PSE Craters as Financials’ Share of the PSEi 30 Hits All-Time Highs; A Growing Mismatch Between Financial Index Performance and Bank Fundamentals

 

History will not be kind to central bankers fixated on financial economy and who created serial speculative booms to sustain the illusion of prosperity. It will also be critical of governments unwilling to address weaknesses, who deflected shifting hard policymaking to independent, unelected and largely unaccountable central banks—Satyajit Das 

In this issue 

PSE Craters as Financials’ Share of the PSEi 30 Hits All-Time Highs; A Growing Mismatch Between Financial Index Performance and Bank Fundamentals

I. PSEi 30 Craters on Signs of Re-Tightening Amid Rising Dollar and Higher UST Yields

II. Despite the Market Carnage: Financials Share of the PSEi 30 Zoom to All-time High!

III. Financialization: The Expanding Role of Banks in Achieving Political Goals

IV. "National Team?" In Q2, Other Financials Corporations Sold, the PSEi 30 Plunged

V. In Q3, Mismatch Between Financial Index-Bank Fundamentals Reached a Blow-off Phase!

VI. Worsening Bank Liquidity Conditions as Cash-to-Deposits Hit Milestone Low

VII. Liquidity and Collateral Crunch? Bank Borrowings, Focused on Bills, Zoomed to Record Highs in September, as Repos also Hit All-time Highs!

VIII. Despite Lower Rates Held to Maturity Assets Near All-time Highs, Record Bank QE

IX. A Snapshot of Q3 and 9-Month Performance of PSE Listed Banks

X. Highlights, Summary and Conclusion

PSE Craters as Financials’ Share of the PSEi 30 Hits All-Time Highs; A Growing Mismatch Between Financial Index Performance and Bank Fundamentals

Even as the PSEi plummeted due to signs of global and local re-tightening, the Financials outperformed, widening the mismatch between share prices and fundamentals. Will a reckoning come soon?

I. PSEi 30 Craters on Signs of Re-Tightening Amid Rising Dollar and Higher UST Yields"

Figure 1

The Sage of Omaha, Warren Buffett, once said, "Only when the tide goes out do you discover who's been swimming naked."

Have the signs of tightening upended the dream of easy money’s "goldilocks" economy, or have they exposed those who have been "swimming naked?"

The surging US dollar index, coupled with rising 10-year Treasury yields—both largely attributed to Trump's policies— has sent global risk assets tumbling. Yet, these developments took shape two months before the US elections. (Figure 1, topmost graph)

This includes the Philippine PSEi 30, which plunged by 4.31%, marking its largest weekly decline in 2024 and the steepest drop since the week of September 30, 2022, when it fell by 8.3%.

As of Thursday, November 14, the headline index broke below the 6,600 level, closing at 6,557.09.

A notable oversold rebound in industrials, led by Meralco (up by 7.78%) and Monde (up by 7.52%), along with financials from BPI (up by 3.7%) and CBC (up by 4.58%), contributed to a low-volume rally of 1.82% on Friday.

Year-to-date, the PSEi 30 is struggling to maintain its narrowing return of 3.5%.

II. Despite the Market Carnage: Financials Share of the PSEi 30 Zoom to All-time High!

The Financial Index, down by only 1.86%, was the least affected in this week’s market carnage. BPI was the only member of the PSEi 30 component to withstand the foreign-driven selloff, while Jollibee ended the week unchanged. (Figure 1, middle pane)

Interestingly, this outperformance has propelled the aggregate free-float market capitalization weighting of the three major banks of the headline index to an all-time high. (Figure 1, lowest chart)

Figure 2

Furthermore, financials accounted for 41.7% of the mainboard's volume on Friday—the third-highest share since October. (Figure 2, topmost diagram)

Meanwhile, October’s cumulative 29.92% accounts for the sector’s highest share since July 2023, which also translates to a 2017 high.

In a related note, the Bangko Sentral ng Pilipinas (BSP) has suspended its free publication of non-BSP-generated data, including PSE data on monthly price-earnings ratios (PER), market capitalization by sector, index data, and volume distribution by sector. This suspension hampers our ability to track critical developments in market internals. (Yes, I wrote them)

The point being, the increasing share of mainboard volume by the financial sector has pillared the rising share of the sector’s market cap share of the PSEi 30.

However, this dynamic also implies growing concentration risk in the stock market.

III. Financialization: The Expanding Role of Banks in Achieving Political Goals

Businessworld, November 13: THE PHILIPPINE banking system’s net profit jumped by 6.4% at end-September as both net interest and non-interest income grew, data from the Bangko Sentral ng Pilipinas (BSP) showed. The combined net income of the banking industry rose to P290 billion in the first nine months of 2024 from P272.6 billion in the same period a year ago.

The PHP 290 billion profit and a 6.4% growth rate represent the Q3 figures year-over-year (YoY).

Continuing from last week’s discussion, the diverging dynamics in the Philippine Stock Exchange (PSE) have also been reflected in the GDP figures. 

Although the financial sector has been on an upward trajectory since the new millennium, its share of the real GDP has rapidly deepened during the BSP’s historic rescue of the sector. 

This was notably influenced by the BSP historic intervention to rescue the sector, which included an unprecedented PHP 2.3 trillion quantitative easing package, historic cuts in official and reserve ratios, as well as unparalleled subsidies and relief measures. 

In line with the rising share of money supply-to-GDP, the financial sector's share of GDP reached its third highest level at 10.8% in Q3. (Figure 2, middle image) 

It even hit an all-time high of 10.9% when considering the 9-month real GDP data. 

While this evolution may be labeled as "financialization," the essential message is clear: BSP policies have led to an economy increasingly immersed (or heavily reliant) in credit and liquidity, primarily channeled through an elite-owned and controlled banking system. 

This deepening dependence comes at the expense of the development of other competing financial conduits, such as capital markets. 

The underlying reason for this is political: the bank-led financial sector serves as the primary non-BSP financier of the government’s deficit spending. 

As a result, the government's calls for improvements in the capital markets appear to be mere lip service. 

However, judging by their "demonstrated preference" in policy choices, it appears that inflating bank shares may serve to camouflage the adverse consequences of this deepening and complex political-economic arrangement. 

