Inside the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop

 

My cynical view is that 90 percent of financial strategy is either tax minimization, regulatory arbitrage (coming up with instruments to comply with the letter of regulations while violating their spirit), or accounting charades (complying with the letter of accounting rules while disguising reality)— Arnold Kling 

In this issue

Inside the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop 

Segment 1.0: The PSEi Debt Financed Asset Transfer Charade

1A. Debt, Not Productivity, Drives the Philippine Economy

1B. The Big Three Borrowers: MER, SMC, AEV The Mechanism: Asset Transfers

1C. The Circular Boost: A Fragility Loop 

Segment 2.0: San Miguel Corporation — The Minsky Ponzi Finance Core

2A. Fragility in Plain Sight

2B. SMC’s Camouflage Tactics

2C. The Mirage of Liquidity

2D. Political Angle: Deals, Influence, and the Administration’s Footprint 

Segment 2.1 — Meralco: A Utility Showing Profit, But Hiding Stress

2.1A. Chromite Gas Holdings: Meralco’s New Largest Exposure

2.1B. Q3 and 9M Performance: Meralco’s Money Illusion Revenues

2.1C. GDP Mirage and Debt Surge and Asset Inflation

2.1D. What This Really Means: Meralco as the Balance-Sheet Absorber 

Segment 2.2 – AEV: Revenue Spikes as Balance-Sheet Shock Absorption

2.2A AEV’s Q3–9M: Not Evidence of Business Growth 

Segment 3.0 — The Batangas LNG–Ilijan–EERI Triangle

3.A How One Deal Created Three Balance-Sheet Miracles 

Segment 4.0: Conclusion: How Concentration Becomes Crisis: The Philippine Energy Paradox 

Inside the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop 

SMC, Meralco, and AEV’s energy partnership reveals how asset transfers inflate profits, recycle fragility across balance sheets 

Disclaimer: This article presents an independent analysis and opinion based solely on publicly available financial reports, regulatory filings, and market data. It does not allege any unlawful conduct, nor does it assert knowledge of internal decision-making or intent by any company or individual. All interpretations reflect broader political-economic dynamics and systemic incentives rather than judgments about specific actors. Readers should treat this as an analytical commentary, not as a statement of fact regarding any wrongdoing. 

Segment 1.0: The PSEi Debt Financed Asset Transfer Charade 

1A. Debt, Not Productivity, Drives the Philippine Economy 

Debt, not productivity, is the engine of the Philippine economy. We’ve said this repeatedly, but what’s striking in 2025 is how debt growth has concentrated in just a handful of dominant companies.

Figure 1 

In the first nine months of 2025, the 26 non‑bank members of the elite PSEi 30 added Php 603.149 billion in debt—a growth rate of 11.22%, pushing their total to an all‑time high of Php 5.979 trillion. This was the second fastest pace after 2022. (Figure 1, upper window) 

The banks were not far behind. Bills payable of the four PSEi 30 banks rose Php 191.8 billion to Php 1.125 trillion. 

Meanwhile, BSP data shows bills and bonds payable across the entire banking industry climbed 9.34% YoY in September (Q3) to Php 1.861 trillion, the third highest on record. (Figure 1, lower chart) 

For clarity, let’s stick to the 26 non‑bank PSEi firms. 

Note: these figures exclude the rest of the 284 listed companies as of Q2. Because holding companies consolidate subsidiary debt, there are double counts here. And these are only published debts—some firms appear to have shifted borrowings into other liabilities or kept exposures off balance sheet. 

Even with those caveats, the Php 5.979 trillion in published PSEi non-bank debt is large enough to equal: 

• 16.8% of the Philippine financial system’s September Php 35.582 trillion in resources/assets; and
• 29.74% of the Php 20.15 trillion in nominal GDP over the first nine months. 

The Php 603.15 billion increase alone accounts for 75% of nominal GDP growth (Php 796.224 billion, or 4.96%) in the same period. 

In short, the debt of the non‑bank PSEi 30 is not just a corporate statistic—it is macro‑significant, shaping both banking dynamics and GDP itself.

1B. The Big Three Borrowers: MER, SMC, AEV The Mechanism: Asset Transfers 

Figure 2

In January–September 2025, the top three debt expanders among the non-bank PSEi 30—Meralco [PSE:MER], San Miguel [PSE:SMC], and Aboitiz Equity Ventures [PSE:AEV]—accounted for 52.65% of the Php 603.15 billion increase. (Figure 2, table and chart) 

Meralco (MER) debt more than doubled, rising 139.4% from Php 89.147 billion to Php 213.43 billion Php (+Php 124.283 billion). 

San Miguel (SMC) debt rose 7%, adding Php 103.312B, reaching a record Php 1.581 trillion. Yes, a T-R-I-L-L-I-O-N! 

