Showing posts with label liquidity crunch. Show all posts
Showing posts with label liquidity crunch. Show all posts

Sunday, July 21, 2024

The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects


In economics, hope and faith coexist with great scientific pretension and also a deep desire for respectability—John Kenneth Galbraith 

In this issue

The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects

I. 2024 SONA Pump: Are Philippine Stocks and the Peso Immune to Global De-Risking and Deleveraging?

II. The History of BBM's Pre-SONA PSEi 30 Pumps 

III. Explaining the Index Pump: Concentrated Gains and Rotational Activities

IV. 2024 SONA Pumps: Concentrated Trading Activities amidst Decadent Volume

V. 2024 SONA Pumps: Concentration in Broker Activities with Marginal Brokers Squeezed Dry 

VI. More Signs of Liquidity Squeeze: Decaying Market Depth and Weakening Market Breadth 

VII. Divergent Signals from the SONA 2024 Pump: Key Points to Ponder

VIII. 2024 SONA Pump: Foreign Money Cushions Domestic Savings Deficiency

IX. 2024 SONA Pump: Engineered by Domestic Financial Institutions?

X. 2024 SONA PUMP: PSEi 30 at 6,800: Windfall from Liquidity Expansion and Conclusion 

The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects 

As the Philippine President is about to deliver his third SONA, the PSEi 30 has surged for a fourth straight week to 6,800. What makes these gains artificial? 

I. 2024 SONA Pump: Are Philippine Stocks and the Peso Immune to Global De-Risking and Deleveraging? 

The Philippine PSEi 30 closed the week ending July 19th just shy of the 6,800 level. 

Philstar.com, July 20: The local stock market inched its way closer to the 6,800-level, finishing the week on a high note despite a downtrend in Asian shares. The local stock market inched its way closer to the 6,800-level, finishing the week on a high note despite a downtrend in Asian shares… a stronger peso and optimistic economic prospects buoyed local market sentiment… also anticipating the second quarter corporate earnings results. 

In addition to the above, 'strong net foreign buying' contributed to this outperformance. 

Previously, a more prominent explanation had been expectations of rate cuts by the Fed and potential monetary easing by the BSP. 

Financial market news coverage has been mechanically influenced by current events—specifically, the 'availability bias' described in post hoc narratives: because of this event, therefore that. As a result, recent events receive disproportionate attribution and focus. 

However, there seems to be a crucial event missing from this coverage: the political leadership is slated to deliver the annual State of the Nation Address (SONA) on July 22nd, Monday. 

Figure 1 

With a 2.16% advance this week, the PSEi 30 has enjoyed its fourth consecutive weekly winning streak. This weekly gain has propelled the Philippine benchmark to be the second-best performer among its regional peers, following Mongolia’s MSE. (Figure 1, topmost image) 

Remarkably, the PSEi outperformed amidst a prevailing downturn in the Asian market, where 12 out of the 19 national benchmarks closed lower by an average of 0.53%. 

Furthermore, the increased risk appetite for Philippine assets was also reflected in the Philippine peso, which was the only Asian currency to advance this week amidst a strong USD. (Figure 1, middle graph) 

The US dollar index $DXY grew by 0.27% WoW, but eight of the nine regional currencies, excluding Japan, closed lower. 

The USD-Philippine peso $USDPHP retraced by 0.08%, from last July 12’s quote of Php 58.38 to Php 58.335. 

While the yield of the Philippine 10-year bond dived a week earlier, paving the way for its outperformance in the region, it remained unchanged this week as most of the regional peers experienced declines. (Figure 1, lowest diagram)

Figure 2

In contrast, Emerging Asia’s 5-year credit default swap (CDS) exhibited a 520-basis points spike in Philippine CDS (ADB data), indicating that while it comes from a low base, a sustained regional risk-off sentiment could reverse any recent gains. China’s CDS soared by 930 bps. (Figure 2, topmost and middle charts) 

How do the causalities cited by the local media fit into this context? 

The strengthening dollar, falling bond yields, declining stocks, and rising CDS are likely symptoms of de-risking and deleveraging in the face of slowing economies and potential rate cuts. 