IV. "National Team?" In Q2, Other Financials Corporations Sold, the PSEi 30 Plunged

The developments in Other Financial Corporations (OFCs) provide valuable insights. 

In Q2, OFCs eased their holdings of equities.  According to the BSP, "The other financial corporations’ claims on the other sectors dropped as their holdings of equity shares issued by other nonfinancial corporations fell." 

The Non-bank financial institutions and OFCs "includes the private and public insurance companies, other financial institutions that are either affiliates or subsidiaries of the banks that are supervised by the BSP (i.e., investment houses, financing companies, credit card companies, securities dealer/broker and trust institutions), pawnshops, government financial institutions and the rest of private other financial institutions (not regulated by the BSP) that are supervised by the Securities and Exchange Commission (SEC)" (Armas, 2014) 

In the same quarter, OFC claims on the private sector decreased by 0.5% quarter-over-quarter (QoQ), while the PSEi 30 index plunged by 7.1%. (Figure 2, lowest visual) 

My guess is that some of these OFCs are part of what could be considered the Philippine version of the "national team." 

V. In Q3, Mismatch Between Financial Index-Bank Fundamentals Reached a Blow-off Phase!

Nevertheless, the deviation between the fundamentals of banks and their share prices has reached "blow-off" proportions!

Figure 3 

In Q3, the banking system reported a modest growth of 6.4%, slightly higher than Q2’s 4.1%. However, the financial index skyrocketed by 19.4% quarter-over-quarter (QoQ). 

From another angle, 9-month profit growth was up by 5.07%, even as the financial index surged by a stunning 23.4% year-on-year in Q3.

Worst of all, profit trends and the financial index have moved in opposite directions. 

Since profit growth peaked in Q3 2022 and subsequently eased, shares of the seven-member bank stocks (excluding the eighth member: PSE) within the financial index have continued to accelerate. (Figure 3, topmost window) 

Meanwhile, given that universal and commercial banks account for 93.9% of total bank assets, their profit growth largely mirrors the entire banking system. In Q3, profit growth was 7.03%, and on a 9-month basis, it stood at 6%. 

These figures underscore the increasing monopolization of the financial industry by banks validated by the BSP’s Total Financial Resources (TFR) data. 

Total financial resources grew by 10.07% to a record PHP 33.08 trillion. 

The banking sector’s share surged to an all-time high of 83.3%, driven mainly by universal and commercial banks, whose contribution reached a record 78.1%. (Figure 3, middle image) 

So let us get this straight: banks have increased their share of trading activities in the PSE, as well as their slice of both the PSEi 30 and the GDP pie. They now command 83.3% of total financial resources and are continuing to rise. 

This dominance doesn’t even account for their substantial role in the local bond markets, where they act as issuers, intermediaries, and holders. 

Even without the BSP acknowledging this, what we are witnessing is the intensifying risks within the Philippine financial-economic system. 

VI. Worsening Bank Liquidity Conditions as Cash-to-Deposits Hit Milestone Low

Have you ever seen any experts or establishment analysts address the developing contradiction between the banks' reported profits and their liquidity conditions? 

Cash and due from banks, or bank cash reserves, plummeted by 13.6% in September 2024, following a brief 4% rebound in August. This decline brought cash reserves to their lowest level since 2019. (Figure 3, lowest graph) 

To address the emerging liquidity shortfall, the BSP previously reduced the bank reserve requirement ratio (RRR) from 19% to 14%, implemented in seven installments from March 2018 to December 2019. 

Cash reserves saw a temporary spike in 2020 when the BSP injected Php 2.3 trillion into the system, accompanied by an RRR cut from 14% to 12% in April 2020. 

However, facing diminishing returns, cash reserves resumed their downward trend. 

Once again, doing the same thing and expecting different results, the BSP reduced the RRR by a larger margin than in 2020, lowering it from 12% to 9.5% in June 2023. 

Despite these efforts, the challenges within the banking system's cash reserve position have persisted.

Figure 4

Moreover, while the growth in peso deposit rates increased from 6.9% in August to 7.07% in September—the slowest growth rate since July 2023—the BSP’s cash-to-deposit ratio plummeted to 12.44%, its lowest ratio since at least 2013! (Figure 4, topmost and second to the highest graphs) 

Yet, with the record bank credit expansion, why the sluggish growth in deposits? Where did the money flow into? 

Even with the recent decline in inflation rates, have a minority of "banked" households continue to draw from their savings? 

Furthermore, the banks' liquid asset-to-deposit ratio, which includes both cash reserves and financial assets, fell to 50.34%, reverting to levels seen during the BSP's rescue efforts in July 2020. 

Incredible. 

And this is just one facet of the mounting liquidity challenges that banks seem to be facing. 

VII. Liquidity and Collateral Crunch? Bank Borrowings, Focused on Bills, Zoomed to Record Highs in September, as Repos also Hit All-time Highs! 

More eye-catching data emerged last September. 

Bank borrowings—primarily in short-term bills—skyrocketed to an all-time high! Borrowings surged by 49.7%, reaching a record PHP 1.7 trillion, with their share of total liabilities climbing to 7.3%, the highest since 2021. (Figure 4, second to the lowest and lowest charts) 

The liquidity shortfall is most pronounced over the short-term, this is why bank’s bills payable zoomed to unscaled heights.

Figure 5

Not only that, bank short-term repo (repurchase agreements) or RRP (reverse repurchase) operations with the BSP and other banks have also launched into the stratosphere!

With record repo operations, the RRP’s 3.72% share of the bank’s total assets surged to the highest level since at least 2015! (Figure 5, upper image) 

Could this rampant use of repurchase agreements (repos) be underlying growing collateral issues in the financial system? As banks increasingly depend on repos for short-term liquidity, are we witnessing a decline in the quality of collateral or a shortage of high-quality assets available for these transactions? 

These developments likely explain the BSP's abrupt announcement of the latest series of RRR cuts, which took effect last October. 

However, such actions resemble a Hail Mary pass, with RRR ratios now headed toward zero. 

VIII. Despite Lower Rates Held to Maturity Assets Near All-time Highs, Record Bank QE

Another paradox: banks reported that credit delinquencies—across the board—marginally declined in September. (Figure 5, lower diagram) 

If this is true, then higher profits combined with lower non-performing loans (NPLs) should result in more, not less liquidity 

Figure 6

Additionally, the easing of interest rates, as indicated by declining treasury yields, should have reduced banks' held-to-maturity (HTM) assets. As noted repeatedly, HTM assets drain liquidity because they lock up funds. (Figure 6, topmost graph)

Yet, there hasn’t been significant improvement in this area. 