Aboitiz Equity Ventures (AEV) debt jumped 24.26%, or Php 89.945B, to Php 460.7B. 

This was not coincidence. 

The synchronized surge reflects the Meralco–Aboitiz buy-in to San Miguel’s energy assets. 

As discussed last August 

"Beneath the surface, SMC’s debt dynamics resemble quasi-Ponzi finance—borrowing Php 681 billion to repay Php 727 billion in 1H 2025, while plugging the gap with preferred share issuance and asset monetization. The latter includes the deconsolidation and valuation uplift of its residual stakes in the Ilijan power facility and Excellent Energy Resources Inc. (EERI), as well as the $3.3 billion LNG deal with Meralco and AboitizPower in Batangas. Though framed as strategic partnerships, these transactions involved asset transfers that contributed heavily to the surge in reported profits. 

"The simulacrum of deleveraging—from Php 1.56 trillion in Q4 2024 to Php 1.506 trillion in Q2/1H 2025—appears to be a product of financial engineering, not structural improvement." 

In other words, SMC’s Q2 “deleveraging” was cosmetic. 

Its debt didn’t fall because operations improved; it fell because SMC dumped assets, liabilities, and valuation gains onto Meralco and Aboitiz.

1C. The Circular Boost: A Fragility Loop 

This buyout sequence increasingly resembles an asset transfer charade:

• SMC unloads assets with embedded liabilities.
• Meralco and AEV borrow heavily to “acquire” them.

Both sides book accounting gains via fair-value adjustments, reclassification, and deconsolidation. 

• Optics improve—higher assets, higher income, stronger balance sheets.
• Substance does not—real cash flow remains weak, debt dependence accelerates, and system-wide concentration rises. 

Each company props up another’s balance sheet, recycling fragility and presenting it as growth. 

The Philippine power sector is already intensely politicized, dominated by quasi-monopolies that operate in their respective territories. Markets exist only in form; in substance, the sector functions as a pseudo-market inside an oligopolistic cage. 

Approximate generation market shares illustrate this concentration: SMC Global ~20–25%, Aboitiz Power ~23%, First Gen + EDC ~12–18%, Meralco/MGen ~7–10%, and ACEN ~5–7% (figures vary by region, fuel type, and year). 

Recent deals only deepen this centralization, reinforcing the economic and political power of these dominant players, while regulatory bottlenecks and concentrated capital ensure that true competition remains largely symbolic. 

Segment 2.0: San Miguel Corporation — The Minsky Ponzi Finance Core 

The Chromite Gas Holdings acquisition is central to understanding SMC’s 2025 numbers.

MGen acquired 60% and Aboitiz’s TNGP took 40%, giving Chromite a 67% stake in several former San Miguel Global Power (SMGP) entities. SMGP retained 33%. This was not an expansion — again, it was an asset transfer. 

Q2: The Illusion of Improvement 

This maneuver produced a dramatic one‑off effect in Q2:

• Debt dipped slightly from Php 1.511 trillion (Q1) to Php 1.504 trillion.
• Cash surged +26.5% YoY to Php 321.14 billion.
• Profits exploded +398% YoY, from Php 4.691 billion to Php 23.4 billion. 

Q3: The Underlying Reality Reappears 

But the illusion unraveled in Q3: 

• Revenues contracted –4.5% in a weak economy.
• Profits collapsed –49.5% to Php 11.9 billion.
• Cash rose again +22.4% to Php 344 billion.

Figure 3

Debt soared Php 103.312 billion YoY, Php 76.28 billion QoQ, bringing total debt to a staggering Php 1.58 trillion. (Figure 3, topmost graph, middle table) 

2A. Fragility in Plain Sight 

Even with the current the sharp rebound in SMC’s share price — whether due to benchmark-ism (potential gaming market prices by the establishment to conceal embedded fragilities) or implicit cross-ownership effects from the Chromite transaction — market cap remains below Php 180B. 

• Borrowing growth this quarter alone equaled ≈40-45% of SMC’s entire market cap (as of the third week of November). 
• Debt outstanding exceeds annual sales. 
• Debt equals 4.44% of the entire Philippine financial system’s assets. 

This is not normal corporate leverage. 

This is systemic leverage. 

2B. SMC’s Camouflage Tactics 

SMC has been masking its worsening debt structure through: 

• Preferred share issuances (debt disguised as equity), another Php 48.6 billion raised in October.
• Asset transfers involving Meralco and Aboitiz (the Chromite–Ilijan–EERI triangle)
• Aggressive fair-value reclassification and balance-sheet engineering 

All three are textbook Minsky Ponzi Finance indicators: Cash flows cannot meet obligations; survival depends on rolling over liabilities and selling assets. 

