Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. However, there are many different possible reasons for monetary growth, including gold discoveries, financing of government spending, and financing of private spending—Milton Friedman
In this issue:
BSP Variant QE 2.0 Variant Bolsters Bank Cash, Deposits, and Total Assets! Banks Income "Boom" in 2022!
I. The BSP QE 2.0 Variant Series in Summary
II. Record "Boom" in 2022 Bank Net Income, Partly Powered by Other Income
III. BSP QE 2.0 Variant Pushed Higher Bank Cash Reserves, Deposit Liabilities, and Total Assets
IV. Treasury Yields Drop: Market Losses Ease and Held-to-Maturity Holdings Slow
V. As Bank Credit Growth Peaks, Higher Costs of Lending via Surge in T-Bill Borrowing, and Higher Deposit Expenses Means Tighter Margins
VI. Sunset Provision for the BSP’s Relief Measures? Higher NPLs to Follow Regardless
BSP Variant QE 2.0 Variant Bolsters Bank Cash, Deposits, and Total Assets! Banks Income "Boom" in 2022!
The net income of Philippine banks zoomed to a record high in 2022! Ironically, why would the banks require massive infusions from the BSP via its variant QE 2.0 last December? We explore.
I. The BSP QE 2.0 Variant Series in Summary
This post represents the fourth exposition series of the historic injections by the BSP, banks, and other financial institutions last December.
In the original post, we identified the stealth unveiling of the BSP QE variant 2.0 by slashing its liabilities or liquidating deposits of banks, and possibly the government.
In the second post, we articulated its impact on the domestic capital markets. Or how the BSP's injections propelled a rally in the PSE and the domestic treasury markets.
In the third post, in concert with the BSP, the banking system also accelerated its acquisition of net claims on the central government, which climbed to record highs. The reflexive action from it was to power a rebound in the money supply growth, which drove the nominal M-series levels to unprecedented heights.
In this fourth chapter, we feature its impact on the banking system.
In the last series, we explain January's 14-year high CPI from another angle: the massive liquidity infusions by the BSP, banking, and other financial institutions.
II. Record Boom in 2022 Bank Net Income, Partly Powered by Other Income
First, the good news.
Figure 1
The banking system attained record net earnings in 2022. Net income vaulted by 37.5% YoY to a monumental or an ALL-Time High (ALT) of Php 309 billion! (Figure 1, upper chart)
Though interest income represented the bulk of the gains, the minor "other income" segment of its "other income" category of the non-interest income delivered the tectonic performance.
The "minor" other income, consisting of rental and miscellaneous incomes, surged by 367.7% YoY to Php 75.18 billion. Yet, the definition of "miscellaneous" income seems opaque: "This refers to the income which cannot be appropriately classified under any of the foregoing income accounts." (BSP, 2019)
The other way to say it was that a footnote became a main subject.
Therefore, the stellar performance of this segment sent the share of the "other income" category ballooning relative to the non-interest revenues and the total operating income to 29.2% and 7.5%, respectively.
The abstruse character of this category keeps the public in the dark about the true nature of income added to the 2022 breakthrough performance.
III. BSP QE 2.0 Variant Pushed Higher Bank Cash Reserves, Deposit Liabilities, and Total Assets
Regardless of the splendid bottom line, the impact of BSP's QE 2.0 variant was conspicuous in the industry's balance sheet.
As we wrote in our third series:
So, the aggregate increase in the net claims on central banks from banks and the BSP was a stunning Php 1.16 trillion! OFCs have yet to publish their 4Q activities.
…
2. What do all these say about the health of the banking and financial system?
But then, if banks were in such a great position, why the need for such intense liquidity injections/subsidies?
The release of deposits held by the BSP flooded the banking system's cash position, peso deposits, and total assets month-on-month (MoM). (Figure 2, top, middle, and bottom windows)
Cash and due cash soared by Php 536.7 billion. Peso deposits surged by Php 816.3 billion, but because FX deposits fell, total deposit liabilities jumped by Php 779.8 billion to an ALT of Php 17.767 trillion.
Total assets also spiked by Php 857.7 billion. It jumped by 10.6% YoY to a pathbreaking Php 23.034 trillion!