Moreover, since authorities aim to meet year-end spending targets, boost GDP, and finance the upcoming elections, it is expected that the government will ramp up its deficit spending in Q4. 

This increase in public spending will likely lead to a rise in banks' and the financial sector’s net claims on central government (NCoCG), which may translate to higher HTM assets. (Figure 6, middle chart) 

Furthermore, if the current trend of declining inflation reverses, or we experience a third wave of rising inflation, banks might resort to accounting maneuvers to shield themselves from potential mark-to-market losses by shifting these assets into HTMs. 

That is to say, increases in debt-financed government spending and rising inflation rates could therefore result in higher levels of HTM assets.

Above all, banks are not standalone institutions; they have deep exposure to counterparties. As noted last week, 

Led by banks, the financial sector is the most interconnected with the local economy.  Its health is contingent or dependent upon the activities of its non-

financial counterparties. 

Alternatively, the sector’s outgrowth relies on political subsidies and is subject to diminishing returns. 

Yet ultimately, this should reflect on its core operational fundamentals of lending and investing. (Prudent Investor, October 2024) 

The transformational shift in the banking system’s business model—from production and consumption—could be ominous. Part of this shift has been motivated by pandemic-era subsidies and relief measures, as well as a move away from unproductive industry loans. 

As a result, the consumer share of total bank loans (excluding real estate) reached an all-time high of 14.9% in September 2024, while the share of production loans declined to 82.7%. The remaining 2.4% comes from non-resident loans. (Figure 6, lowest image) 

Banks have embraced the government’s belief that spending drives the economy, neglecting the balance sheet health of individuals, as well as the potential misallocations as a result of artificially low rates. 

But what happens to the consumer economy once their balance sheets have been tapped out? 

This should not surprise to our readers, given that the "inverted belly" of the Treasury yield curve has already been signaling these concerns.

IX. A Snapshot of Q3 and 9-Month Performance of PSE Listed Banks

Finally, here is a snapshot of the micro aspects of the financials.

Table 7

The performance of PSE-listed banks indicates that while all-bank profits grew by 14% to Php 226 billion in the first nine months of 2024, bills payable jumped by 79%, or Php 579 billion, reaching Php 1.31 trillion. This increase in bills payable signifies more than double the net profits generated over the same period. The data excludes the small-scale Citystate Savings Bank [PSE: CSB]. [Table 7]

PSEi banks accounted for 84% of the nine-month increase in bills, relative to their 73% share of net income growth. Metrobank [PSE: MBT] represented the most aggressive borrower, with a 61% share. 

We have yet to reconcile the stark divergence between the reported BSP bank performance and the aggregate activities of listed firms. 

Nonetheless, through aggressive lending, banks boosted their top and bottom lines in Q3, positively impacting the nine-month performance. 

Fueled by a 29.7% growth in non-PSEi banks, the net income growth of all banks soared by 22%. 

X. Highlights, Summary and Conclusion 

In the end, we can summarize the banking sector as having the following attributes: (as of September or Q3) 

1. all-time highs in:

-Financial Index

-market cap share of the PSEi 30 (3 biggest banks)

-turnover of financial sector to mainboard volume (near)

-nominal or Philippine peso and % share of total financial resources

-nominal net claims on central government

-nominal Held-to-Maturity assets

-total bank lending in Philippine pesos

-percentage share of consumer bank lending

-nominal bank borrowing (mainly Bills)

-nominal repo operations

- nominal net financial assets

2. Historical lows in:

-cash-to-deposits

-production pie of total bank lending

-reserve requirement ratio

3. Declining trend in:

-cash reserves

-profit growth

-deposit growth

-liquid asset-to-deposit ratio

How is it that the supposedly "profitable" financial institutions, supported by the recent slowdown in non-performing loans, have been accompanied by sustained declines in deposit and savings rates, as well as a massive hemorrhage in liquidity that compelled them to rapidly access short-term financing via bills and repos?

Have profits been overstated? Have NPLs been understated?

To what extent have the BSP’s relief measures and subsidies caused distortions in banks’ reporting of their health conditions?

Why the flagrant disconnect between stock prices and the actual conditions of the banks?

Could the "national team" have been tasked with camouflaging recent developments through a panicked pumping of the sector’s shares?

Does the ongoing shortfall in liquidity portend higher rates ahead?

Given all these factors, what could possibly go wrong?

As we recently pointed out,

To be clear, we aren’t suggesting that CBC and other record-setting bank shares, such as BPI, are a simulacrum of Lehman; rather, we are pointing to the distortive behavior of speculative derbies that may hide impending problems in the sector. (Prudent Investor, October 2024)

____

References 

Satyajit Das, Central banks: The legacy of monetary mandarins, New Indian Express, November 15, 2024 

Jean Christine A. Armas, Other Financial Corporations Survey (OFCS): Framework, Policy Implications and Preliminary Groundwork, BSP-Economic Newsletter, July-August 2014, bsp.gov.ph 

Prudent Investor, Q3 2024 5.2% GDP: Consumers Struggle Amid Financial Loosening, PSEi 30 Deviates from the GDP’s Trajectory, November 10, 2024 

Prudent Investor, Important Insights from the Philippine PSEi 30’s Melt-Up! October 7, 2024

  

Q2 2024 6.3% GDP? Stagnation in PSEi 30’s Q2 and 1H 2024 Performance as Debt-to-Income Ratio Soared to an All-Time High!

 

True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse sooner or later and to bring about a depression—Ludwig von Mises

In this issue: 

Q2 2024 6.3% GDP? Stagnation in PSEi 30’s Q2 and 1H 2024 Performance as Debt-to-Income Ratio Soared to an All-Time High!