2C. The Mirage of Liquidity 

SMC reports cash reserves (Php 344 billion) rising to nearly matching short‑term debt (Php 358 billion). (Figure 3, lowest diagram) 

But internal breakdowns suggest: 

• A portion of “cash” is restricted
• Some is pledged to lenders
• Some sits inside joint ventures 

Balance-sheet “cash” includes mark-to-model items tied to asset transfers 

Meaning: true liquidity is far lower than reported. 

2D. Political Angle: Deals, Influence, and the Administration’s Footprint 

In the current political climate, the administration’s footprint is crucial for every major economic deal. 

SMC’s transactions likely benefited from proximity to the leadership — but political shifts also show how influence-connection-network shapes outcomes across the corporate landscape. 

Take the Villar group: after apparently losing favor with the administration, their Primewater franchise has been terminated in several provinces, and authorities have cracked down on their real estate assets, claiming prior valuations were inflated. The SEC even revoked the accreditation of the appraiser involved. 

Meanwhile, MVP of Meralco reportedly eyes Primewater, underscoring how political favor reshapes corporate fortunes. Where Villar faces contraction, SMC and its allies (Meralco, Aboitiz) secure expansion through administration‑blessed asset transfers. 

In any case, it is possible that the deal had administrative blessing—or at least the nudge, given the proximity of the principals involved. The other possible angle is that this could be an implicit bailout dressed up as a buy-in deal. 

But the more important point is this: 

Even political closeness cannot permanently mask structural insolvency. 

SMC is too big to fail on paper — but too debt-bloated to hide forever, or political cover buys time, not solvency. 

Segment 2.1 — Meralco: A Utility Showing Profit, But Hiding Stress 

2.1A. Chromite Gas Holdings: Meralco’s New Largest Exposure 

Meralco’s Chromite Gas Holdings investment has become its largest exposure among joint ventures and associates, carried at Php 84.08 billion in 2025. Yet, despite the size, Chromite has contributed no direct revenues so far. 

The assets acquired from San Miguel Global are framed as enhancing Meralco’s ability to deliver reliable, stable, and cost‑effective electricity—but the numbers tell a different story—one shaped more by accounting and regulatory pass-throughs than by genuine economic or demand strength. 

2.1B. Q3 and 9M Performance: Meralco’s Money Illusion Revenues

Figure 4 

The headline 4% GDP in Q3 exposed Meralco’s fragility: 

• Revenues in gwh: –2.08% YoY, –6.64% QoQ.
• Electricity sales in pesos: +7.09% YoY, –3.35% QoQ.
• 9M gwh sales: –0.37% YoY, while peso sales rose +6%.
• Profitability: +18.19% in Q3, +9.93% in 9M. 

This is classic money illusion: peso revenues rise while physical demand falls. (Figure 4, upper and lower graphs) 

Operational output is not driving earnings. Instead, tariff pass‑throughs, higher generation charges, and regulatory adjustments inflate nominal sales. It is a regulatory inflation windfall, not genuine demand strength. 

2.1C. GDP Mirage and Debt Surge and Asset Inflation 

Meralco’s results reinforce that Q3 GDP was effectively lower than the 4% headline once adjusted for inflation and real‑sector contraction. Nominal growth masks real decline—exactly the GDP mirage motif you’ve been threading. 

More troubling is the balance sheet: 

• Debt surged +139% to Php 213.4 billion.
• Assets inflated +34.5% to Php 792 billion. 

This scale of short‑term expansion is not normal for a utility. It only happens when major assets are shuffled, revalued, or purchased at non‑market prices. Capex and operations do not explain it. Asset transfers do. 

2.1D. What This Really Means: Meralco as the Balance-Sheet Absorber 

Regulated returns (tariff-based profits) look stable, but the underlying structure is growing riskier. A utility with: 

• falling physical demand,
• surging debt, and
• massive non-operational asset expansion

is not strengthening — it is absorbing leverage for some entity. 

And that entity is SMC. 

The Chromite/Ilijan/EERI structure effectively places Meralco in the role of balance-sheet absorber for San Miguel’s asset-lightening strategy. 

Meralco’s earnings stability conceals a fragile, debt-heavy balance sheet inflated by SMC-linked asset transfers, not by real demand or utility fundamentals 

Segment 2.2 – AEV: Revenue Spikes as Balance-Sheet Shock Absorption 

Almost the same story applies to Aboitiz Equity Ventures. 

While AEV publicly emphasizes energy security, stability, market dominance, and regulatory influence as its core priorities, the weakening macro economy reveals a different angle.

