Debt-fueled booms all too often provide false affirmation of a government’s policies, a financial institution’s ability to make outsized profits, or a country’s standard of living. Most of these booms end badly—Carmen Reinhart and Kenneth Rogoff
Philippine Banks: June’s Financial Losses and Liquidity Strains Expose Late-Cycle Fragility
In this issue:
Part 1: Earnings Erosion and the Mask of Stability
1.A NPLs Fall, But Provisions Rise: A Tale of Two Signals
1.B Philippine Bank’s Profit Growth Falters: Q2 Deficit
Breaks the Streak
1.C Universal and Commercial Banks Lead the Weakness; PSE
Listed Banks Echo the Slowdown
1.D Income Breakdown: Lending Boom Masks Structural Risk
1.E CMEPA’s Gambit: Taxing Time Deposits to Diversify
Bank Income
1.F The Real Culprit: Exploding Losses on Financial
Assets
1.G San Miguel’s Share Plunge: A Canary in the Credit
Mine? Beneath the Surface: Banks Signal Stress
1.H The NPL Illusion: Velocity Masks Vulnerability
1.I Benchmark Kabuki: When Benchmark-ism Meets Market
Reality
Part 2: Liquidity Strains and the Architecture of
Intervention
2.A Behind the RRR Cuts: Extraordinary Bank Dependence on
BSP
2.B RRR Infusions: Liquidity Metrics Rebound; Weak Money
Creation Amid Record Deficit Spending
2.C Rising Borrowings Reinforce Funding Strains, Crowding
Out Intensifies, Record HTM Assets
2.D Divergence: Bank Profits, GDP and the PSE’s Financial
Index; Market Concentration
2.E OFCs and the Financial Index: A Coordinated Lift?
2.F Triple Liquidity Drain; Rescue Template Risks:
Inflation, Stagflation, Crisis; Fiscal Reflex: Keynesian Response Looms
2.G Finale: Classic Symptoms of Late-Cycle Fragility
Philippine Banks: June’s Financial Losses and Liquidity Strains Expose Late-Cycle Fragility
From earnings erosion to monetary theatrics, June’s data shows a banking system caught in late-cycle strain.
Part 1: Earnings Erosion and the Mask of Stability
1.A NPLs Fall, But Provisions Rise: A Tale of Two Signals
Inquirer.net August Bad loans in the Philippine banking system fell to a three-month low in June, helped by the central bank’s ongoing interest rate cuts, which could ease debt servicing burden. However, lenders remain cautious and have increased their provisions to cover possible credit losses. Latest data from the Bangko Sentral ng Pilipinas (BSP) showed nonperforming loans (NPL), or debts that are 90 days late on a payment and at risk of default, cornered 3.34 percent of the local banking industry’s total lending portfolio. That figure, called the gross NPL ratio, was the lowest since March 2025, when the ratio stood at 3.30 percent.
But the NPL ratio masks a deeper tension: gross NPLs rose 5.5% year-on-year to Php 530.29 billion, while total loans expanded 10.93% to Php 15.88 trillion. The ratio fell not because bad loans shrank, but because credit growth outpaced them.
Loan loss reserves rose 5.5% to Php 505.91 billion, and the NPL coverage ratio ticked up to 95.4%. Past due loans climbed 9.17% to Php 670.5 billion, and restructured loans rose 6.27%. Provisioning for credit losses ballooned to Php 84.19 billion in 1H 2025, with Php 43.78 billion booked in Q2 alone—the largest since Q4 2020’s pandemic-era spike.
So, while the establishment cites falling NPL ratios to reassure the public, banks are quietly bracing for defaults and valuation hits—likely tied to large corporate exposures. The provisioning surge is a tacit admission: risk is rising, even if it hasn’t yet surfaced in headline metrics.