Figure 3
Such massive injections put a dent in the YoY % downtrend of liquidity benchmarks (cash reserves, M3, and peso deposits) in the face of a plateauing or seeming growth slowdown of the banking system's loan portfolio. (Figure 3, topmost window)
IV. Treasury Yields Drop: Market Losses Ease and Held-to-Maturity Holdings Slow
The liquidity infusions bloated the % share of cash holdings as bank investments declined while bank loans steadied. (Figure 3, second to the highest window)
Nonetheless, accumulated losses of Php 122.83 billion eased from its record Php 131.692 billion last November as treasury yields declined. (Figure 3, second to the lowest pane)
In the face of slowing 10-year treasury yields, the blazing growth of Held-to-Maturity (HTM) assets also decelerated in December to 45% from 52% a month ago. (Figure 3, lowest pane)
Validating our position:
And so, if we read the BSP right, forcing down rates represented the primary objective for this stealth reopening of the monetary spigot.
By forcing down rates, bank losses—through publicly declared (mark-to-market) assets and those concealed via HTMs—abated.
For now.
V. As Bank Credit Growth Peaks, Higher Costs of Lending via Surge in T-Bill Borrowing, and Higher Deposit Expenses Means Tighter Margins
Banks also borrowed to fund mounting liquidity constraints and for operations.
Figure 4
But this time, they have been borrowing via short-term or T-bills. (Figure 4, topmost window)
Bills payable jumped by 32.72% in December, its fifth straight month of over 30% increase. With the recent surge in T-bill rates, this seemed a symptom of a liquidity squeeze. (Figure 4, second to the top window, left)
Banks borrowed to plug short-term funding requirements at higher costs.
As we have noted earlier, not only will rising rates adversely impact the consumer demand for bank credit through quantity demanded, but it will also increase deposit expenses and the funding costs for its operations. (Figure 4, second to the top window right and second to the lowest chart)
That is to say, higher funding costs in the face of slower credit growth should tighten the interest margins of banks. It will also disrupt liquidity conditions. Non-performing loans should compound the industry’s liquidity predicament.
VI. Sunset Provision for the BSP’s Relief Measures? Higher NPLs to Follow Regardless
Furthermore, should the BSP lift these relief measures, which are due to expire this yearend, it would be natural to see the NPL data rebound from lower credit expansion, liquidity tightening, and the possible reporting of actual (pre-pandemic) conditions. (Figure 5, middle chart)
NPLs have diverged from reported loan loss provisions. (Figure 5, topmost window)
The 2018 inflation and rate hikes episode should serve as a template for the reaction of bank credit expansion. (Figure 5, middle chart)
And this could be the reason for the Php 1 trillion injections.
As the sector's biggest borrower, the real estate sector has been another beneficiary of the milestone liquidity operations. As real estate loans outperformed, its share of total loans spiked last December. (Figure 5, lowest window)
So, by inundating the banks with money, the BSP hopes to keep NPLs at bay.
The thing is, despite the relief measures, whether the BSP grants another extension or not, NPLs are due to rise. The law of diminishing returns ensures the erosion of artificial measures to keep imbalances (malinvestments) intact over time.
This analysis brings us to the crux: Why would the banking industry, supposedly oozing with profits, require an unprecedented scale of liquidity subsidies? Perhaps the answer is that the "boom" represents an accounting mirage.
___
References:
Prudent Investor, The BSP Unveils Stealth QE 2.0 (Variant)! January 15, 2023; substack, blogger
Prudent Investor, BSP QE 2.0 Variant Spurs Huge PSEi 30 Rally; Falling US Dollar Reflates the Everything Bubble substack, blogger
Prudent Investor, BSP QE Variant 2.0 Confirmed! Historic Monetization of Public Debt by Financial Institutions! The Greatest Monetary Policy Experiment! February 6, 2023 substack, blogger
12. Other Income:
(a) Rental Income (i) Safe Deposit Box - This refers to the earned portion of rental collected in advance from lessees of safe deposit boxes. (ii) Bank Premises and Equipment - This refers to rental earned from lessees on bank premises and equipment. (iii) Real and Other Properties Acquired - This refers to rental earned from lessees on real and other properties acquired.
(b) Miscellaneous Income - This refers to the income which cannot be appropriately classified under any of the foregoing income accounts.
Bangko Sentral ng Pilipinas, FINANCIAL REPORTING PACKAGE FOR BANKS, May 2019, bsp.gov.ph
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