I. Introduction: The Growing Disconnect Between PSEi 30 Fundamentals, Prices, and the GDP

II. 1H 2024: PSEi 30 Firms Insatiably Gorge on Debt: More Borrowing, More Trouble?

III. PSEi 30: The Mirage of Profit Gains Amidst Explosive Rise in Debt

IV. PSEi 30: Caveats in Corporate Reporting and Governance: The PLDT 4-Year Budget Overrun Example 

V. BSP’s Inflationism: The Slowing Growth of PSEi 30 Revenues and Its Implications 

VI. Impact of BSP’s Inflationism: PSEi 30’s Deepening Signs of Illiquidity

VII. San Miguel’s Intensifying Debt and Cash Crunch: Implications for Financial Stability

VIII. Analyzing the PSEi’s Impact on Financial Liquidity: The Surge in PSEi and Bank Borrowings Increases Financial Fragility

IX. PSEi 30 1H Analysis: A Concise Industry Overview

X. Q2 GDP Growth of 6.3% Highlights a Two Speed Economy: Stagnation in PSEi 30 Revenues and Net Income

XI. The PSEi 30 Nears 7,000: The Widening Discrepancy Between Prices and Fundamentals

Q2 2024 6.3% GDP? Stagnation in PSEi 30’s Q2 and 1H 2024 Performance as Debt-to-Income Ratio Soared to an All-Time High!

In a detailed analysis, we highlight the growing disconnect between PSEi 30 fundamentals (for Q2 and 1H 2024), PSEi 30 prices, and GDP.

I. Introduction: The Growing Disconnect Between PSEi 30 Fundamentals, Prices, and the GDP 

The PSEi 30 soared by 7.03% in Q1 2024, plummeted 7.12% in Q2, or was almost flat with a slight decrease of 0.6% in the first half of the year. 

However, two months into Q3, the PSEi 30 has fully recovered its Q2 losses and was up 7.94% YTD as of August 22nd.

Despite the fragile consumer conditions, owing to the "Marcos-nomics stimulus" channeled via record deficit spending, Q2 GDP rose to 6.3%.

Nevertheless, the dynamics in motion in Q1 extended through Q2 2024 and in the first half of the year.

In our conclusion last May, 

In the end, the loosening of financial conditions has led to an increasing divergence between corporate share prices and fundamentals. 

Furthermore, the PSEi 30’s Q1 2024 financial performance demonstrates a two-speed economy: a private sector slowdown, which has even affected the elites, translating to further hardship for the middle and lower classes, and a booming government. (Prudent Investor, May 2024) 

Let's compare the debt conditions of the non-financial members of the PSEi 30 with its entire constituents. 

However, there are some caveats regarding the presented statistics. 

Nota bene:  

-Older data, representing PSEi members of the specified Q2 end-of-period, presents an apples-to-oranges scenario. The PSEi periodically updates its constituents, which we labeled as 1A data. 

-The older data also excludes data revisions. 

-Current or 2023-2024 Q2 data provides a more accurate comparison as it reflects present members, labeled here as 1B data. 

-The aggregates are overstated due to holding companies incorporating subsidiaries. 

II. 1H 2024: PSEi 30 Firms Insatiably Gorge on Debt: More Borrowing, More Trouble?

Figure 1

The table presented is an example of 1B data. It compares the recently published first half (1H) of 2024 numbers with the first half of 2023 figures of PSEi firms. (Figure 1, top table) 

The 2023 headlines and the rest of the historical data are referred to as 1A. 

Despite coming from a high base, the debt of non-bank PSEi 30 members increased by 5.9% or Php 308.5 billion to Php 5.535 trillion, which is the second highest on record, following last year's Php 5.6 trillion (1A). (Figure 1, middle graph)

The net debt increase of Php 308.5 billion was the fourth highest, after 2022, 2020, and 2023 (1A).

While fifteen of the 27 non-bank PSEi 30 firms posted increases in debt (1B), San Miguel’s eye-popping PHP 147 trillion accounted for 53% of the total. 

The other top borrowers were Ayala Corp (Php 46.3 billion), Ayala Energy subsidiary ACEN Corporation (Php 34.5 billion), and Aboitiz Equity (Php 26.85 billion). 

It's important to note that this discussion does not include the borrowings of PSEi 30 banks. 

The good news is that despite the massive debt increase, soaring bank assets have led to a reduced PSEi 30 Debt-to-Total Financial Resources ratio, which has dropped below 2019 levels. (Figure 1, lowest image) 

But here's the caveat: while bank assets outgrew the PSEi 30’s non-bank debt—partly due to the non-inclusion of bank debt data—banks still represent a substantial source of lending to PSEi firms.

Furthermore, the outperformance of bank assets has been driven by the steep growth in consumer credit exposure and holdings in Philippine government debt. 

Additionally, some companies may have tucked away debt through other classifications (e.g., lease liabilities) or via off-balance sheet arrangements, which may result in an understated actual debt position. 

Figure 2

For instance, while Wilcon Depot has no published debt, interest expenses (from lease liabilities) have been on an uptrend. (Figure 2, topmost chart)

In this way, understanding the mechanics behind the statistics can help strip away the façade of good news based on headline metrics.

III. PSEi 30: The Mirage of Profit Gains Amidst Explosive Rise in Debt 

Second, media headlines captivate their audiences by focusing on the percentage gains in revenues and income of the most prominent members of this elite group. 

However, they rarely mention that these gains largely stem from the illusion of the low-base effects.

In reality, these exciting profit gains represent only a small fraction of the increases in debt. 

In the first semester, the published net income of the PSEi 30 rose by a modest 4.36%, or Php 20.4 billion, reaching the second-highest level of Php 487.12 billion. 

Yet, this growth rate marks the slowest increase since 2021. (Figure 2, middle image) 

Net income of non-financial companies grew by 2.03%, with one-third of these companies experiencing a decline in profits.

Meanwhile, the headline performance was primarily driven by the big three banks, whose profit growth of 15.4% significantly boosted the overall.

In context, the non-bank debt growth of 5.9% eclipsed the PSEi 30’s net income growth of 4.36%. 

Crucially, the net debt growth of Php 308.5 billion represents a staggering 15.2 times the net profit increase of Php 20.4 billion! Fifteen times! An all-time High! (Figure 2, lowest pane)

Strikingly, as a proportion of income, the net debt growth of Php 308.5 billion accounted for 63% of the aggregate net income of Php 487 billion in the first semester! 

Essentially, this demonstrates the law of diminishing returns in action: while debt used to be a significant contributor to (demand) revenue and income growth, malinvestments have resulted in corrosive effects. 

