prudent investor newsletters: In 3Q and 9M Non-Bank PSYEi firms Borrowed Php 4.75 to Generate a Peso of Income; More Bailout: BSP Redefines Deposit Substitutes!

The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane—Marcus Aurelius [Marcus Aurelius Antoninus Augustus] (121-180) Roman emperor (161-180)

In this issue…

In 3Q and 9M Non-Bank PSYEi firms Borrowed Php 4.75 to Generate a Peso of Income; More Bailout: BSP Redefines Deposit Substitutes!

-Non-Bank PSYEi firms Borrowed Php 4.75 to Generate a Peso of Income!

-The Inequality from Access to Bank Credit, Dennis Uy’s Phoenix Petroleum the Next San Miguel?

-Lower 3Q Revenues and Net Income Exposes Statistical Inflation of 3Q’s 6.2% GDP!

-While Banks Powered Revenue and Income Growth, the BSP Launches Another Regulatory Bailout by Redefining Deposit Substitutes!

-Revenues and Net Income Must Be Lower Outside Banks and Accounting Charade

In 3Q and 9M Non-Bank PSYEi firms Borrowed Php 4.75 to Generate a Peso of Income; More Bailout: BSP Redefines Deposit Substitutes!

Non-Bank PSYEi firms Borrowed Php 4.75 to Generate a Peso of Income!

Let us cut to the chase.

Non-bank members of the composite index borrowed Php 4.75 for every peso it generated in the 9-months of 2019. While non-banks earned Php 55.6 billion, the increase in marginal borrowings over the same period amounted to Php 263.7 billion. And though lower than the previous quarter’s 6.15% debt immersion, it reveals the developmental economic growth mechanism of the Philippines: a debt-dependent model.

Table 1

And so the BSP shouldn’t be surprised that interest expense has expanded and should continue to increase an accelerated clip. And because there is no free lunch, higher levels of debt translate to the rising cost of debt servicing, which should contribute to LOWER earnings and an INCREASE in credit risks.

Again from the BSP’s 2018 Financial Stability Report: “Philippine Stock Exchange (PSE)-listed non-financial corporations (NFCs), the growth of interest expense (IE) has outpaced the rise of earnings before interest and taxes (EBIT) …The same companies have also reported lower profitability with respect to return on assets.”

And because companies may resort to the bloating of revenues and earnings, published debt indicators may have even been understated. And remember, there are many other forms of liabilities other than the debt, which may be used to conceal, through reclassification or the use of off-balance-sheet, their actual conditions.

At the end of September, holding firms and the property sector had the registered the largest % increase borrowings, aside from having the most % share of the total.

Remember, credit expansion activities of banks had supposedly been southbound. While the sector’s lending grew 10.4% in September, the 9-month growth rate of PSYEi was lower at 6.6%.

Yet, in perspective, the PSEi’s aggregate non-bank borrowing of Php 4.727 trillion accounted for 50.4% share of the BSP’s total credit data in September amounting to Php 8.471 trillion! And that’s only the elite 30.

The magnitude of borrowing by composite members of the PSYEi reveals the degree of concentration in access to bank financing. A few but privileged, mostly politically connected entities have been benefiting from this limited access to formal credit.

In plain English, to the extent that borrowing represents additional and frontloaded spending, then the GDP has been skewed to these few entities.

Inequality, anyone?

The Inequality from Access to Bank Credit, Dennis Uy’s Phoenix Petroleum the Next San Miguel?

Table 2

Expanding the coverage to those with borrowings of more than Php 10 billion, aside from members of the Composite Index and their subsidiaries, four issues made it to the list: namely, property issue Sta. Lucia Land, Senator Villar’s Vista Land, Administration’s favorite chummy Dennis Uy’s Phoenix Petroleum (PNX), and contractor and airport operator Megawide Construction.