Figure 5 

AEV posted Q3 revenues of +19.6%, pushing net income up +12.8%. (Figure 5, upper visual) 

But on a 9M basis, revenues were only +2.84% while net income fell –10.6% — a clear mismatch between quarterly momentum and year-to-date weakness. 

In its 17Q report, AEV notes that fresh contributions from Chromite Gas Holdings, Inc. (CGHI) drove the 5% rise in equity earnings from investees. This aligns precisely with the pattern seen in Meralco: newly consolidated or newly transferred assets creating a one-off jump. 

Meanwhile, the balance sheet shows the real story: 

• Debt surged 24.3% to Php 460.7B
• Cash jumped 15% to Php 90.84B
• Assets expanded 14.94% to Php 971B 

A sudden Q3 revenue surge combined with a weak 9M total is entirely consistent with: 

• Newly absorbed assets booking revenue only after transfer
• Acquisition timing falling post–June 2025
• Consolidation effects appearing sharply in Q3 

This means the revenue spike is not organic growth — it is the accounting after-effect of assets acquired or transferred in 1H but only recognized operationally in Q3. 

AEV’s cash swelling amid rapid debt accumulation strongly suggests:

• bridging loans used during staged acquisition payments
• temporary liquidity buffers ahead of full transfer pricing
• staggered settlement structures typical in large utility-energy asset sales
• pending regulatory approvals delaying full cash deployment 

Cash rises first → debt stays elevated → assets revalue → revenue shows up later. 

This pattern is classic in large asset transfers, not in real economic expansion. 

2.2A AEV’s Q3–9M: Not Evidence of Business Growth 

They are the accounting shadow of San Miguel’s 1H asset unloading—financed by AEV’s debt surge and disguised as operational growth. 

What looks like stability is really fragility recycling: AEV, like Meralco, has become a balance-sheet counterparty absorbing the system-wide effects of SMC’s asset-lightening strategy, with short-term profitability masking long-term stress. 

Segment 3.0 — The Batangas LNG–Ilijan–EERI Triangle 

3.A How One Deal Created Three Balance-Sheet Miracles 

If Segment 2 showed the operational weakness across SMC, Meralco, and Aboitiz, Segment 3 explains why their balance sheets still looked strangely “strong.” 

The answer lies in one of 2025’s most consequential but least-understood restructurings: 

The Batangas LNG–Ilijan–EERI triangle. 

This single transaction is the hidden engine behind the debt spikes, asset jumps, and sudden income boosts in Q2–Q3. 

Once you see this triangle, everything else snaps into place. 

1. The Triangle in One Line 

This wasn’t three companies expanding. 

It was one deal split three ways, enabling:

• SMC to book gains and create a “deleveraging” illusion
• Meralco to justify its 139% debt explosion
• Aboitiz to absorb a 24% debt spike while looking “strategically positioned” 

All this happened without producing a single additional unit of electricity. 

While the EERI–Ilijan complex is designed to deliver 1,200–2,500 MW of gas-fired capacity, as of Q3 only 850 MW are fully operational and a 425 MW unit remains uncertified — meaning the promised output exists largely on paper, not yet in reliable commercial dispatch. This reinforces the point: the triangle deal moved balance sheets faster than it delivered power.

2. How the Triangle Worked 

Here’s the real flow: 

• SMC restructured and monetized its stakes in Ilijan, Excellent Energy Resources Inc. (EERI) and Batangas LNG terminal
• Meralco bought in — financed almost entirely by new debt
• AboitizPower bought in — also financed by new debt 

The valuation uplift flowed back to SMC, booked as income and “deleveraging progress” 

The result: 

• All three balance sheets expanded
• None of them improved real output
• This was transaction-driven balance-sheet inflation, not industrial growth. 

3. Why This Triangle Matters: It Solves Every Q3 Puzzle 

Without this transaction, Q3 numbers look impossible:

• Meralco’s debt doubling despite falling electricity volume
• AEV’s Php 90B debt jump despite declining operating income
• SMC’s “improving leverage” despite worsening cash burn 

Once the triangle is added back in, the contradictions vanish:

• Meralco and AEV levered up to buy SMC’s assets
• SMC booked the valuation uplift as earnings
• All three appeared financially healthier — e.g. cash reserves jumped— without becoming economically healthier (Figure 5, middle graph) 

Q3 looked disconnected from reality because it was. 

4. The Illusion of Progress 

On paper:

• SMC: higher profit
• Meralco: larger asset base
• AEV: greater scale 

In substance:

• SMC gave up future revenue streams
• Meralco and AEV loaded up on liabilities
• System-wide fragility increased— e.g. accelerates the rising trend of financing charges. (Figure 5, lowest chart) 

The triangle recycles the same underlying cash flows, but layers more leverage on them. 