1.B Philippine Bank’s Profit Growth Falters: Q2 Deficit
Breaks the Streak
Figure 1
Philippine banks posted their first quarterly profit contraction in Q2 2025, down -1.96% YoY—a sharp reversal from Q1’s 10.64% growth and Q2 2024’s 5.21%. This marks the first decline since Q3 2023’s -11.75%. (Figure 1, upper window)
Even more telling, since the BSP’s historic rescue of the banking system in Q2 2021, net profit growth has been trending downward. Peso profits etched a record in Q1 2025, but fell in Q2.
The Q2 slump dragged down 1H performance: bank profit growth slipped to 4.14%, compared to 2H 2024’s 9.77%, though slightly higher than 1H 2024’s 4.1%.
1.C Universal and Commercial Banks Lead the Weakness; PSE Listed Banks Echo the Slowdown
Earnings growth of universal-commercial (UC) banks sank from 8.6% in Q1 2025 to a -2.11% deficit in Q2.
UC bank profits grew 6.33% in Q2 2024. Still, UC banks eked out a 3.1% gain in 1H 2025 versus 5.3% in the same period last year. UC banks accounted for 93.1% of total banking system profits in 1H 2025—underscoring their dominance or concentration but also their vulnerability.
PSE listed banks partially echoed BSP data. (Figure 1, Lower Table)
Aggregate earnings growth for all listed banks hit 6.08% in Q2 and 6.77% in 1H—down from 10.43% and 9.95% in the same periods last year. The top three banks in the PSEi 30 (BDO, BPI, MBT) reported combined earnings growth of 4.3% in Q2 and 5.31% in 1H 2025, substantially lower compared to 13.71% and 15.4% in 2024.
The discrepancy between BSP and listed bank data likely stems from government, foreign, and unlisted UC banks—whose performance may be masking broader stress.
1.D Income Breakdown: Lending Boom Masks Structural Risk
What explains the sharp profit downturn?
Figure 2
Net interest income rose 11.74% in Q2, while non-interest income increased 14.7%—slightly higher than Q1’s 11.7% and 14.5%, respectively. However, net interest income was lower than Q2 2024’s 14.74%, while non-interest income rebounded from -5.71% in the same period. (Figure 2, topmost chart)
In 1H 2025, net interest income grew 11.7%, and non-interest income rose 14.6%, compared to 15.53% and -8.83% in 1H 2024. Net interest income now accounts for 82.5% of total bank profits—a fresh high, reflecting the lending boom regardless of BSP’s rate levels.
This share has reversed course since 2013, rising from ~60% to 77% by end-2024—driven by BSP’s easy money policy and historic pandemic-era rescue efforts. Banks’ income structure resembles a Pareto distribution: highly concentrated, and extremely susceptible to duration and credit risks.
BSP’s easing cycle has not only failed to improve banks’ core business, but actively contributed to its decay.
1.E CMEPA’s Gambit: Taxing Time Deposits to Diversify Bank Income
The government’s response has been the Capital Market Efficiency Promotion Act (CMEPA). CMEPA, effective July 2025, imposes a flat 20% final withholding tax on all deposit interest income, including long-term placements.
By taxing time deposits, policymakers aim to push savers into capital markets, boosting bank non-interest income through fees, trading, and commissions. But in reality, this is financial engineering. (Figure 2, middle graph)
With weak household savings and low financial literacy, deposit outflows will likely shrink banks’ funding base rather than diversify their revenues.
It would increase time preferences, leading the public to needlessly take risks or gamble—further eroding savings.
Or, instead of reducing fragility, CMEPA risks layering volatile market income on top of an already over-concentrated interest income model.
We’ve previously addressed CMEPA—refer to earlier posts for context (see below)
1.F The Real Culprit: Exploding Losses on Financial Assets
Beyond this structural weakness, the real culprit behind the downturn was losses on financial assets.
In Q2 2025, banks posted Php 43.78 billion in losses—the largest since the pandemic recession in Q4 2020—driven by Php 49.3 billion in provisions for credit losses! (Figure 2, lowest image)
For 1H 2025, losses ballooned 64% to Php 73.6 billion, with provisions reaching Php 84.19 billion.