Interestingly, while PNX’s 9-month revenue grew 12% to Php 73.169 billion or by Php 8.206 billion, its net income eked out only Php 918.3 million. PNX has a market cap of Php 15.7 billion, as of November 25. Yet, the company guzzled a stunning Php 18.4 billion in 9M 2019, more than twice the marginal revenue growth and over 100% of the company’s market cap! 2019’s 9M borrowing represented 39% of its aggregate debt!

PNX appears to be the next San Miguel. Oh, by the way, San Miguel’s debt ballooned to a staggering Php 831.6 BILLION in 9M 2019 which is over TWICE the firm's market cap, and equivalent to 3.8% of the total resources of the Philippine financial system as of September!

Lower 3Q Revenues and Net Income Exposes Statistical Inflation of 3Q’s 6.2% GDP!

Let us then move on to revenues and earnings.

Table 3

Firms of the composite index reportedly generated 13.14% in net income growth in the 3Q and 15.05% in 9-months. In the context of revenues, the same members declared a revenue growth of 6.98% in the 3Q lower than the 8.97% in 9-months.

In aggregate, lower revenues and income in the 3Q weighed on the 9-month performance, which in the perspective of the GDP, reveals the vast overstatement of the 3Q’s 6.2% GDP!

Keep in mind, the aggregate revenues of the headline index have accounted for 30.36% of the nominal GDP in the 3Q and 30.6% in 9-months. Of course, this comparison is apples-to-oranges, for the simple reason that published financial statements are supposed to represent ACTUAL performance, while the GDP is an ESTIMATED figure derived from econometric models, which inputs are collated mostly from surveys.

While Banks Powered Revenue and Income Growth, the BSP Launches Another Regulatory Bailout by Redefining Deposit Substitutes!

Philippine banks, hands down, delivered the substance of income and revenue growth covering the 3Q and the 9-months. Revenues expanded 22.42% in the 3Q, lower than 29.33% in 9-months. Meanwhile, net income spiked 39.3% in the 3Q to heave 9M growth rate to 33%. As a result of the Treasury boom, banks registered a spike in published earnings in spite of lower revenues.

And yet, the banking system may be inflating both their revenues and earnings. Why then, would a Php 400 billion injection of funds be required through the BSP's lowering of reserve requirement ratio? The answer is to alleviate the industry’s liquidity quagmire.

And yet more evidence of problems than a boom.

The BSP announced another regulatory bailout of the banking system this week. Deposit substitutes, a component of M3, has been redefined.

From the BSP: “This means that borrowings from banks, quasi-banks and other financial intermediaries are no longer considered as deposit substitutes which are subject to reserve requirements. Examples of these borrowings include interbank borrowings, repurchase agreements with financial counterparties as well as bonds issued to financial intermediaries. The exclusion of these types of borrowings from the reserve base of banks and quasi-banks will result in freed-up liquidity for lending or investment activities.”

Why would the BSP send an avalanche of the liquidity to the banks, if they’ve been growing revenues and profits?*

*Powered by Speculative Frenzy and Asset Inflation, 3Q and 9M Bank Profits Zoomed! Cash Reserves Rise on RRR Cuts November 17, 2019

Revenues and Net Income Must Be Lower Outside Banks and Accounting Charade

However, if we exclude the banks, the non-financial revenue and income growth would have been lower: specifically, 5.85% in 3Q pulled lower 9M's revenues to 7.54%. Revenues spilled over to net income, which increased by 9.03% in the 3Q to weigh on 9M net income growth to 12.5%. Seen in the context of GDP, lower revenues and income exposes the padding of the 3Q's 6.2%.

And speaking of net income growth, many firms have applied accounting prestidigitation or have been bolstered by one-off /non-recurring transactions. For instance, despite stagnant revenues, accounting add-backs ballooned a holding company’s net income growth. The sale of a subsidiary energized the net income growth of another.

That said, with a good account of published numbers having been inflated, this explains why the PSYEi 30 companies remedy their liquidity shortfalls with massive borrowings.

Please find the revenue and net income breakdown of the components of the PSYEi below. Pls. note FGEN and ICT numbers which are quoted in USD have been converted using the 9M USD peso averages published by the BSP.

Net income…