I love agitation and investigation and glory in defending unpopular truth against popular error—James A. Garfield (1831-1881) 20th President of the United States (1881)
In this issue
After 3 Cuts in the BSP's Reserve Requirement Ratio in July, Banks Remain Starved of Cash and Deposits, Borrowed Frantically as Net NPLs Expands Anew!
-In Spite of Spin, Banking Woes Surfaces on Media
-Banking System’s Frantic Borrowing from the Bond Markets Accelerates in July
-Deposit Liabilities Marginal Recover, But the Gap Between Deposit Growth and Bank Credit Issuance have been Widening
-The Marginal Effects of RRR Cuts and Massive Bond Borrowings on the Banking System’s Cash Resources
-Net NPLs Increase Anew in July, Monetary Tightening from Mounting Credit Delinquencies
After 3 Cuts in the BSP's Reserve Requirement Ratio in July, Banks Remain Starved of Cash and Deposits, Borrowed Frantically as Net NPLs Expands Anew!
In Spite of Spin, Banking Woes Surfaces on Media
Pieces of the Bangko Sentral ng Pilipinas’ liquidity puzzle in the context of media’s narrative…
First, the missing liquidity…
Let me quote anew from an Inquirer article “Another Rate Cut Looms” (August 5): As the Philippines’ inflation rate eased early this year, the country’s banking industry lobbied the central bank to ease monetary policy and—after a short period of regulatory hesitation —got what it asked for. But almost three months after the Bangko Sentral ng Pilipinas cut its key interest rate by 25 basis points and more than two months after it initiated a multiphase 200-basis-point reserve requirement reduction, the latest data showed that liquidity growth in the local financial system remained sluggish. Now BSP Governor Benjamin Diokno wants to know why. “I share your concern,” the central bank chief told the Inquirer, when asked about the last week’s money supply and bank lending growth data for June, which showed the former being flat and the latter slowing down on an annual basis. In particular, Diokno said he wanted to know where the almost P200 billion in extra cash went since it was freed up by the monetary-easing moves as well as the expectations for more easing created by his clear statements favoring the infusion of more liquidity into the system.” [bold added]
…which RRR cuts were supposed to been the fix…
A month before, the BSP Chief admitted to tightness in the financial system and cleared the banking system from earlier suspicions that it had been speculating against the peso. From the Inquirer’s “BSP chief vows to sustain economic boom with cash” (July 3): “Diokno said regulators saw that the financial system was indeed suffering from tight liquidity, which was prompting local banks to raise cash for their lending operations by issuing debt instruments in recent months. The BSP chief said that banks were “behaving” by not speculating against the peso. “They won’t need to float as many debt instruments with the [future] cuts in the reserve requirement] because they’ll have the liquidity they need,” he said. “We have a lot of policy space, considering the global trend of [monetary policy] easing. Just be patient. We’ll get there.” [bold added]
…but it hasn’t been enough…
This weekend, the BSP Chief once more promised rate cuts to ease tightness in the financial system. From the Inquirer’s “BSP seen to cut rate soon” (September 14, 2019): “Speaking to reporters Friday morning, Bangko Sentral ng Pilipinas Governor Benjamin Diokno said the 25-basis-point reduction in the regulator’s key overnight borrowing rate that he promised would be implemented before yearend might happen at the next policy meeting of the Monetary Board in less than two weeks. “Prospects are bright that it might come sooner rather than later,” he said. “It won’t reach November or December so it could be sooner.” So far, the central bank has reduced its overnight borrowing rate by a total of 50 basis points over two policy meetings since May as the inflation rate continued to soften. This closely watched barometer now stands at 4.25 percent. This rate influences how much banks charge their own corporate and retail customers for loans. Diokno added that another reduction in banks’ reserve requirement ratio could come this month or next. The reserve requirement—a portion of banks’ cash that regulators require to be kept in reserve in their vaults —currently stands at 16 percent. The central bank chief wants to reduce this to single-digit levels before the end of his term in 2023 in the hopes of putting the liquidity to more productive use.” [bold added]
Why engage in a panic cutting of RRR rates when Diokno’s term ends 4-years from now?
For starters, the BSP slashed the banking system’s Reserve Requirement Ratio (RRR) in 3 phases: 100 basis points (bps) last May 31th, 50 bps last June 28th, and 50 bps last July 26th. The central bank expected that the release of Php 200 billion from regulatory shackles would help plug the liquidity hole in the banking system, thereby easing the “need to float as many debt instruments”.
