Mundus vult decipi, ergo decipiatur (The world wants to be deceived, so let it be deceived)—Attributed to Sebastian Franck
In this issue:
PSEi 30’s Q1 2023 Financial Performance: Inflation’s Potemkin Village
I. PSEi 30’s Q1 2023 Financial Performance: The Unseen Forces Beneath the Buoyant Headlines
II. Echoing the Banking System, PSEi 30s Cash Reserves Plummeted in Q1 2023!
III. Record Net Income Growth Insufficient to Fill the Cash Vacuum, So Another Record Borrowing Binge!
IV. Diminishing Liquidity Exhibited by Decelerating Revenue Growth and PSE’s Low Turnover
V. PSEi 30: Q1 2023 Financial Performance per Sector
VI. PSEi 30: Q1 2023 Financial Performance by Members
PSEi 30’s Q1 2023 Financial Performance: Inflation’s Potemkin Village
Members of the Philippine PSEi 30 recently reported their Q1 2023 Financial Performance. Despite the exuberant headline figures, mounting liquidity strains remain hidden from the public's eye.
I. PSEi 30’s Q1 2023 Financial Performance: The Unseen Forces Beneath the Buoyant Headlines
The mainstream media have flushed the public with glowing reports of the listed companies. They almost function like external PR branches of these firms.
True, the top and bottom-line figures of the members of the PSEi 30 brimmed with enthusiasm. But here, we point out the items they don't reveal.
II. Echoing the Banking System, PSEi 30s Cash Reserves Plummeted in Q1 2023!
First off, the aggregate cash reserves of the elite members plunged by 12.74% YoY or Php 203.6 billion. (Figure 1, upper chart)
A majority, or seventeen (56.7%) of the thirty, drained cash reserves as the BSP hiked rates to 2007 highs.
The cash drain indicates emerging liquidity problems in the corporate world. It is correlated with the liquidity conditions of the banking system.
Although the bank's cash reserves bounced from the BSP's liquidity injections in March, the YoY delta remains negative. Since December 2021, bank cash reserves have been in a cascade. (Figure 1, lower diagram)
That is to say, strains in bank liquidity have percolated into the non-financial corporate world.
III. Record Net Income Growth Insufficient to Fill the Cash Vacuum, So Another Record Borrowing Binge!
But they said net income zoomed in Q1 2023! Should this not be sufficient to fill the liquidity gap?
Figure 2
In a word, no.
Q1 2023 aggregate income posted a breakthrough high of Php 242.12 billion, up by 20.55%. The (net) net income of Php 41.3 billion was the highest (since 2020)—likely a milestone. (Figure 2, upper window)
Even if these numbers were accurate, it was insufficient to fill the vacuum.
Of course, developing liquidity strains have prompted corporations to do what they do best—take advantage of the subsidies of the BSP.
So, in conjunction with domestic and foreign lending institutions and the local capital markets, many members of the PSEi 30 went on a borrowing binge!
At Php 5.492 trillion, Q1 2023 aggregate debt signified the highest level for the period. Although it was up by only 10.6% because of the high base effect, the total net borrowing of Php 526.83 billion was second to the record Php 528.24 billion in 2020. (Figure 2, lower chart)
Pure and simple, because the cash drain represented 4.9x net income, the PSEi 30 borrowing splurge represented 12.8x the net income! Non-financials used the massive borrowings to plug the cash drain and bloat income!
Though seven of the 26 non-financials posted declines in debt levels, the rest registered increases. Above all, SMC commanded an incredible 46% share of the overall borrowings!
To ram this point, not only was the credit shindig meant to spur demand or "top line" growth, corporations used borrowings to fill the cash gap and repay or refinance existing debt at higher rates. It also helped inflate earnings. Announced CAPEX signified the rationale for such undertakings.
The outstanding debt of the Non-Financial PSEi 30 represents 19.1% of the total financial resources of the Philippines.
Figure 3
PSEi 30 Banks were also heavy borrowers, although we haven't isolated it here.
From the industry's viewpoint, banks have altered their borrowing structure, focusing on Bills (short-term) than Bonds (long-term)—which again exhibits further evidence of liquidity/collateral strains. (Figure 3, upper window)
The shift towards T-bill borrowings (BSP and intrabank) started in 2H 2021. The uptrend in Bills borrowings has almost coincided with the upsurge in the benchmark BVAL T-bill yields (1, 3, and 6 months). (Figure 3, lowest pane)
Aside from higher demand for short-term liquidity, collateral could also be a factor behind the increases.
IV. Diminishing Liquidity Exhibited by Decelerating Revenue Growth and PSE’s Low Turnover
Figure 4
And so, despite the near-record credit absorption by the PSEi 30, aggregate revenues surged by 17.8%—significantly slower than the 2022 annual rate of 32.6%. (Figure 4, upper chart)
In this way, instead of boosting the top line, the increase in borrowings represented a symptom of intensifying challenges in the PSEi 30's financial conditions.
The monetary surplus from bank credit expansion that fed into price inflation has been segueing into a deficit—hence the slowing price inflation.
Put this way, helped by the BSP rate hikes, the decline in liquidity conditions signifies merely symptoms of the gradual unraveling process of the embedded systemic imbalances.
To wit, the eye-catching media reports, which spotlight the booming revenues and the bottom line, are essentially charades analogized by the proverbial Potemkin Village.
As further evidence, despite the frantic push by some parties to elevate the equity bellwether, the PSEi 30, its frail volume has also been a manifestation of mounting strains in liquidity conditions. (Figure 4, lower window)
V. PSEi 30: Q1 2023 Financial Performance per Sector
In any case, sectoral distribution illustrates their idiosyncratic performances. (Figure/Table 5, upper pane)
Described in bullet points:
-The property sector (-46.2%) has the biggest cash drain in YoY.
-Industrials posted the largest increases in revenue (+23.43%) and income (+42.01) YoY.
-Mining revenues (-28.74%) and net income (-39.9%) contracted.
-Industrials (+14.5%) had the most debt increase YoY.
-Overall, in the context of the peso, holding firms had the most significant increases in debt, revenues, and net income. It also endured the largest cash deficit.
VI. PSEi 30: Q1 2023 Financial Performance by Members
Now for the breakdown per company (all in pesos): (Figure/Table 5, lower window)
-the most significant revenue contributors were SMC and SM. Investments. DMC and its subsidiary SCC reported declines.
-JGS and SM Investments delivered the most net income gains. Globe and DMC posted the largest income declines.
-Aside from San Miguel, Ayala Corp, Aboitiz Equities, and Metro Pacific represented the biggest borrowers.
-Excluding SMC, the net borrowings accounted for 53% of the Php 526.83 billion net in Q1 2023.
A mirage has signified the backbone of the Q1 2023 financial performance of the elite PSEi 30.
Good luck to the believers.
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