Are Philippine stocks and the peso suggesting immunity to this emerging phenomenon? 

II. The History of BBM's Pre-SONA PSEi 30 Pumps

Here is the most important thing the echo chamber has critically missed: 

Since the inauguration of the incumbent President in 2022, the PSEi 30 has enjoyed a series of pre-State of the Nation Address (SONA) pumps. 

The incumbent's previous SONAs were on July 25, 2022, and July 24, 2023. 

From the 6,065.23 trough on June 23, 2022, the PSEi 30 soared to a peak of 6,863.86 on August 19 of the same year, delivering a 13.17% return. (Figure 2, lowest graph) 

The PSEi 30 then surrendered all of those gains and more but found a second post-election honeymoon in October, alongside the UK’s Bank of England (BoE) rescue of its emerging pension crisis, which saw global stocks bottom and reverse to the upside. 

The second SONA pump began on July 7, 2023. It emerged from an interim low of 6,379.03 to reach an interim high of 6,679.13 on July 26, 2023, resulting in a 4.7% return. 

In both instances, the PSEi 30 surrendered all its fleeting gains in no time. 

The third SONA pump came at the temporary bottom of 6,158.48 on June 21, 2024, following the Ayungin Shoal incident. Through July 19th or at 6,791.69, the PSEi 30 has returned by 10.3%. 

How will this time be different compared to its recent predecessors? 

Nota Bene: The SONA pumping cycle doesn’t necessarily end on its actual date, as factors such as momentum and domestic and local liquidity flows may determine its lifespan. 

III. Explaining the Index Pump: Concentrated Gains and Rotational Activities 

Why is it an index pump?


Figure 3

This week's 2.16% gain represents the largest week-before-SONA returns. (Figure 3, topmost chart). The difference between the present and previous environments doesn't provide a relevant comparison or suitable probabilities for making a forecast. For instance, the political-economic landscape of 2009 and 2010 was influenced by the climax of the Great Financial Crisis. 

This week’s gains were once again concentrated on the (free float) market cap heavyweights. 

While it may be true that 20 of the 30 member issues were up this week, the outsized gains of the top 10 issues, which carried an astounding 72% share of the PSEi 30 (as of July 19th), delivered the gist of this week’s 2.16%. (Figure 3, middle graph) 

On average (equal-weighted price change), the weekly return was only .92%. 

The substantial difference between the average and the change in the headline index was principally due to the free float weights. 

And this week’s activities resonated with the last four-week performance. 

Fundamentally, while the PSEi 30 was up 10.3% from June 21st to July 19th, the accrued gains were largely derived from the top 5. 

Again, while 22 of the 30 member issues rose during this period, the average gain was 5.48% indicating the spread caused by distortions of the free float market cap relative to the equal-weighted price change. (Figure 3, lowest visual) 

Moreover, the top 5 issues, which expanded by an average of 15.4%, accounted for most of the 5.5% four-week average growth. 

Figure 4

In addition, the 51.17% pie of the top 5 heavyweights have drifted close to their recent milestone levels, with the index pumps rotating among the heavyweights. (Figure 4, topmost graph)

That is, shifting or rotational pumps from ICTSI to the financial 3 to the other market cap heavies—which presently includes the real estate members! (Figure 4, middle and lowest windows)

IV. 2024 SONA Pumps: Concentrated Trading Activities amidst Decadent Volume

Figure 5

Aside from the incredible pre-closing pumps and dumps contributing to the headline returns, the 2024 version of SONA pumps has emerged against the backdrop of a DETERIORATING mainboard volume! (Figure 5, topmost graph)

As an aside, we omitted posting recent charts of pre-closing massive pumps and dumps to conserve space.

At least there was some volume surge in previous SONA pumps, which is certainly lacking today. And incredibly, little is known about how cross-trades have padded such low-volume pumps.

However, it has not just been the PSEi 30 market cap weightings; the lean trading volume has also been concentrated among the heavyweights.

