Demonstrated Preference: The BSP’s Survey on Bank CEOs

Demonstrated Preference: The BSP’s Survey on Bank CEOs

Markets versus surveys…

Banks officers have expressed sanguinity with the industry

What they said…

From the Inquirer…

The country’s top bankers expect the Philippine financial system to remain stable for the next two years, at least, with some even expecting it to strengthen, according to a new survey conducted by the Bangko Sentral ng Pilipinas (BSP).

In a statement, the central bank said that its maiden Banking Sector Outlook Survey conducted in the first half of the year showed that 66.7 percent of the respondents consider a stable outlook for the banking system while the remaining 33.3 percent view that banking system will be stronger in the next two years.

What the markets think…

 

Down 29.38% (Oct 05 2018), the Banking index has been the biggest drag to the PSE.

The banking index is a market cap weighted basket of 10 bank stocks consisting of Asian United Bank, BDO, Bank of the Philippine Islands, China Bank, East West Bank, MetroBank, Philippine National Bank, Rizal Commercial Bank, Security Bank, andUnion Bank.

If the equities represent a claim to a future stream of cash flows, then plunging prices of bank stocks have been indicative of weakness rather than strength in them. 

What they have done in the context of…

…profits…

 

…and liquidity…

 

What they have been doing to address these…

From: The Crowding-Out: Wave of Announcements for Another Round of Massive Bank Financing! The Minsky Cycle to the Minsky Moment September 23, 2018

Here are the announcements for this week alone. Security Bank published its latest exercise of raising USD 300 million from its USD 1 Billion Medium Term Note Program (MTN). And smaller peers like the Philippine Savings Bank (PSB) and the Philippine Bank of Communications (PBCOM) also announced new rounds of capital market peso financing this week.

The banking system has been diversifying funding sources for quite some time.

Bonds. Union Bank will raise Php 10 billion through a commercial and bond offering. Philippine National Bank also has Php 20 billion in the pipeline.

Stock rights.  BDO and China Bank raised Php 60 billion in January 2017 and Php 15 billion in June 2017 respectively. BPI Php 50 billion in May 2018 and Metrobank Php 60 billion in April 2018. East West Bank raised Php 10 billion last April 2018. Rizal Commercial Bank acquired Php 15 billion from the June 2018 offering. Union Bank concluded its Php 10 billion offering this month.

Long-Term Negotiable Certificate of Deposits (LTNCD). LTNCDs represent the traditional instrument.

Metrobank also announced an LTNCD program with an unspecified amount this week. Aside from this week’s announcement, PSB received Php 5.0845 billion from LTNCD issuance last August. BDO received Php 8.2 billion from LTNCD issuance in April. RCBC has a Php 20 billion LTNCD offering this September. There were many more at the start of the year.

Medium Term Notes. Aside from Security Bank which got funded by USD 300 million this month, Bank of the Philippine Islands acquired $600 million out of its target USD 2 billion programme in late August. Both RCBC and PNB raised USD 300 million each last April.

Mixed offering. China Banking raised Php 50 billion through a combination of Retail Bonds, LTNCDs and commercial papers last March.

Astonishing isn’t it? The rate of publications and announcements resonate with the hysteric coverage of inflation by media.

Demonstrated preference as described by the great Murray N. Rothbard,

The concept of demonstrated preference is simply this: that actual choice reveals, or demonstrates, a man's preferences; that is, that his preferences are deducible from what he has chosen in action. Thus, if a man chooses to spend an hour at a concert rather than a movie, we deduce that the former was preferred, or ranked higher on his value scale. Similarly, if a man spends five dollars on a shirt we deduce that he preferred purchasing the shirt to any other uses he could have found for the money. This concept of preference, rooted in real choices, forms the keystone of the logical structure of economic analysis, and particularly of utility and welfare analysis.

So let us piece together the fragmented information to get at the kernel of what bank executives have been saying. 

Banks have been struggling with their business performance since 2013, and in reaction to these, they have been aggressively raising funds from the public through various means.  

And since the funding requirement of banks abets the draining of liquidity in the financial system, and since the travails of the banking system have seen by the market participants, banks shares have been part of the recent liquidation activities.

Perhaps banks through their subsidiaries or affiliated firms have been selling shares to prop their liquidity conditions.

Perhaps, banks prefer that the public directly finance them through loans than through bidding up their share prices.

At worst, banks ask their existing shareholders, through stock rights, for funding.

That said, how does one solicit funds from the public? By presenting a bullish or a bearish outlook?

Actions speak louder than words.

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