Once again, this provisioning surge is a tacit admission: while officials cite falling NPL ratios, banks themselves are bracing for valuation hits and potential defaults, likely tied to concentrated corporate exposures.
1.G San Miguel’s Share Plunge: A Canary in the Credit
Mine? Beneath the Surface: Banks Signal Stress
Figure 3
Could this be linked to the recent collapse in San Miguel [PSE: SMC] shares?
SMC plunged 14.54% WoW (Week on Week) as of August 15th, compounding its YTD losses to 35.4%. (Figure 3, upper diagram)
And this share waterfall happened before its Q2 17Q 2025 release, which showed debt slipping slightly from Php 1.511 trillion in Q1 to Php 1.504 trillion in 1H—suggesting that the intensifying selloff may have been driven by deeper concerns. (Figure 3, lower visual)
SMC’s Q2 (17Q) report reveals increasingly opaque cash generation, aggressive financial engineering, and unclear asset quality and debt servicing capacity.
Yet, paradoxically, Treasury yields softened across the curve—hinting at either covert BSP intervention through its institutional cartel, a dangerous underestimation of contagion risk, or market complacency—a lull before the credit repricing storm.
If SMC’s debt is marked at par or held to maturity, deterioration in its credit profile wouldn’t show up as market losses—but would require provisioning. This provisioning surge is a tacit admission: banks are seeing heightened risk, even if it’s not yet reflected in NPL ratios or market pricing.
We saw this coming. Prior breakdowns on SMC are archived below.
Of course, this SMC–banking sector inference linkage still requires corroborating evidence or forensic validation—time will tell.
Still, one thing is clear: banks are exhibiting mounting stress—underscoring the BSP’s resolve to intensify its easing cycle through rate cuts, RRR reductions, deposit insurance hikes, and a soft USDPHP peg. The ‘Marcos-nomics’ debt-financed deficit spending adds fiscal fuel to this monetary response.
1.H The NPL Illusion: Velocity Masks Vulnerability
Figure 4
NPLs can be a deceptive measure of bank health. Residual regulatory reliefs from the pandemic era may still distort classifications, and the ratio itself reflects the relative velocity of bad loans versus credit expansion.
Both gross NPLs and total loans hit record highs in peso terms in June—Php 530.29 billion and Php 15.88 trillion, respectively—but credit growth outpaced defaults, keeping the NPL ratio artificially low at 3.34%. (Figure 4, topmost pane)
The logic is simple: to suppress the NPL ratio, loan velocity must accelerate faster than the accumulation of bad debt. Once credit expansion stalls, the entire kabuki collapses—and latent systemic stress will surface.
1.I Benchmark Kabuki: When Benchmark-ism Meets Market Reality
This is where benchmark-ism hits the road—and skids. The system’s metrics, once propped up by interventionist theatrics, are now showing signs of exhaustion.
These are not isolated anomalies, but worsening symptoms of prior rescues—now overrun by the law of diminishing returns.
And yet, the response is more of the same: fresh interventions to mask the decay of earlier ones. Theatrics, once effective at shaping perception, are now being challenged by markets that no longer play along.
The system’s health doesn’t hinge on ratios—it hinges on velocity. Velocity of credit, of confidence, of liquidity. When that velocity falters, the metrics unravel.
And beneath the unraveling lies a fragility that no benchmark can disguise.
Part 2: Liquidity Strains and the Architecture of Intervention
2.A Behind the RRR Cuts: Extraordinary Bank Dependence on BSP
There are few signs that the public grasps the magnitude of developments unfolding in Philippine banks.
The aggregate 450 basis point Reserve Requirement Ratio (RRR) cuts in October 2024 and March 2025 mark the most aggressive liquidity release in BSP history—surpassing even its pandemic-era response. (Figure 4, middle chart)
Unlike previous easing cycles (2018–2019, 2020), where banks barely tapped BSP liquidity, the current drawdown has been dramatic.