This is growth by relabeling, not growth by production. 

5. What This Signals for 2025–2026 

The triangle exposes the real state of Philippine corporate finance:

• cash liquidity is tight
• banks are reaching their risk limits
• debt has become the default funding model
• GDP “growth” is being propped up by inter-corporate transactions, not capex
• conglomerates are supporting each other through balance-sheet swaps 

Most importantly: 

This is a leverage loop, not an investment cycle. The mainstream is confusing balance-sheet inflation for economic progress. 

The Batangas LNG–Ilijan–EERI triangle created no new power capacity. Instead, it created the appearance of corporate strength.

Segment 4.0: Conclusion: How Concentration Becomes Crisis: The Philippine Energy Paradox 

The Philippine energy sector operates as a political monopoly with only the façade of market competition. 

The triad of San Miguel, Aboitiz, and Meralco illustrates deepening centralization, pillared on a political–economic feedback loop. 

Major industry transactions, carried out with either administration blessing or tacit nudging, function as implicit bailouts channeled through oligarchic control. 

This further entrenches concentration, while regulatory capture blinds the BSP, DOE, and ERC to mounting risks—encouraging moral hazard and ever-bolder risk-taking in expectation of eventual government backstops. 

This concentration funnels public and private savings into monopolistic hands, fueling outsized debt that competes directly with banks and government borrowings, intensifying crowding-out dynamics, resulting in worsening savings conditions, suppressing productivity gains, and constraining consumer growth. 

Fragility risks do not stop with the borrowers: counterparties—savers, local and foreign lenders, banks, and bond markets—are exposed as well, creating the potential for contagion across the broader economy. 

The feedback loop is self-reinforcing: policies fuel malinvestments, these malinvestments weaken the economy, and weakness justifies further interventions that deepen concentration, heighten vulnerability, and accelerate structural maladjustments. 

Viewed through a theoretical lens, San Miguel’s ever-expanding leverage fits a Minsky-style financial instability pattern—now extending into deals that serve as camouflaged backstops. This reflects what I call "benchmark-ism": an engineered illusion of stability designed to pull wool over the public’s eyes, mirroring Kindleberger’s cycle of manipulation, fraud, and corruption. 

Taken together, these dynamics reveal unmistakable symptoms of late-cycle fragility. 

What is framed as reform is, in truth, a vicious cycle of concentration, political capture, extraction, and systemic decay. 

____ 

references 

Prudent Investor Newsletters, Q2–1H Debt-Fueled PSEi 30 Performance Disconnects from GDP—What Could Go Wrong, Substack, August 24, 2025 

Prudent Investor Newsletters, Is San Miguel’s Ever-Growing Debt the "Sword of Damocles" Hanging over the Philippine Economy and the PSE? December 02, 2024

 

2023 Philippine Banking Profits Up by 17.7%; BSP’s Twin Dilemma: Promoting Capital Markets by Subsidizing Universal Banks? The Real Estate Paradox

Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance, by repeated doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop, either because the banks are getting into a shaky condition or because the public begins to balk at the continuing inflation, that retribution finally catches up with the boom. As soon as credit expansion stops, then the piper must be paid, and the inevitable readjustments liquidate the unsound over-investments of the boom, with the reassertion of a greater proportionate emphasis on consumers' goods production. Thus, the Misesian theory of the business cycle accounts for all of our puzzles: The repeated and recurrent nature of the cycle, the massive cluster of entrepreneurial error, the far greater intensity of the boom and bust in the producers' goods industries—Murray N. Rothbard

 

In this issue

 

2023 Philippine Banking Profits Up by 17.7%; BSP’s Twin Dilemma: Promoting Capital Markets by Subsidizing Universal Banks? The Real Estate Paradox

I. 2023 Philippine Banking Profits Up by 17.7%: Powered by Net Interest Income as Non-Interest Income Declined

II. Corroding Bank Liquidity Amidst Record Peso Profits?

III. Underreported NPLs? The Slowing Real Estate Industry

IV. Market Losses Ease as Record Held-to-Maturity Assets Worsened Bank Liquidity Conditions

V. 2023: Universal-Commercial Bank Monopolization of Philippine Financial Resources

VI. BSP’s Twin Dilemma: Promoting Capital Markets by Subsidizing Universal-Commercial Banks? Real Estate Contradictions

 

2023 Philippine Banking Profits Up by 17.7%; BSP’s Twin Dilemma: Promoting Capital Markets by Subsidizing Universal Banks? The Real Estate Paradox

 

Though profits of Philippine banks increased by 17.7% in 2023, the industry's liquidity gap has only widened. Why? This post explains the BSP's Twin Dilemma on promoting the capital markets and the real estate paradox.