Worse yet, unbeknownst to the public, this marks a substantial buildup in credit risks, channeled through balance sheet mismatches of the nation’s largest firms. 

Amazing. 

IV. PSEi 30: Caveats in Corporate Reporting and Governance: The PLDT 4-Year Budget Overrun Example

Another cautionary note is that elite firms may be prone to exaggerating their top and bottom lines to convincingly portray their financial viability to the public.

Furthermore, "errors" could also be a factor, reminiscent of the PLDT's 4-year "budget overrun" debacle. Local authorities drew a veil over the reporting fiasco of the largest telecommunications company and allowed them to escape unscathed, despite the company settling with plaintiffs of a class action suit for a paltry sum of USD 3 million. 

In our humble opinion, the PLDT case exemplifies the decay of corporate governance, where elite companies can evade accountability for misdeclarations (whether accidental or intentional). 

Instead of being transparent, they may choose to pay small fines, raising the question: what would prevent other elite companies from following suit?

V. BSP’s Inflationism: The Slowing Growth of PSEi 30 Revenues and Its Implications

Figure 3

Meanwhile, corporate revenues grew by 8.71% in the first semester (1B). Non-bank PSEi 30 expanded by 7.4% while bank revenue growth of 24.2% delivered the gist of the PSEi 30’s semestral expansion. (Figure 3, table)

Twenty-three of the 30 constituents posted positive YoY growth while seven saw a contraction. In pesos, San Miguel was the leader with an increase of Php 103.8 billion followed by JGS with Php 24.8 billion, BDO and BPI with Php 24.1 billion and Php 23.1 billion respectively.

1H revenue growth of 8.71% resonated with its equivalent in (nominal) GDP of 9.5%.  If the GDP numbers are close to accurate then PSEi 30’s share of revenues amounted to 27.8% of the NGDP. 

Yes, 30 firms accounted for over a quarter of the statistical economy in 2024.

And that's only the 30 firms—a hallmark of the trickle-down, plutocratic political-economic structure.

The slowing NGDP and PSEi 30’s revenue growth are symptoms and manifestations of the corrosive nature of the BSP’s inflationism, expressed through over-indebtedness and price instability, which negatively impact profits and liquidity.

Importantly, because this increases the public’s time preferences or short-term orientation, the public becomes inclined toward activities that cater to instant gratification, such as speculation and gambling.

This inclination also permeates into the political spectrum, raising the public’s desire for more interventions and resulting in the deepening politicization of the socio-economic sphere.

VI. Impact of BSP’s Inflationism: PSEi 30’s Deepening Signs of Illiquidity

This leads us to the fourth component: cash.

It is no surprise that the mounting imbalance between profits and debt has resulted in deepening signs of illiquidity, as the cash reserves of the PSEi 30 constituent firms continue to decline. (Figure 3, lower visual)

In addition to borrowing, PSEi 30 corporations have partially used their cash reserves to bridge the liquidity gap in their financing operations.

Yet, despite the massive borrowings, the aggregate cash reserves (1A) have fallen to their lowest level since 2021, with 14 of the 30 firms posting cash contractions.

Aboitiz Equity and gaming company Bloomberry recorded the largest cash decreases, while Meralco and LTG registered the most significant gains.

VII. San Miguel’s Intensifying Debt and Cash Crunch: Implications for Financial Stability

San Miguel’s situation appears to be a poster child for the entropic process leading to illiquidity and insolvency.

Despite the astonishing Php 147 billion surge in borrowing from the first semester of 2023 to 2024, and a published net income of Php 13.6 billion, SMC’s cash reserves fell by Php 8.31 billion to Php 253.9 billion—its lowest level since 2018. (And that’s assuming that the reported cash reserves are accurate)

Why wouldn’t it?

Figure 4

Short-term debt skyrocketed from Php 363.8 billion in 1H 2023 to Php 533.67 billion in 1H 2024, an increase of Php 169 billion! (Figure 4, topmost chart)

Both the level of short-term debt and the annual increase in short-term debt are all-time highs!

More importantly, SMC’s short-term debt now exceeds 100% of its cash reserves!

Additionally, interest payments, which amounted to Php 24.12 billion and counting, have not been included in this analysis.

In context, SMC’s Php 1.484 trillion in debt represents about 4.6% of the Php 32.33 trillion in total financial resources and 5.9% of the 2024 annualized Php 25.2 trillion NGDP! (Figure 4, middle and lowest charts)

Incredible.

In simple terms, SMC needs to generate funds to pay or refinance both its massive short-term and long-term obligations.

Rising interest payments will further erode its profits.

With vastly insufficient profits and cash flows, SMC will naturally have to draw on its most liquid reserves: cash.

The company may also need to increase its borrowing rate or resort to selling assets or dilute its equity to meet its operational liquidity requirements.

Keynesian economist Hyman Minsky theorized the transition from financing stability to instability phenomenon as "Ponzi Finance."

Borrowing to pay interest or selling assets to pay interest (and even dividends) on common stock lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes. A unit that Ponzi finances lowers the margin of safety that it offers the holders of its debts. (Minsky 1992)

Regardless of interest rates, SMC’s debt stock has reached a fragile state, increasingly vulnerable to a bout of perilous illiquidity. 

If SMC cannot raise the required amount, it may exhaust all its cash or, alternatively, embark on a selling spree of its assets or dilute its equity.

New ventures like the Bulacan-based New Manila International Airport (NMIA) project are unlikely to generate sufficient cash flows to meet its skyrocketing obligations.

However, in our humble opinion, the company must convince the public that it is viable enough to continue with its borrowing orgy. 

Yet, what happens at SMC will not stay at SMC. A "tail event" for San Miguel could send shockwaves through the banking system, financial markets, and the broader economy—which relies on elite firms for GDP growth.

Of course, we would expect the BSP or the government to mount a bailout. However, doing so could accelerate other negative feedback loops in the financial system.

VIII. Analyzing the PSEi’s Impact on Financial Liquidity: The Surge in PSEi and Bank Borrowings Increases Financial Fragility

The PSEi’s mounting liquidity shortage has been mirrored in the banking system.