As of July, banks had pulled Php 463 billion since October 2024 from the BSP (Claims on Other Depository Corporations)—Php 84.6 billion since March and Php 189.2 billion in June. Notably, 40.9% of the Php 463 billion liquidity drawdown occurred in July alone.
This surge coincides with mounting losses on financial assets and record peso NPLs—masked by rapid credit expansion, which may be a euphemism for refinancing deteriorating debt. Banks’ lending to bad borrowers to prevent NPL classification is a familiar maneuver.
When banks incur significant financial losses—whether from rising NPLs, credit impairments, or mark-to-market declines—the immediate impact is not just weaker earnings but a widening hole in their funding structure. The December 2020 episode, when the system booked its largest financial losses, highlighted how such shocks create a liquidity vacuum: instead of recycling liquidity through lending and market channels, banks are forced to patch internal shortfalls, draining capital buffers and eroding interbank trust.
Into this vacuum steps the BSP. Reserve requirement cuts, while framed as policy easing, have functioned less as a growth stimulus and more as a liquidity lifeline. By drawing on their balances with the BSP, banks convert regulatory reserves into working liquidity—filling gaps left by financial losses. The outcome is growing dependence on central bank support: what appears as easing is in fact the manifestation of extraordinary support, with liquidity migrating from market sources to the BSP’s balance sheet.
This hidden dependence underscores how financial repression has hollowed out market-based liquidity, leaving the BSP as the primary lender of first resort
2.B RRR Infusions: Liquidity Metrics Rebound; Weak Money Creation Amid Record Deficit Spending
The liquidity drawdown has filtered
into banks’ cash positions. As of June, peso cash reserves rebounded—though
still down 19.8% year-on-year. Cash-to-deposit ratios rose from 9.87% in May to 10.67% in
June, while liquid assets-to-deposits climbed from 47.29% to 49.24%. (Figure 4,
lowest image)
Figure 5
RRR-driven cash infusions also lifted deposits. Total deposit growth rebounded from 4.96% in May to 5.91% in June, led by peso deposits (3.96% to 6.3%) and supported by FX deposits (4.42% to 6.8%). (Figure 5, topmost graph)
Yet paradoxically, despite a 10.9% expansion in Total Loan Portfolio and ODC drawdown, deposits only managed modest growth—suggesting a liquidity black hole. CMEPA’s impact may deepen this imbalance.
Despite record deficit spending in 1H 2025, BSP currency issuance/currency in circulation growth slowed from 9% in June to 8.1% in July, after peaking at 14.7% in May during election spending. Substantial money creation has not translated into higher CPI or GDP, and the slowdown suggests a growing demand problem. (Figure 5, middle diagram)
Even with July’s massive ODC drawdown, BSP’s cash in circulation suggests a financial cesspool has been absorbing liquidity—offsetting whatever expansionary efforts are underway.
2.C Rising Borrowings Reinforce Funding Strains, Crowding Out Intensifies, Record HTM Assets
After a brief slowdown in May, bank borrowings surged anew by 24% in June to Php 1.85 trillion, nearing the March record of Php 1.91 trillion. Escalating liquidity strains are pushing banks to increase funding from capital markets. (Figure 5, lowest pane)
This intensifies the crowding-out effect, as banks compete with the government and private sector for access to public savings.
Figure 6
Meanwhile, as predicted, record-high public debt has translated to greater bank financing of government via Net Claims on the Central Government, showing up in banks’ record-high Held-to-Maturity (HTM) assets. HTM assets have become a prime contributor to tightening liquidity strains in the banking system. (Figure 6, topmost graph)
2.D Divergence: Bank Profits, GDP and the PSE’s Financial Index; Market Concentration
Despite slowing profit growth, the PSE’s Financial Index—composed of 7 banks (BDO, BPI, MBT, CBC, AUB, PNB, SECB) plus the PSE—hit a historic high in Q1 2025, before dipping slightly in Q2. (Figure 6, middle visual)
Meanwhile, the sector’s real GDP partially echoed profits, reinforcing the case of a downturn.