But, but, but…
A slowdown in bank funding from bonds just hasn’t been happening.
From the Inquirer’s “More PH banks seeking fresh funds”: (September 6): “More Philippine banks are raising fresh capital to boost their capability to oil the wheels of the growing domestic economy. Sy family-led China Bank has obtained board approval to raise as much as P15 billion from the sale of peso-denominated debt notes qualifying as tier 2 or supplementary capital. Separately, Philippine Savings Bank has obtained the green light from the Bangko Sentral ng Pilipinas to amend its articles of incorporation to expand its authorized capital stock to P6 billion divided into 600 million common shares from P4.25 billion divided into 425 million common shares. [bold added]
And there’s more…
From the Metrobank’s September 10 disclosure: “Metropolitan Bank & Trust Company (“Metrobank”) approved the issuance of a Peso Bond, which will be the fourth tranche under its PHP100 Billion Bond and Commercial Paper Program. Metrobank has mandated ING Bank N.V., Manila Branch and Standard Chartered Bank (SCB) as Joint Lead Arrangers for this planned issuance. This fourth tranche will have a tenor of at least three and a half years to be priced using the applicable interpolated PHP BVAL Reference Rate benchmark.”
From the BDO Unibank’s September 10 disclosure: “BDO Unibank, Inc. (BDO) is set to offer P5.0 billion in Long-Term Negotiable Certificates of Deposit (LTNCD) as part of the Bank’s efforts to diversify the maturity profile of its funding sources and support business expansion plans. BDO earlier issued P7.32 billion worth of LTNCDs in April this year. This latest tranche of LTNCDs will have a term of five and a half (5 ½) years with an indicative rate in the area of 3.75%. The final coupon rate will be set at the end of the offer period. Interest will be paid quarterly, calculated on a 30/360 day count basis. The minimum investment is P100,000 with increments of P50,000.”
From Asia United Bank’s August 27 disclosure: “Please be advised that in the meeting of the Board of Directors held earlier today, the board of directors has approved a Php 30 Billion AUB Bond Program.The terms, details and timing will be set by the management”
And these are just the latest (as of the last week of August and September).
Not only has the liquidity starved banking system been competing with the National Government (NG) to raise domestic currency (peso) savings but also savings in foreign currencies.
From the Businessworld (September 6): “RIZAL Commercial Banking Corp. (RCBC) is returning to the US dollar bond market by selling $300 million of five-year unsecured bonds amid strong demand from investors overseas, it said in a statement on Friday. Proceeds of the borrowing will support the bank’s loan portfolio and green projects, it said. The five-year debt notes, which will be issued on Sept. 11, is a drawdown from its $2-billion medium-term note program. The notes have a coupon rate of 3% a year at 99.751”
From the Bank of the Philippine Island’s August 29th disclosure: Bank of the Philippine Islands (the “Bank”) has updated its Medium Term Note Programme (the “Programme”) in the aggregate amount of up to two billion US Dollars (USD2,000,000,000), or its equivalent in other currencies.
Despite the media’s constructive spin, vulnerabilities of the banking system have increasingly been surfacing.
Banking System’s Frantic Borrowing from the Bond Markets Accelerates in July
The BSP released the banking system’s updated balance sheet and selected performance indicators for July. The period covers 150 bps of RRR reduction or the release of about Php 150 billion of cash to the system, and the initial 25 bps cut in the BSP’s overnight RRP facility in May. The final stage of the first wave of RRR cuts took effect at the end of July, while the second policy rate cut was announced and implemented in August.
August’s update, thus, should reveal of the interim impact of the BSP’s first full batch of easing. And if the August CPI data of 1.7%, a 46-month low, should be a gauge, such policies have unlikely met the BSP’s objectives. (figure 1, upper window)
Figure 1
In spite of the 150 bps of RRR cuts or about Php 150 billion of cash emancipated to the system, growth in the banking system’s bill payable spiked anew by 44.78% in July from 36.93% in June (year on year) to Php 834.5 billion while bonds payable growth zoomed 191.07% in July from 160% in June to Php 472.19 billion. (figure 1, middle window)
And as a result of the upside spiral of bonds payable, its share of total liabilities have ballooned from 2.82% in June to 3.13% in July. The share of bills payable-to-total liabilities fell to 5.52% in July from 6.02% in June. (figure 1, lowest pane)
The July numbers don’t include the current (late August- early September) news announcements or disclosures, which means that either RRR and policy rate cuts have yet to make its presence felt, or that the BSP's easing policies have been affected by the law of diminishing returns.