I. 2023 Philippine Banking Profits Up by 17.7%: Powered by Net Interest Income as Non-Interest Income Declined

 

Businessworld, February 12, 2024: THE NET INCOME of the Philippine banking industry rose by 14.4% last year amid higher interest income and trading gains, according to central bank data.  Banks’ net income rose to P354.93 billion from P310.12 billion in 2022, spurred by a 20% year-on-year increase in net interest income to P906.872 billion. Noninterest income fell by 15.8% to P218.93 billion from P259.89 billion in 2022.

 

Figure 1

 

The Philippine banking system reported 17.7% net income in 2023, down from 34.34% and 35.06% in 2022 and 2021. (Figure 1, topmost graph)

 

The 14.5% net income growth reported by the media accounted for the Q4 2023 performance. (Figure 1, middle chart) Q4's 14.5% was above Q3's 11.3% but signified the second-lowest growth rate since Q1 2021. Rising rates have capped bank net income.

 

Interestingly, interest income represented the bank's primary source of earnings, as non-interest income fell by 12.6% in 2023 and 15.8% in Q4, mainly from the decrease in profits from the sale of assets. (Figure 1, lowest diagram)

 

Figure 2

Yet, the ratio of net interest income to total operating income surged to record highs last Q4. (Figure 2, topmost chart)

 

Fascinatingly, the net interest income record surge comes amid the falling bank lending growth rate, whereas financial investments bounced in Q4. (Figure 2, middle pane) 

 

Last December, bank lending (exclusive of Interbank loans and Repo transactions) increased by 7.6%, the slowest rate since April 2022's 7.34%. 

 

Despite surging consumer loans, cascading supply-side loans—which made up the bulk—resulted in its slowdown.  Nonetheless, compared to the previous rate hikes of 2019, the impact of multi-year high rates has been minimal.

 

On the other hand, net investments jumped by 10.96%, the highest since August 2023.

 

Paradoxically, despite the record 2023 profits in peso, some banks continue to raise funding via the capital markets in 2024, namely, BDO's Php 63 billion sustainable bonds, Rizal Commercial Bank's USD 400 million unsecured sustainable bonds, and Union Bank's 10 billion stock rights offering.

 

Ironically too, the record net income comes amidst the surge in the banking system's funding costs, which have risen alongside the BSP's rates to 2019 levels. (Figure 2, lowest graph)

 

Figure 3

Further, despite higher rates, December reinforced the decreasing trend of deposit liabilities growth with 7.05%—a five-month low.  Peso deposits grew by 6% compared with the 13.2% of FX accounts. (Figure 3, topmost graph)

 

Last December, peso deposits comprised 84% of the total, while FX deposits accounted for the remaining 14%.

 

II. Corroding Bank Liquidity Amidst Record Peso Profits? 

 

Because of the insufficiency of deposit growth, banks have tapped the pricier capital markets for funding—mainly tilted towards short-term T-bills. (Figure 3, middle window)  

 

It has also increased access to the BSP's repo facilities. December repo transactions hit a record high. (Figure 3, lowest graph)

 

Figure 4

 

BSP data also shows the biggest-ever use of BSP securities (bills) by the financial system. (Figure 4, topmost window)

 

That's right.  Despite the profusion in published profits, the industry has been raising funding for short-term requirements.  Why? 

 

Based on BSP metrics, bank liquidity continues to erode.  

 

No matter how one slices and dices the data (monthly or annually), cash-to-deposits and liquid assets-to-deposits continue with their downtrend. (Figure 4, middle graph)

 

Corroding liquidity has not only been evident in the decreasing growth of bank loans, peso deposits, and cash reserves, but it also became apparent in M3 (from 7.01% in November to 5.9% in December). (Figure 4, lowest chart)

 

As a caveat, these conditions are in general.  However, several sectors have benefited from bank credit expansion or implied (selective) loosening of financial conditions, like the government, consumers, and real estate. 

 

Public debt closed the year at a record high of Php 14.62 trillion.  Total systemic leverage (bank credit and public debt) rose 8.53% YoY in December to a record Php 26.94 trillion.  The PSEi posted a 2.04% return in Q4 2023, fundamentally from the 7.97% November and December returns. 

 

Basically, while bank credit expansion slowed, it closed the year at record levels in pesos.

 

III. Underreported NPLs? The Slowing Real Estate Industry

Figure 5

 

Non-performing assets have reportedly been declining.  (Figure 5, topmost chart)

 

Increasing performing loans should optimize the use of bank resources, which should add to the bank's liquidity—unless underreporting has been rampant (also possibly shielded by relief measures).

 

The media provides clues on the likely understating of credit delinquencies.