Financial GDP dropped sharply from 6.9% in Q1 2025 and 8% in Q2 2024 to 5.6% in Q2 2025. It accounted for 10.4% of national GDP in Q2, down from the all-time high of 11.7% in Q1—signaling deeper financialization of the economy. (Figure 6, lowest chart)
Figure 7
Bank GDP slowed to 3.7% in Q2 from 4.9% in Q1 2025, far below the 10.2% growth of Q2 2024. Since Q1 2015, bank GDP has averaged nearly half (49.9%) of the sector’s GDP. (Figure 7, topmost window)
Thanks to the BSP’s historic rescue, the free-float market cap weight of the top three banks (BDO, BPI, MBT) in the PSEi 30 rose from 12.76% in August 2020 to 24.37% by mid-April 2025. As of August 15, their share stood at 21.8%, rising to 23.2% when CBC is included. (Figure 7, middle chart)
This concentration has cushioned the PSEi 30 from broader declines—suggesting possible non-market interventions in bank share prices, while amplifying concentration risk.
2.E OFCs and the Financial Index: A Coordinated Lift?
BSP data on Other Financial Corporations (OFCs) reveals a dovetailing of ODC activity with the Financial Index. OFCs—comprising non-money market funds, financial auxiliaries, insurance firms, pension funds, and money lenders—appear to be accumulating bank shares, possibly at BSP’s implicit behest.
In Q1 2024, BSP noted: "the sector’s claims on depository corporations rose amid the increase in its deposits with banks and holdings of bank-issued equity shares."
This suggests a coordinated effort to prop up bank share prices—masking underlying stress. (Figure 7, lowest graph)
Once a bear market strikes key bank shares and the financial index, losses will add to liquidity stress. Economic reality will eventually expose the choreography propping up both the PSEi 30 and banks.
2.F Triple Liquidity Drain; Rescue Template Risks: Inflation, Stagflation, Crisis; Fiscal Reflex: Keynesian Response Looms
In short, three
sources of liquidity strain now pressure Philippine banks:
- Record holdings of Held-to-Maturity assets
- Rising Financial losses
- All-time high non-performing loans
If BSP resorts to its 2020–2021 pandemic rescue template, expect the USDPHP to soar, inflation to spike, and rates to rise—ushering in stagflation or even possibly a debt crisis.
With the private sector under duress from mounting bad credit, authorities—guided by top-down Keynesian ideology—are likely to resort to fiscal stimulus to boost GDP and ramp up revenue efforts.
2.G Finale: Classic Symptoms of Late-Cycle Fragility
Velocity-dependent metrics are poised to unravel once credit growth stalls. Liquidity dependence is paraded as resilience. Market support mechanisms blur price discovery. Policy reflexes recycle past interventions while ignoring structural cracks.
Losses are being papered over with liquidity, fiscal deficits are substituting for private demand, and the veneer of stability rests on central bank backstops. This choreography cannot hold indefinitely. If current trajectories persist, the risks are stark: stagflation, currency instability, and a potential debt spiral.
The metrics are clear. The real story lies in the erosion of velocity and the quiet migration from market discipline to state lifelines. What appears resilient today may be revealed tomorrow as fragility sustained on borrowed time.
As the saying goes: we live in interesting times.
____
Prudent Investor Newsletter Archives:
1 San Miguel
- Is San Miguel’s Ever-Growing Debt the "Sword of Damocles" Hanging over the Philippine Economy and the PSE? December 02, 2024 (substack)
- Escalating Systemic Risk: As Cash Reserves Plummeted, San Miguel’s 9M Debt Zoomed to an Astonishing Php 1.405 TRILLION! November 20, 2023 (substack)
Just among the many…
2 CMEPA
- The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback July 27, 2025 (substack)
- The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design July 20,2025 (substack)