Deposit Liabilities Marginal Recover, But the Gap Between Deposit Growth and Bank Credit Issuance have been Widening
And there’s more.
Through bonds, the banking system has been tapping the priciest source of funding for its operations and CAPEX.
And that’s because deposit liabilities, which has barely been tackled by media, have continually been under strain. Total deposit growth improved marginally to 6.14% in July from 5.8% a month ago. Peso liability growth increased 6.6% from 6.01% while foreign currency deposits dropped to 3.78% from 4.75% over the same period.
Figure 2
Deposit accounts for the lion’s share of the banking system’s total liabilities at 85.4% last July. Peso deposits accounted for the largest share of total deposits with an 83.3% share, while foreign currency deposits had 16.7%. (figure 2, upper window)
The good news is that after halving in June, the peso savings growth rate bounced back to 4.23% from 2.16% a month ago. Demand deposit growth also increased to 6.6% from 5.29% over the same period. However, Time Deposit growth slipped to 12.35% from 14.86% while Long Term Negotiable Certificate of Deposits (LTNCD) contracted 2.04% from the positive growth of 3.56% over the same period. (figure 2, middle window)
Nonetheless, despite interim fluctuations, the general trend of deposit liability growth has been southbound.
More importantly, the rate of growth of deposit liabilities has been dropping at a faster pace than the growth banking system’s total loan portfolio. Since more than 80% of the money supply (M3) growth comes from the banking system’s loan issuance through deposits, the widening gap in the growth between deposit growth and bank credit expansion implies a massive leakage in the financial system.
The first sentence of the New Central Bank Act (RA 7653), justifying the imposition of reserves against deposits: “In order to control the volume of money created by the credit operations of the banking system, all banks operating in the Philippines shall be required to maintain reserves against their deposit liabilities…”.
While the unbanked segment of society may be a contributor to such leakage, the Php 21.3 trillion question is, where has the money created by the banking system gone???
Without treating the disease hampering on the industry’s liquidity, the BSP’s frantic freeing up of reserves in the face of the downtrend in deposit growth should only magnify the fragility of banks from various risks factors, including external economic and credit events. That is to say; unless the BSP address the underlying source of malaise that has been plaguing the banking system, whereby liquidity tightness signifies a symptom, further easing measures would be rendered ineffectual. Stop-gap measures will only defer but worsen the outcome.
The Marginal Effects of RRR Cuts and Massive Bond Borrowings on the Banking System’s Cash Resources
Figure 3
THREE RRR cuts would have amounted to an estimated Php 150 billion of cash freed for the use of the banking system. Nevertheless, media proclivity is to puff up the so-called benefits from the BSP’s change in policies, as indicated by this headline from an Inquirer article, “With interest rates cut, loans, cash supply head for the sky” last September 3rd.
The rate of change in cash and due banks posted a reduced deficit of -.38% on a year-on-year basis last July from -2.02% a month ago, the second-best month for 2019 after March’s .24%. In the context of the nominal peso, cash and due banks shriveled by Php 9.3 billion in July from a negative Php 48.74 billion last June. (figure 3, upper window)
From a nominal peso, month on month basis, cash and due banks increased by Php 49.7 billion from a negative Php 46.5 billion in June. That’s most likely from the combined effects of massive bank borrowing spree and the RRR cuts.