 

Businessworld, February 13, 2024: THE VACANCY RATE for residential property in Metro Manila will likely hit up to 18% in the first quarter of 2024 due to the sizable completions of new condominium units, Colliers Philippines said.  “Residential vacancy definitely will not drop below 17%. Between 17.5-18%, that’s the vacancy that we’ll likely see for the first quarter of 2024,” Colliers Philippines Research Director Joey Roi H. Bondoc told BusinessWorld on the sidelines of a briefing last week. You still have sizable number of completed units on the market so it will take time before the vacancy drops,” he added. According to Mr. Bondoc, there is a “lukewarm demand” in the pre-selling or primary market due to higher interest rates and mortgage rates which discourage investors to buy completed condominium units. (bold mine)

 

The real estate sector is the biggest client of the banking system.

 

Because the total bank's real estate supply-side loans bounced strongly in the last three months of 2024 (October 8.2%, November 11.6%, and December 10.6%), their % share of total bank lending spiked to approach their highs in the 1H 2022.  (Figure 5, middle pane)

 

In the meantime, total bank construction loans also soared by 9.8% in October, 8.9% in November, and 10.1% in December.

 

"Real" Household construction GDP surged 9.6% in Q4 2023, while Financial and non-financial construction GDP grew by 5.6%. 

 

Meanwhile, "real" real estate (transactional: buy, sell, rent, and others) GDP grew by 5.6% in Q4 2023.

 

According to the BSP's real estate index as of Q3, NCR (all types of housing) prices surged by 12.3%, while national prices jumped by 12.9%.

 

The point of the above is that there was a brisk uptake in the supply side in the real estate sector nationwide, unsupported by demand for residential projects (in the NCR). 

 

And in support of these has been heightened speculative demand in the secondary market (reason for price increases).

 

The real estate sector has used excess liquidity (bank credit expansion) to bridge its financial deficits or liquidity gap.

Since the sector breathes in the oxygen of credit, it can't afford a genuine tightening by the BSP.   Also, the BSP won't tolerate a deflation in real estate values that adversely impacts collateral values, which backs bank loans that would rattle the banking sector's balance sheets.  That's why the BSP enforced an asymmetric policy, focusing on headline tightening accompanied by various exceptions.

 

Yet, due to the BSP's Universal Commercial bank lending restriction (which was extended from 20% to 25% in 2020), the published Real Estate loans could be underreported and shifted into other categories.  

 

Most importantly, the real estate's contribution to the national GDP has dropped to a record low in Q4 2023, even as their % share of the total bank lending rebounded to 20.2% (Figure 5, lowest chart)

 

And as previously predicted, due to "integrated communities," once confined to office spaces have spread to residential areas.

 

The thing is, though office spaces are the concern here, all other segments of the property sector constitute part of such "integrated communities," which therefore extrapolates to interconnection.  

 

By extension, it also means that the paradigm of "integrated community" is codependent not only on the vibrancy of the office properties but also residential, shopping malls, hotels, logistics and commercial hubs, and other related structures. 

 

Indeed, the dilemma of the office segment, the weakest link of the commercial real estate sector (CRE), should spread to other areas. (Prudent Investor 2013)

 

Therefore, unless disposable income and savings rise, high rates of vacancies are likely symptomatic of present and forthcoming credit delinquencies—which are also symptoms of overspending and malinvestments—that are about to impact the liquidity, balance sheet and income statements of the banking industry. It should affect the economy, over time, as well.

 

Surprisingly, the BSP noticed this too.  But they have been caught in a pickle (see below discussion on their 2023 Financial Stability Report). 

 

IV. Market Losses Ease as Record Held-to-Maturity Assets Worsened Bank Liquidity Conditions

 

Back to the bank’s balance sheet.

Figure 6

 

Net financial assets slipped from its All-Time High last December.  However, buoyant capital markets (fixed income and stocks) mitigated its mark-to-market losses by 59.8%, from Php 68.234 billion in November to Php 49.343 billion in December.  (Figure 6, topmost graph) Easing losses should have allayed the liquidity strains.

 

Last but not least, despite a bounce from a growth slowdown due to falling yields, the bank's held-to-maturity (HTM) continued to carve a streak of record highs. (Figure 6, middle window)

 

HTMs grew by 5.7% in December— to a record high of Php 4.022 trillion.  HTMs accounted for 16% of the banking system's total assets, 21.1% of deposit liabilities, and 138% of cash reserves.

 

Banks continue to amass HTMs primarily via net claims on central government (NCoCG) or due to the monetizing of public debt.   Bank NCoCG closed 2023 with Php 5.19 trillion. (Figure 6, lowest chart)

 

As previously explained, shielding mark-to-market deficits via juggling accounting identity through HTMs erodes bank liquidity.

