During the Bubble, virtually everyone dismisses Bubble analysis, instead believing the boom is well-founded and sustainable. The pain on the downside is proportional to the excesses during the preceding boom. Tremendous damage is inflicted during the final “Terminal Phase” of excess—Doug Noland
Denials Won’t Wash Away Reality; PSE’s Banks Confirms BSP Data, The Profit and Illiquidity Divergence: The PNB Example
The Amazing Silence on the Collapse of Bank Lending and Money Supply Growth
The paucity in the content of media's coverage of the virtual collapse of bank lending and money supply growth signifies nothing short of astounding.
For those that did, they were merely a verbatim of the BSP’s press release (here, here, here and here.
Philstar’s “Credit growth eases to 9.9% in March, slowest in 8 years” wins the best title.
Among these reports, the Business Mirror has the closest to relevancy: “A growing cash supply is often beneficial for an expanding economy such as the Philippines, as it provides fuel to the productive sectors of the country. However, an excessively slow growth in M3 could be detrimental to the country’s overall growth, especially if it is not enough to fuel the productive activities in the economy. An excessively high cash supply growth, meanwhile, could stoke inflationary pressures and pull prices upward for the economy. An imbalanced growth of M3 is also an indicator that the economy is potentially overheating.”
The relationship between money supply and economic performance and inflation, without stating the transmission and feedback mechanism has been assumed in such a report.
In general, underlying the presumption is that money supply growth is a necessity.
Under a sound money regime, such wouldn't be true. Aside from the medium of exchange function, money’s ultimate role is with its purchasing power or the number of specific goods or services it can acquire in exchange for a defined unit/s of money.
Under the conventional central bank’s paper money standard, money supply has always been inflated to accommodate political objectives. The cost of which has been to lower people’s living standard via boom-bust cycles and or the loss of purchasing power of the currency.
As the great Austrian economist Ludwig von Mises explained: (bold and underline added) “The services money renders are conditioned by the height of its purchasing power. Nobody wants to have in his cash holding a definite number of pieces of money or a definite weight of money; he wants to keep a cash holding of a definite amount of purchasing power. As the operation of the market tends to determine the final state of money's purchasing power at a height at which the supply of and the demand for money coincide, there can never be an excess or a deficiency of money. Each individual and all individuals together always enjoy fully the advantages which they can derive from indirect exchange and the use of money, no matter whether the total quantity of money is great or small. changes in money's purchasing power generate changes in the disposition of wealth among the various members of society. From the point of view of people eager to be enriched by such changes, the supply of money may be called insufficient or excessive, and the appetite for such gains may result in policies designed to bring about cash-induced alterations in purchasing power. However, the services which money renderscan be neither improved nor repaired by changing the supply of money. There may appear an excess or a deficiency of money in an individual's cash holding. But such a condition can be remedied by increasing or decreasing consumption or investment. (Of course, one must not fall prey to the popular confusion between the demand for money for cash holding and the appetite for more wealth.) The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do.”
But news reports are intended to simplify the description of events.
Even more, the orthodoxy only sees statistical relationships from such phenomena. As such, causal relationships have hardly been a subject for scrutiny. For instance, what has caused the decline in credit?
Why should a mere 175 basis points increase in policy rates even as Reserve Requirement Ratios had been cut twice by the BSP stunt credit and money supply growth? Why not, for that matter, 200 or 300 or 400 or 500 bps?
Or why would an “excessively slow growth in M3 could be detrimental to the country’s overall growth”?
Or how about this: what is the causal relationship between bank credit expansion-money supply and the banking system’s balance sheet?
In 2018, Profits and Illiquidity Chimed, BSP data on Banks Validated by PSE Banks
In 2018, PSYEi banks delivered supposedly 6.84% net income growth in the face of falling interest margins. The 9-bank financial index posted a lower 5.17% net income growth. Interest margins fell 6.97% for PhiSYx banks and 8.39% for the Financial Index
In 2018, the banking system’s mounting illiquidity dilemma has become apparent in the PSEi banks (+.1) and in the financial index (-2.68%). Banks liquid assets consist of cash, due from the Bangko Sentral and due from other banks.
And to reinforce falling liquidity conditions, the compression in the growth in deposit liabilities, the primary source of funding of the bank’s core lending operations, banks have tapped into other sources of more expensive funding (e.g. bonds and LTNCD). In 2018, deposit liabilities of PSEi banks grew 7.31% and the Financial Index 7.91%.
The BSP usually publishes bank FS during the third week after the month. It has almost been two weeks into May, with March data still undisclosed. Perhaps next week along with the 1Q GDP and April CPI.
Patent Inconsistency Between Profits Growth and Illiquidity: The PNB Example
In the meantime, four banks have reported big profit spikes in 1Q 2019: BDO 66.1%, PNB 29.6%, Asia United 38.12%, and Philippine Business Bank 35.51% even as gross interest margins continue to fall dramatically, 9%, 19.74%, 13.09%, and 19.5%, respectively.
Ironically, the four banks reported a bigger drop in liquidity reserves (-6.21%) compared to last year’s benchmark numbers.
Deposit liability grew by 7.24% during the period hardly any improvement from last year.
And we note that banks like Philippine National Bank has embarked on aggressive fundraising amidst supposedly raging profits growth.
PNB reported a 17.16% surge in net income to Php 9.56 billion profit in 2018. In the 1Q of 2019, the bank’s profits soared by29.6% to Php 1.9 billion.
Interestingly, even with such impressive rate of profit growth, PNB has been tapping aggressively unconventional sources of funding for its operations.
Last January, PNB announced that it would raise financing via a huge Php 100 bond program, from Philstar, “The Philippine National Bank (PNB) plans to raise up to P100 billion through the issuance of peso-denominated bonds and commercial papers. In a disclosure to the Philippine Stock Exchange (PSE), the Lucio Tan-led bank said its board of directors has approved the establishment of a peso bonds and commercial paper program amounting to P100 billion to be issued in one or more tranches.”
PNB raised funding via LTNCD in February, from the Businessworld: “PHILIPPINE NATIONAL Bank (PNB) issued P8.22 billion worth of long-term negotiable certificates of deposit (LTNCD), which will be used to extend the lender’s maturity profile.”
In April, PNB announced a stock rights offering, from the Inquirer: Tycoon Lucio Tan-led Philippine National Bank (PNB) plans to raise about P12 billion in fresh equity from the sale of new shares to existing shareholders. PNB’s board approved on Friday a stock rights offering to “strengthen its common equity tier 1 and enable the bank to sustain its asset growth.”
A few days ago, the Bank announced that it is open for a strategic partnership, from the Inquirer: “The group of tycoon Lucio Tan is willing to cede up to 25 percent of Philippine National Bank to a strategic partner and has received “serious” interest from three foreign institutions for a prospective buy-in deal.”
What’s PNB going to spend on that requires massive amounts of funding? A litany of reasons have been provided by media: extend the lender’s maturity profile, strengthen its common equity tier 1, comply with the required liquidity ratios mandated,et.al…
Or could we just be witnessing accounting profits amidst decaying balance sheets?
Despite such booming profits, the bank’s 1Q liquidity shrunk 7.5% more than 2018’s annual 2.16% contraction. Deposit liabilities grew by 13.16 in 1Q 2019 slower than 15.72%.
The yield curve inversion has been consistent with other mounting symptoms of illiquidity expressed as shrinking liquid reserves, panic fundraising, and in March, plunging growth of industrial credit growth, crashing in consumer credit and plummeting rate of money supply growth.
Denials won’t wash away reality.
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