly positive note. However, this reversal wasn’t enough; BPI soared by an astounding 7.39% on Friday! In two days, BPI soared by a stunning 22% from bottom to peak! BPI closed the week astoundingly higher by 5.74% while MBT crashed 8.66%. Will this GDP week serve as fodder for MBT’s vertical recovery?
Since the pricing of the SROs has yet to be announced, perhaps forcing prices to the sky would help issuers to secure higher proceeds. After all, the calculation of SRO prices usually depends on a weighted average of a given period. Hence, higher prices should translate to more funds. So coordinate pumping must help. Money grows on trees!
As I said here, hardly anything attached to the PSEi 30 has been natural. In contrast, most seem out of sync with reality.
To cosmetically embellish status symbols and to arouse the adrenalin of greater fools, prices have systematically been falsified or fabricated.
The two-day BPI repertoire was greatly aided by last-minute gymnastics of SM to push the PSEi above 8,900, the highest weekly close.
Nothing is what it seems.
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