Despite the bond Philippine Treasury boom caused by the cash hoarding of the National Government, plus the flooding of rice imports, as well as, the global bond-buying binge and possibly the RRR cuts, the BSP’s measure of liquidity, liquid assets to deposit ratio increased slightly to 47.73% in July from 47.63% in June. This measure recently peaked to 48.99% in March 2019. Meanwhile, the cash to deposit ratio likewise climbed marginally to 18.58% from 18.35%. (figure 3, middle window)
Since its recent zenith in August 2017, the banking system’s cash reserves have dropped 14.25% or an aggregate Php 400.5 billion. Cash and due banks as a share of total assets have slipped to 13.9% in July 2019 from 19.5% in its recent peak in August 2017! With the growth rate in the bank’s issuance of loans dropping, its share of assets likewise declined to 58.41% in July. Total Loan Portfolio share of total assets peaked at 58.98% in September 2018. Despite posting a lower share in July to 23.55% from 23.64%, the Philippine Treasury boom has recently boosted the banking system’s share of Total Investments relative to Total Assets. (figure 3, lowest window)
Accumulated market gains rocketed threefold in July (305%) from 247.6 in June. Substantial expansions of financial Assets DFVPL (Designated Fair Value through Profit and Losses), which jumped 33.5% from 32.05%, and Available for Sale (AFS) Investments which likewise spiked 24.21% from 16.56% over the same period provided the framework for such blockbuster gains.
Meanwhile, the growth rates in Financial Assets Held-for-Trading (HFT) moderated to 22.7% from 26.3% a month ago, and Held-to-Maturity Assets (HTM) eased to 16.28% from 18.45%. The subsidy provided by the boom in Philippine Treasuries temporarily bolstered the bank's investments, which helped offset liquidity and lending constraints, thereby helped boost total asset growth slightly to 9.98% (yoy) in July from 9.8% a month ago.
To this end, the drop in HTM holdings as a share of gross financial assets to 64.12% from 65.47% suggests that the banks use of rampant juggling of the accounting books to conceal losses had been diminishing.
After all, the deepening dependence on the BSP for providing stimulus reveals that the economy CANNOT withstand the normalization of interest rates. That said, zero-bound rates have brought upon diminishing returns as evidenced even by a slowing statistical GDP. And keep in mind, financial tightening has occurred in spite of the massive fiscal “build, build, and build” stimulus. That is to say, slowing growth in the face of UNPRECEDENTED stimulus puts into the spotlight the entropic ramifications of massive political policies anchored on financial repression.
Sure enough, unless the BSP is tinkering with negative rates, only so much can be done from RRR cuts and reduction in policy rates because resources are finite. Negative rates will unlikely work or even occur in a cash-reliant economy.
At the day’s end, insanity, once described as doing the same thing over and over again but expecting different results, have become the conventional tool for global central bankers, including the BSP.
As an aside, cash strained banks are searching nook and cranny or for every possible means to squeeze money from their depositors. From GMA (September 10): At least five local lenders have been given the go signal the Bangko Sentral ng Pilipinas (BSP) to adjust the transaction fees for using an automated teller machine (ATM), a central bank official said Monday. The adjusted ATM transaction fees could be implemented starting next October.
Net NPLs Increase Anew in July, Monetary Tightening from Mounting Credit Delinquencies
If increases in the quantity of money supply is inflationary, then the opposite decreases in the quantity of money supply is deflationary.
While current monetary tightness may not signify outright deflation, the falling growth rate of liquidity, from either debt repayment or published and unpublished defaults which contracts or destroys money supply, have spurred the present disinflationary environment.
Bank credit expansion contributes to over 80% of the money supply (M3) growth last July. With total bank credit expanding at 10.91% in July, which came at the back of a spike in consumer loans 22.98% from 15.35% a month ago, even as production loans steadied at 9.83% over the same period, domestic liquidity increased slightly to 6.7% in July from 6.4% in June.
Nonetheless, the downtrend in the rate of credit growth has percolated into a downturn in the rate of money supply growth that has affected consumer prices downwards, as well as, the economy. For an economy reliant on credit, not only does a slowdown in credit constrain growth, but likewise cause impairments to swell too. A feedback loop follows.
Figure 4
The banking system’s July Net Non-Performing Loans (NPL) jumped to 1.14% the third highest rate this year. Net NPLs are at the highest levels since at least 2013. Net NPLs have risen in conjunction with the plunge in the banking system’s Total Loan Portfolio growth, as with M3. That said, the unstated reason behind the financial tightness has been about the mounting credit delinquencies in the banking system. The declarations made by the banks constitute the BSP’s numbers, but how about the undisclosed NPLs?
Popular wisdom holds that, based on the BSP econometric models, the banking system’s capital reserve ratios have been “robust”.
If banks have been truly profitable and if they have sufficient capital as publicly declared, then why the engage in frantic borrowing, in competition with the NG, for the public’s savings through the capital markets?
Such logic, embraced by the mainstream, may be an embodiment of “a square peg in a round hole”.
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