Figure 5

In the first semester, cash growth among listed banks increased by a mere 1.82% year-over-year (boosted by the big three of the PSEi 30 at 3.36%), while bills payable soared by 39.2% across all banks, driven higher by a 68.12% surge from the PSEi 30’s big three. (Figure 5, table) 

Nota Bene: BPI categorizes its borrowing under "Other borrowed funds," making the time element of its debt distribution ambiguous and therefore not included in our data. 

In any case, universal-commercial (UC) banks have ramped up their borrowing activities, with bills and bonds payable growing at accelerated rates of 40.62% and 11.78%, respectively, resulting in a total increase of 27.8% as of June. (Figure 5, middle graph) 

UC bank borrowings in pesos reached an all-time high of Php 1.401 trillion last June! 

UC banks have not only increased their borrowing but have also shifted focus to short-term debt, reflecting the industry’s deteriorating liquidity conditions. 

The long-term decline in cash-to-deposits and liquid assets-to-deposits ratios continued in June. (Figure 5, lowest diagram) 

Bank client issues are also reflected in the banks' health reflecting on liquidity conditions—despite the accounting charade surrounding Held-to-Maturity (HTM) assets and various relief measures that have obscured the actual conditions of Non-Performing Loans (NPL).

If banks are as profitable as claimed, why is financial liquidity deteriorating and why are borrowings at record levels? 

IX. PSEi 30 1H Analysis: A Concise Industry Overview

Figure 6

By industry, debt grew the most in the holding sector, while the property sector came in a distant second in the first semester. (Figure 6, top table)

The holding sector accounted for the largest share representing 74%, while the property sector 11%.

Similarly, banks generated the most significant net income gains, followed by the service sector.

Banks' net income comprised 61.6% of the total or the PSEi 30’s net income, while services had a 28% share.

The holding sector dominated revenue growth, with a share of 54.7%, while banks accounted for 21.9%.

Cash increased the most in the industrial sector, with banks in second place.

X. Q2 GDP Growth of 6.3% Highlights a Two Speed Economy: Stagnation in PSEi 30 Revenues and Net Income

Moving to the second quarter, "Marcos-nomics" powered the GDP growth of 6.3%.

The poor top-line performance of several PSE-listed firms, which have reported their Q2 2024 results, underscores this issue.

… 

Fifth and finally, the PSE-GDP data indicate that there is confusion in associating a high GDP with the performance of the PSEi 30, which is currently in a bear market. (Prudent Investor 2024) 

This context is further validated by examining the revenues and net income of the 30 elite companies in the PSEi 30, some of which are even involved in government projects. 

Whereas Q2 NGDP grew from 9.1% in Q2 2023 to 10.1% in Q2 2024, the PSEi 30’s gross revenues climbed from 8.24% to 9.14% over the same period, despite the significant increase in debt. (Figure 6, lower graph) 

Similar to the first half of the year, Q2 revenues of the elite firms, amounting to Php 1.799 trillion, signified 28% of the Q2 NGDP, which stood at Php 6.486 trillion—once more, the trickle-down, plutocratic political economy. 

Revenues grew, but there is a catch. 

The net income of the PSEi 30’s non-bank firms showed a slight decline of 0.13% year-over-year. 

However, the bank's net income, which expanded by 13.7%, boosted the aggregate net income growth to 2.35%. This figure represents gross net income.

Figure 7

Alternatively, the real net income for the PSEi 30 stagnated or even contracted by -1.45% in Q2 2024! That’s right; net income shrank. (Figure 7 top and bottom tables) 

Outside the banking and property sectors, there was hardly any increase in net income in real terms. 

Net income for thirteen of the PSEi 30 firms (43%) decreased in Q2. Semirara, DMC Holdings, GT Capital, JG Summit, and Bloomberry led this decline. 

Conversely, Ayala Corp, SM Investments, ICT, and Meralco led the gainers.

In the meantime, SMC and Meralco posted the most significant revenue gains, while DMC and Semirara experienced revenue contraction.

XI. The PSEi 30 Nears 7,000: The Widening Discrepancy Between Prices and Fundamentals

In line with global stocks, the PSEi 30’s relentless climb toward the 7,000 level has been primarily driven by the local version of the "national team" and supported by foreign funds, thanks to the "Powell Pivot" towards easier monetary conditions.

While this surge has largely been driven by price-multiple expansion or speculation, it has overlooked critical concerns that have been festering beneath the surface.

Or, stocks have departed from the ongoing stagnation in fundamentals.

However, if higher interest rates did not put a brake to the government's and the PSEi 30's insatiable debt absorption and immersion, easier money conditions will surely intensify it.

What could possibly go wrong?

___

References: 

Ludwig von Mises, OMNIPOTENT GOVERNMENT THE RISE OF THE TOTAL STATE AND TOTAL WAR, p.251; 1944 & 2010, Mises Institute, Mises.org

Prudent Investor Newsletter, Despite the PSEi 30 FOMO, Q1 2024 PSEi 30 Financial Performance Unveiled a Two-Speed Economy, May 19,2024

Hyman P. Minsky, The Financial Instability Hypothesis, p.7 Levy Economics Institute, May 1992, levyinstitute.org

Prudent Investor, Philippines' Q2 GDP Growth of 6.3%: Unpacking the "Marcos-nomics" Stimulus, June 2024 Philippine Employment Rates—A Statistical Pump August 11, 2024 

 

Bullseye! BSP Opens with First Rate Cut, the "Marcos-nomics Stimulus " is on a Roll! PSE’s Q2 Retail Activities Validates Ongoing Consumer Weakness

 

The lesson of history, then, is that even as institutions and policy makers improve, there will always be a temptation to stretch the limits. Just as an individual can go bankrupt no matter how rich she starts out, a financial system can collapse under the pressure of greed, politics, and profits no matter how well regulated it seems to be― Carmen M. Reinhart

In this issue 

Bullseye! BSP Opens with First Rate Cut, the "Marcos-nomics Stimulus " is on a Roll! PSE’s Q2 Retail Activities Validates Ongoing Consumer Weakness 

I. Bullseye! BSP Opens with First Rate Cut, the "Marcos-nomics Stimulus " is on a Roll!

II. Slowing Retail GDP Validated by Topline Performance of PSE’s Retail Chains

III. Marcos-nomics Rate Cut(s) Designed to Rescue the Banking System; Banks Bolstered the PSEi 30’s Stagnant Q2 Net Income

IV. Marcos-nomics Rate Cut(s): Reduce Debt Servicing Costs to Accommodate MORE Debt!

V. BSP Rate Cut Validates the Price Signals of the Philippine Treasury Market

VI. Summary and Conclusion: Watch for the Third and Fourth Phase of the Marcos-Stimulus (Pandemic Rescue Template 2.0) 

Bullseye! BSP Opens with First Rate Cut, the "Marcos-nomics Stimulus " is on a Roll! PSE’s Q2 Retail Activities Validates Ongoing Consumer Weakness

The BSP opened its series of monetary easing with a rate cut last week validating our thesis that the unannounced "Marcos-nomics stimulus" is on a roll!