For instance, the Sy Group's share of the main board volume has been rising in support of the pumps to its shares. (Figure 5, middle pane)

Additionally, the volume share of the top 20 traded issues accounted for 83.6% over the 4-week period, slightly higher than the 83.1% year-to-date. This means that less than 20% of the volume has been dispersed among the other 264 listed companies. Duh!

The PSE noted that there are 284 listed firms as of the second quarter. 

V. 2024 SONA Pumps: Concentration in Broker Activities with Marginal Brokers Squeezed Dry

More to this point:

Although the overwhelmingly dominant share of the top 10 brokers decreased from 59.16% YTD to 57% in the four-week SONA pump, the number of total active participating brokers fell to its lowest level (since I began plotting it). (Figure 5, lowest image)

This means that while transactional volume has spread to a wider scope of brokers, which is good news, the plunge in the active share of participants implies that current conditions have squeezed the marginal brokers, which is bad news.

The PSE also noted that there are a total of 122 active brokers in their Second Quarter Report. 

Could this be confirmation of our prediction that a large segment of marginal brokers will become extinct soon?

And the above data reveals the extent of concentration of trading volumes and trading participants to an elite cabal, who are likely managing the PSEi 30 levels.

VI. More Signs of Liquidity Squeeze: Decaying Market Depth and Weakening Market Breadth

Figure 6

Naturally, the insufficiency in volume and market depth translates to the underperformance of market breadth.

While this week's market internals showed advancing issues marginally higher by 53 against declining issues, from the June 21st low to the present (SONA pump 2024), decliners remained ahead of advancers 1,924 to 1,888, a spread of 36 in favor of decliners.

This means that the headline performance has starkly diverged from the PSE universe. Incredible.

Another likely indicator of general market sentiment is the participation level of traded issues.

Unlike in the prior SONAs where the number of traded issues saw slight increases, we have been witnessing the opposite in the present conditions—a contraction!

The decreasing rate of average daily traded issues accentuates the ongoing liquidity squeeze at the PSE.

Other measures, such as the average daily number of trades and the average daily volume per trade, exhibit the same worsening liquidity drought.

VII. Divergent Signals from the SONA 2024 Pump: Key Points to Ponder

Yet, for prudent investors, here are some critical points to ponder:

-How can this be a bullish sign when the 10% increase in the Index has been accompanied by a drought in volume supported by stagnant participation and decaying breadth?

-Why would the increasing concentration of the index, trading, and market activities not signify an INCREASING risk to financial stability?

-How could the ARTIFICIAL embellishment of the index signify a bullish sign?

Lastly, why and how would these orchestrated campaigns to impose price distortions not magnify increasing imbalances and malinvestments in the PSE, the local capital markets, and the economy?

VIII. 2024 SONA Pump: Foreign Money Cushions Domestic Savings Deficiency

What is the source of financing for the SONA pump?

In essence, savings or credit are the sources of investments (real or financial).

Under the classical gold standard, credit represents the savings of another individual, intermediated by depository institutions.

Under the current fiat money, the US dollar standard, credit can account for "money from thin air."

How has the PSE's low volume signified a sign of increased savings? Or has institutional money been tapping credit for the SONA pump?

Or has the PSEi 30 been reliant on foreign savings and leverage (carry trades)?

PSE data provides some clues:

True, aggregate foreign money flows surged to PHP 2.8 billion this week, the largest since May 17, 2024. 

However, the degree of flow has failed to boost the PSEi 30 during the SONA pump in 2023 and may represent a temporary dynamic today.

As it stands, in the world of global financialization, foreign money flows may account for fund flows by affiliates or subsidiaries of PSE-listed firms registered abroad and offshore firms of allies and colleagues, rather than from money managers in search of higher returns.

These fund flows may be used to artificially inflate statistics to show increased interest by foreigners "to paint the tape."

In any case, while foreign flows cushioned the ongoing decline in trading volume this week, these inflows accounted for a mere PHP 93.6 million from the June 21st trough. 

The spike in this week's flows reveals that foreign flows have largely been absent in the previous three weeks, and it is likely that the 2024 SONA pump has been engineered by domestic financial institutions. 

