Whenever it involves the future, we aren't predicting, nor are we forecasting. We are imagining—Peter Atwater
PSEi 30 Net income Slumps by 47.4% in 2020, Non-Financial Debt Soared 8.6%!
Net income of the members of the PSYei 30 nearly halved (-47.4%) in last year’s pandemic-stricken environment, which came in the backdrop of a 19.5% slump in revenues.
In 2019, net income grew by 11.82%, or Php 76.9 billion in contrast to 2020’s record deficit of Php 344 billion.
To survive, PSE non-financial firms borrowed 8.6% more from 2019, or a record Php 365 billion, representing a 34.2% increase from the aggregate debt increase of Php 272 billion in 2019.
In percentage, the service sector (12.3%) registered the most borrowings. Meanwhile, in gross peso amount, the holding sector with Php 167 billion had the most gains of the year. As such, cash reserves of the holding sector ballooned by Php 152 billion, the largest, as well.
In short, not has 2020’s record debt growth eclipsed 2019 and 2018, it was used to plug the Non-Financials’ earnings deficit of Php 303 billion.
Also, for the past years, borrowings of the PSE Non-Financials continues to outpace net income by a wide margin.
PSE’s Non-financial borrowing accounted for about 43.8% of the banking’s credit portfolio at the close of 2020. However, given the duplication of entries, i.e. debts of holding firms are published along with their subsidiaries, the share of PSEi non-financial accounts for less than that.
The paradox between what the banking system tells us about their lending portfolio and the PSEi 30’s the change in debt levels signifies the most interesting story.
According to the BSP, the Bank’s Total Loan Portfolio (ex-Interbank and repos) slumped by 1.13% in 2020.
If their statistics are accurate, then a massive credit deflation haunts the non-PSEi 30 space and the economy.
Otherwise, the disparity can be explained by either the banking industry’s understatement of their loan portfolio or the overstatement of debt increases by members of the headline index.
If massive credit deflation has been gnawing at the financial system, then the embedded imbalances are about to surface soon.
Generating paltry net income derived from rocketing debt levels, cultivated from the BSP’s zero-bound regime is unsustainable. This is a sign of capital decumulation.
Because of the mounting risks of duration (sensitivity to changes in interest rate) and inflation, systemic fragility increases with it.
Authorities can surely use policies to buy some time. However, such imbalances will surface eventually.
Valuations of the PSEi 30 are a manifestation of these.
As of May 21st, based on published 2020 eps of the composite members of the PSEi 30, the average PER, excluding negative earnings, was 25.6. Among the highest PERs are three of the top 5 largest market cap firms, namely, SM 46.86, SMPH 53.2, and ALI 54.49.
The PSEi 30 closed lower at 6,370.87 last April but its PER ratio was at 22.29, which according to the BSP, was slightly lower than the peak last February at 23.71. The current PER ratio remains adrift at 1996 pre-Asian Crisis highs.
Almost everyone is hoping that this year’s earnings will soar to offset the current elevated ratios. Yes, companies can manufacture numbers for it.
But it won’t wash away the risks embedded in it. Something will have to give.