I. Bullseye! BSP Opens with First Rate Cut, the "Marcos-nomics Stimulus " is on a Roll!

Bullseye!

In its second phase of the unannounced Marcos-nomics stimulus, the BSP (Bangko Sentral ng Pilipinas) began its campaign to formally ease financial conditions with its first rate cut.

The fact that the "Marcos-nomics stimulus" is on a roll means that widening fiscal deficits, which should also reverberate into "trade deficits" and expand the "twin deficits," should escalate public debt levels and, correspondingly, increase the debt burden. 

With fiscal deficits likely to bulge ahead, prompting more borrowings, the logical sequence would be for the BSP to cut rates to ease the onus of debt servicing.

And that’s only the argument for Philippine government debt. 

The BSP’s case for rate cuts will also involve private sector’s mounting debt burden or systemic debt in general. And that excludes shadow banking or informal finance. 

Therefore, BSP rate cuts represent the next phase of the "Marcos-nomics stimulus." (Prudent Investor, July 2024; bold original) 

GMA News, August, 15, 2024: The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) on Thursday decided to reduce policy rates by 25 basis points, the first cut in nearly four years and the first adjustment since the off-cycle hike in October 2023. 

Why would the BSP start a series of rate cuts with a Q2 headline GDP of 6.3% (6% for the 1H GDP)? 

Yet, the BSP continues to confuse the public by hedging its position with a "rinse and repeat" stance: We will cut, we will not cut, we will cut, we will not cut... to thy kingdom come. 

Just a day before, a business media outlet even cited the BSP as having ""more room to stay tight" after better-than-expected gross domestic product (GDP) growth in the second quarter." 

Stay tight, then cut rates? Incredible. 

For a supposedly data-driven institution, why fixate on interest rates while ignoring the financial and monetary developments despite their actions?

Figure 1

For instance, the BSP’s report on total financial resources (TFR) rocketed by 10.54% to a record Php 32.332 trillion last June, with the banking system, led by the Universal and Commercial banks, surging by 12.3%. (Figure 1, upper window)

Aggregate TFR and bank FR amounted to 128% and 107% of GDP, respectively. 

That is to say, not only have growth rates been accelerating, but banks have also been deepening their stranglehold over the nation’s financial resources—which alternatively translates to an escalation of concentration risk. (Figure 1, middle graph) 

Needless to ask, why would TFR and bank assets skyrocket if rates have been "tight?" Or, why the crescendo of systemic leverage? 

Amazing. 

II. Slowing Retail GDP Validated by Topline Performance of PSE’s Retail Chains 

Getting back to the essence of the Marcos-nomics, despite the Orwellian language, why the cut rates? 

To gauge the heartbeat of consumers, we use the PSE’s Quarterly Report (17Q) to analyze the quarterly activities of the major non-construction retail chains listed on the stock exchange (SM Retail, Puregold, Robinsons Retail, Philippine Seven, SSI Group, and Metro Retail Group). 

The growth rate of BIG 6 retail chains bounced marginally from the Q1 low of 5.13% to 7.22% in Q2.  However, since peaking in Q3 2022, its growth rate has been slowing—exhibited by the downtrend. (Figure 1, lowest image) 

On the other hand, since hitting a low of 10.6% in Q3 2023, the nominal retail GDP has improved in the last three quarters—with Q2 posting a 12.8% growth.  The revenues of the BIG 6 accounted for an estimated 24.6% share of the Philippine retail market, based on the retail GDP. 

The huge variance in growth rates between the revenues of the BIG 6 tell us that either the NON-listed retail chains OUTPERFORMED, or that the retail GDP has been exaggerated. 

The thing is, the growth rate may differ, but the trends resonated. 

Real consumer GDP also corroborated the slowdown. 

In the first two quarters of 2024, real consumer spending grew by 4.6%. 

The slowdown in consumer spending is just one aspect of the complex chain of people’s actions.

Figure 2

While consumer spending has slowed, loans of the BIG 5 retail chains (excluding SM Retail) hit an all-time high in Q2. (Figure 2, topmost graph) 

As banks continue to shift their portfolios toward consumers—with the gap in favor of consumer lending reaching its highest-level last June—credit card and salary loan non-performing loans (NPLs) have accelerated in Q1 2024. (Figure 2, middle and lowest charts)

Figure 3 

This represents a breathtaking structural transformation anchored on Keynesian ideology that the consumer drives the economy. (Figure 3, topmost graph)

Unfortunately, despite the unprecedented metamorphosis, increased leveraging has only resulted in the material slackening of consumer spending.

Essentially, the consensus comprised of media, experts and officials has overlooked the importance of balance sheet conditions and productivity!

III. Marcos-nomics Rate Cut(s) Designed to Rescue the Banking System; Banks Bolstered the PSEi 30’s Stagnant Q2 Net Income

But there’s more.

The BSP wasn’t transparent enough to reveal that despite the seismic transformation of its business model and the all-time highs in credit expansion within the Philippine banking system, the industry has experienced an erosion of profit growth since Q2 2022—coinciding with rising rates. (Figure 3, middle diagram)

From a low of 2.95% in Q1, bank profits increased by 4.1% in Q2 2024. The data exhibit the sustained corrosion of bank liquidity despite the three-year streak in profit growth.  Bank’s cash-to-deposit and liquid asset-to-deposits on an 11-year downtrend.  (Figure 3, lowest chart)

In my humble opinion, these bank profits represent accounting profits because they conceal massive losses through Held-to-Maturity (HTM) holdings, opaqueness in capital conditions, and unpublished NPLs due to subsidies and various relief measures.

Figure 4

In any case, the big three PSEi banks saved the PSEi 30's Q2 net income activities from outright stagnation.