Our guess: Could this partly be the handiwork of the Maharlika Sovereign Wealth Fund and other government financial institutions? 

More importantly, despite foreign flows, trading volume remains in the doldrums, exposing only the deficiency in savings. 

Yes, the Philippine Statistics Authority declared an increase in gross savings in 2023. However, the broader picture tells us a different story: a marginal rebound following a collapse. 

Yet, questionably, this savings data is determined by GDP! 

IX. 2024 SONA Pump: Engineered by Domestic Financial Institutions?

There are clues pointing to this possibility. 

The SONA pumps may involve Other Financial Corporations (OFCs). 

For instance, according to BSP data covering Q3 2023: "Based on preliminary results of the Other Financial Corporations Survey, the domestic claims of the other financial corporations grew by 2.4 percent in Q3 2023… the other financial corporations’ claims on the other sectors, particularly the private sector, grew as the sector extended more loans to households and increased its holdings of equity shares in other nonfinancial corporations" (bold added)

Figure 7 

Claims on the private sector surged at the end of Q2 2023 going into Q3 2023. (Figure 7, topmost graph) 

Did flows from the OFCs account for the SONA 2023 pump? 

What about in 2022? 

While the Q3 2022 data was silent on claims on the private sector, the reversal from outflows in Q2 2022 could have been indirectly responsible for the June to August 2022 SONA pump, which delivered a 13% gain. 

X. 2024 SONA PUMP: PSEi 30 at 6,800: Windfall from Liquidity Expansion and Conclusion

Furthermore, signs of accelerating liquidity growth could extrapolate to money diffusion into the PSEi 30, channeled through orchestrated or engineered asset pumps. 

May's fourth largest public spending, possibly representing an early-stage distribution of liquidity from the pre-Election "Marcos-nomics stimulus," may also have been used by banks and non-bank financial institutions for the 2024 SONA pump

This has a precedent. 

An uptrend in the growth of cash in circulation financed the previous national (Presidential) elections, which percolated into the pumps of SONA 2022 and the 2022 post-election stock market honeymoon. 

Another factor was the spillover from the historic PHP 2.3 trillion liquidity injections in 2020-2021 by the BSP to rescue the banking system—which was sold to the public as benefiting the economy. 

An uptick in the growth of cash in circulation from April to October 2023 also supported the 2023 SONA and the Q4 2023 rally in the PSEi 30. 

How does this apply to the present? 

May 2024's cash in circulation growth of 6.1% represents the highest level since December 2022, which fund flows have likely spurred this SONA 2024 pump. (Figure 7, middle image) 

It is unsurprising that a substantial part of liquidity growth has been partly funded by bank credit expansion. 

Universal Commercial Bank lending growth, which may have been used to finance pre-election spending in 2021-2022, has been manifested in the pumps of SONA 2022 and the post-election honeymoon. And its reduced growth may have depressed the returns of the SONA 2023 pump. (Figure 7, lowest chart) 

Finally, the accelerating UC bank lending growth from Q4 2023 to the present has been instrumental in financing the 2024 SONA pump. 

As previously explained, though disinflation could prevail in the interim due to the slowing real economy, supported by the rise in non-performing loans (NPLs), which may constrain the uptrend in bank lending, sustained increases in deficit spending should put a floor on inflation. 

A resurgence of inflation, which should cap interest rate cuts, will further expose imbalances and malinvestments resulting from all these orchestrated attempts to create an artificial economic and financial boom through credit expansion, price manipulation, and statistical artifices. 

Although the political leadership did not explicitly mention the stock market to boost his political capital during the previous SONAs, the message—implying "strong earnings growth ", "optimistic economic prospects", a "stronger peso," and so on—represents the commonplace conveyance by institutional mouthpieces in explaining the recent spike in the PSEi 30. 

However, when everything goes off the rails, it has to be either the US Federal Reserve or something foreign, but hardly ever local affairs (attribution bias). 

QED.  

Sunday, February 18, 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 bondsRizal 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 metricsbank 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