 

The ultimate paradox is that market losses, under-declared NPLs, and record HTMs have drained bank liquidity conditions in the face of supposed record earnings.

 

V. 2023: Universal-Commercial Bank Monopolization of Philippine Financial Resources

 

But there is more.

 

In their latest Financial Stability Report, the BSP-led Financial Stability Coordinating Council (FSCC) argued that the capital markets must increase their contribution to economic financing.

 

Banks have long been the major funding source for the economy. Nothing in the current environment will change that. But bank loans must price credit risk and liquidity risk because the money they lent out is itself borrowed from the public. Provisioning takes the conservative view by adjusting the size of the balance sheet, but it does not rectify the liquidity gap should a loan account become payment impaired.

 

This is where we heed Greenspan’s reminder that spare tires are necessary where there is that unexpected flat tire. Capital market development has been a longstanding mantra, but this segment of the market remains modest vis-à-vis bank loans. Several initiatives have already been put in place. We look forward to more initiatives and, in particular, our attention is to provide corporates from different credit backgrounds with access to this market. This will require better signaling of risk pricing:

 

a. Updating of issuer and issue ratings through the credit cycle.

b. Determining spot rates to ensure comparability through properly discounted future cashflows.

c. Aligning risk pricing between loans and securities to reflect structuring and information costs (BSP FSCC, 2024) [bold original, italics mine]

 

Fascinating.  But the BSP's data shows otherwise.

Figure 7

In 2023, the total financial resources grew by 7.59% to an unprecedented Php 31.06 trillion or a record 147% of the 'real' GDP. (Figure 7, upper chart)

 

Bank financial resources grew by 8.62% to a milestone of Php 25.86 trillion or an unparalleled 122.8% of the GDP.  The bank's share of the total financial resources hit a historic 83.3%!

 

The gist of this growth emanated from Universal-Commercial banks, which expanded 8.43% to a landmark high of Php 24.26 trillion, or a monumental 115.2% of the headline GDP.   The UC bank share reached an epic 78.1% of the total! (Figure 7, lower diagram)

VI. BSP’s Twin Dilemma: Promoting Capital Markets by Subsidizing Universal-Commercial Banks? Real Estate Contradictions

 

Despite the fog of technical gobbledygook supposedly aimed at improving capital markets, the BSP seems to have ignored the following basics and facts:

 

-UC banks have been monopolizing financial resources at the expense of non-UC banks, non-bank financials, and the capital markets.  Monopolization (Too big to fail) redounds to mounting concentration risks.

 

-UC bank borrowings from the public (to fund the government) have contributed to the crowding out of the economic resources.

 

-The BSP seems to have forgotten a fundamental political-economic adage, popularly attributed to ex-US President Ronald Reagan, "If you want more of something, subsidize it; if you want less of something, tax it." 

 

Historic injections, unprecedented monetary policies, and unmatched relief measures have supported and continue to subsidize UC banks.

 

-Permitting the price rigging of the marketplace (or mispricing/falsified price signals) impacts the economy via the aggravation of the accumulation of misallocation of resources (malinvestments).

 

-Boom-bust cycles from the constant intervention or manipulation of interest rates (low rates) consume savings and capital, weakening the economy over time (via malinvestments) while increasing various credit-related and market risks channeled through the banking system. The growing liquidity gap is an expression of this.

 

Present or incumbent policies contribute to entropy and not the development of the capital markets.

 

Going back to the quandary over real estate conditions, the BSP seems caught in a bind.

 

Real estate will always be closely monitored given its stylized role in the boom-and-bust cycle. At present, there seems to be some surprising trends in the residential sector, with prices rising in tandem with vacancies. With the loan portfolio of banks significantly invested in real estate activities, prudence requires a second look. Are housing prices rising because of the rising cost of construction and development? Is this, instead, an indication of generational wealth planning getting ahead of the supply that has been delayed by COVID-19? Or is this a more ominous sign? (BSP FSCC, 2024) [bold italics mine]

 

The boom cycle is not a sign of strength.  Instead, these are speculative activities funded by easy money or loose financial conditions that lead to a bust. In short, the artificial boom results in a bubble bust.

Engineering a stock market bubble, comprising part of boom-bust cycles, only worsens such imbalances. 

___

References

Murray Rothbard, Economic Depressions: Their Cause and Cure, Mises.org, June 25, 2012

 

Prudent Investor, Philippine Real Estate: Mainstream Expert Worried Over Increasing Demand-Supply Gap; Q1 2023 Data of Top 5 Listed RE Firms and the Property Index, May 29, 2023

 

FINANCIAL STABILITY COORDINATION COUNCIL, 2023 FINANCIAL STABILITY REPORT December 2023, BSP.gov.ph, p.39 and p.38