Net income by the non-financial members of the PSEi slightly contracted by 0.13%. However, the 13.71% net income growth of the PSEi 30 banks boosted the aggregate net income growth to 2.35%. (Figure 4, upper table)

Meanwhile, despite disinflationary forces, revenue growth increased by 9.14% in Q2, pushing the first semester’s topline up by 8.71% (to be discussed in another post).

In brief, it’s not just consumers; the overall slowing of the economy has been evident in the topline and bottom-line performance of the PSEi 30. We will omit the debt conditions of the PSEi 30’s non-financials from this discussion.

As a side note, why then the PSEi 30 pump?

Think of it this way: why the slowdown in the PSE’s performance despite record bank lending and the soaring expansion of systemic leverage (exhibited by members of the PSEi 30)?

Consumer spending per capita GDP peaked in Q1 2021 and has turned south in the face of historic levels of systemic leverage—comprising the formal credit (bank credit plus public debt) system, which accounted for 112% of the annualized 2024 GDP! (Figure 4, lower graph)

Figure 5

As it stands, this monumental build-up in systemic leverage translates to escalating hidden financial skeletons in the form of balance sheet mismatches—which have yet to be revealed. UC bank and public debt accounted for 108% of the annualized 2024 GDP. (Figure 5, topmost chart)

Incredible.

In a nutshell, the Marcos-nomics stimulus via the BSP’s rate cut also represents the RESCUE of the banking system (Pandemic Bailout Template 2.0).

IV. Marcos-nomics Rate Cut(s): Reduce Debt Servicing Costs to Accommodate MORE Debt! 

With the slowing of the real economy, the government has stepped up the tempo of its spending to boost the statistical economy, GDP.

This represents the opening salvo of Marcos-nomics. Besides, the torrent of spending is all about politics: pre-election funding, the subtle pivot to a war economy, the deepening administrative (infrastructure and bureaucracy) and the welfare state.

Record Q2 spending bolstered the Q2 budget deficit and accounted for a direct 27.4% share of the Q2 GDP, the second largest in GDP’s history (as previously explained). (Figure 5, middle chart)

Since debt has financed the Marcos-nomics stimulus, the rising but flawed debt-to-GDP metrics should increase further. With it, the debt servicing-to-GDP ratio should also rise.

If anything, both debt-to-GDP and debt-servicing-to-GDP ratios have now exceeded pre-Asian crisis levels. (Figure 5, lowest image)

This signifies the primary reason why the BSP cut rates.

Its recourse to deficit spending means more debt, so the BSP must reduce its cost of servicing to allow for or accommodate more debt!

Anyway, according to the government officials, there is "Nothing to worry about PH debt." Debt won’t matter until it does. Alternatively, this could also mean "never believe anything in politics until it has been officially denied." 

Furthermore, as with the pandemic template, liquidity injections should represent the third phase of the Marcos-nomics stimulus. 

Figure 6

The BSP's net claims on the Central Government (NCoCG) remain adrift at near record levels— indicating near-record holdings of government debt by the BSP. What tightening? Where? (Figure 6, topmost chart)

The all-time highs in public spending and bank lending should translate into HIGHER liquidity growth. The growth of BSP’s currency issuance has been accelerating since April 2024, rising by 7.4%—its highest since December 2022!

Should public spending, bank lending, and bank (NCoCG) fail to deliver the various government headline targets, expect the BSP's NCoCG to explode higher.

The fourth and final phase of the Marcos stimulus would involve expanding subsidies and widening the coverage of various relief measures for the banking system. 

Again, this would mirror the Pandemic Bailout Template 2.0. 

All these said, the rebound in liquidity growth should manifest in higher inflation and reinforce the uptrend of the USD-Philippine peso exchange rate. (Figure 6, middle and lowest graphs) 

Moreover, the Fed has long been used by the BSP as a pretext for keeping its stance, unfortunately, waiting for the FED seemed like "Waiting for Godot," so the BSP relented and eased ahead of the Fed.  This should provide further fuel to the bull market of the USDPHP over time. 

V. BSP Rate Cut Validates the Price Signals of the Philippine Treasury Market

Lastly, the BSP rate cuts validated the Philippine treasury markets.  

The curve’s transition from a steepening to a bullish flattening to an inversion in the belly (2-7 years yield) highlights disinflation, rising uncertainties and the growing slack in the real economy (rising risk of recession). 

Figure 7

The belly’s inversion only deepened right after the BSP’s rate cut (as of August 16th) 

And don’t just take it from me, a chart from the BSP’s 2023 Financial Stability Report expresses this. (p.13) 

VI. Summary and Conclusion: Watch for the Third and Fourth Phase of the Marcos-Stimulus (Pandemic Rescue Template 2.0) 

So, there you have it. 

Last week’s BSP rate cut validated our thesis of a "Marcos-nomics stimulus."

It represents the second phase of the tacit bailout of the deficit-spending-driven GDP, the banking system, and the firms of elites. The other objectives are the financing of the growing domain of various political agendas—mostly pre-election spending, the warfare state, infrastructure, and the bureaucratic state. 

One can expect the liquidity injections via the BSP and the banking system to account for the third phase of the stimulus program. 

To complete the fourth and final phase of the Pandemic Bailout Template 2.0, various subsidies and relief measures will be implemented to support the banking system. 

Despite the interim disinflation phase, the sustained bailout means the re-emergence of the third wave of inflation and the strengthening of the USD-Philippine peso bull market. 

The real tightening is about to come. 

Good luck to those who believe in the illusion that manipulated stock market pumps will translate into economic prosperity. 

___

References:

Prudent Investor, Bullseye! “Marcos-Nomics” Stimulus on a Roll as Q2 2024 Public Spending Hits All-Time High! BSP Rate Cuts Next? July 28,2024 

Other post on Marcos-nomics: 

Prudent Investor, Philippines' Q2 GDP Growth of 6.3%: Unpacking the "Marcos-nomics" Stimulus, June 2024 Philippine Employment Rates—A Statistical Pump August 11, 2024 

Prudent Investor, Marcos-nomics stimulus: Yields of the Philippine Treasury Curve Plunged, The Turbocharging of Pre-Election Liquidity Growth July 14, 2024 

Prudent Investor, Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending? June 30, 2024