Philippine Banks: June’s Financial Losses and Liquidity Strains Expose Late-Cycle Fragility

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 

The Philippine banking system is showing unmistakable signs 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) 

The Confidence Illusion: BSP’s Property Index Statistical Playbook to Reflate Property Bubble and Conceal Financial Fragility

 

Fake numbers lead to a phony economy, with fraudulent policies, chasing a mirage—Bill Bonner 

In this issue 

The Confidence Illusion: BSP’s Property Index Statistical Playbook to Reflate Property Bubble and Conceal Financial Fragility

Part I. The BSP’s Statistical Magic: From Crisis to Boom Overnight

I. A. Statistics as Spectacle — The Real Estate Index Makeover

I. B. The Tale of Two Indices: Deflation and Vacancies Erased: RPPI’s Parallel Universe of Price Optimism

I. C. Multiverse Economic Logic, Pandemic Pricing Without Mobility

I. D. BSP’s Statistical Signaling as Policy: Reflation by Design

Part II: The Confidence Transmission Loop and Liquidity Fragility

II. A. Confidence as Catalyst: BSP’s Keynesian Animal Spirits Playbook

II. B. Benchmark Rate Cuts and the Wealth Effect Mirage

II. C. Developer Euphoria: Liquidity, Debt, and Overreach

II. D. Affordability Fallout: Mispricing New Entrants

II. E. Vacancy vs. Real Demand: The Phantom of Occupancy, Market Hoarding and the Developer Divide

II. F. The Squeeze on Small Property Owners: Valuation Taxes and Hidden Costs

II. G. Sentiment Engineering: Policy Windfalls, Redistribution, Inequality

Part III: Policy Transmission: Consumer Debt, Market Dispersion, and the Mounting Fragility

III. A. Capital Market Transmission: Where Confidence Becomes Signal

III. B. Price Divergences and Latent Losses: Fort Bonifacio & Rockwell

III. C. Liquidity Spiral: From Losses to Liquidation Risk

III. D. Concentration Risk in Consumer Lending

III. E. Credit-Led Growth: Ideology and Fragility

III F. Employment Paradox and Inflation Disconnect

III G. Fragile Banking System: Liquidity Warnings Flashing

IV. Conclusion: The Dangerous Game of Inflating Asset Bubbles 

The Confidence Illusion: BSP’s Statistical Playbook to Reflate Property Bubble and Conceal Financial Fragility 

How benchmark-ism and sentiment engineering are used to buoy real estate and stock prices to back banks amid deepening stress. 

Part I. The BSP’s Statistical Magic: From Crisis to Boom Overnight 

I. A. Statistics as Spectacle — The Real Estate Index Makeover 

In a fell swoop, the real estate industry’s record vacancy dilemma has been vanquished by the BSP. 

All it took was for the monetary agency to overhaul its benchmark—replacing the Residential Real Estate Price Index (RREPI) with the Residential Property Price Index (RPPI). (BSP, July 2025) 

And voilà, prices have been perpetually booming, and there was never an oversupply to begin with! 

Regardless of the supposed “methodological upgrade”—anchored in hedonic regression and presented as aligned with global best practices—the index is built on assumptions and econometric modeling vulnerable to error or deliberate manipulation. 

Let us not forget: the BSP is a political agency. Its goals are shaped by institutional motives, and there’s no third-party audit of its inputs or underlying calculations. The only true litmus test for the data? Economic logic. 

I. B. The Tale of Two Indices: Deflation and Vacancies Erased: RPPI’s Parallel Universe of Price Optimism

Figure 1

Under the original RREPI, national price deflation was recorded during the pandemic recession: Q3 2020 (-0.4%), Q1 2021 (-4.2%), Q2 2021 (-9.4%). Deflation returned in Q3 2024 at -2.3%. (Figure 1, upper visual) 

But under RPPI? No deflation at all. 

Instead, the same quarters posted gains: Q3 2020 (6.3%), Q1 2021 (4.1%), Q2 2021 (2.4%), and Q3 2024 (7.6%). Not even a once-in-a-century health and mobility crisis could dent the official boom narrative. 

The new RPPI also shows a material deviation from the year-on-year (YoY) price changes in residential and commercial prices in Makati reported by the Bank for International Settlements (BIS). Figure 1, lower pane) 

The BSP’s narrative: “Property prices rise in Q1 2025, highest in the NCR.” 

Yet media sources paint a starkly different picture—perhaps reporting from another universe—or even permanently bullish analysts observed that the vacancy woes were intensifying. 

Just last April 29th, BusinessWorld noted: 

"The vacancy rate for residential property in Metro Manila will likely hit 26% by the end of this year, with condominium developers reining in their launches to dispose of inventory, according to property consultant Colliers Philippines." (italics added) 

On April 8th, GMA News also reported: 

"The oversupply of condominium units in Metro Manila is now estimated to be worth 38 months, as the available supply has continued to increase while there have been 9,000 cancellations, a report released by Leechiu Property Consultants (LPC)." (italics added) 

LPC reported last week that due to prevailing ‘soft demand,’ the NCR condominium oversupply slightly decreased to 37 months in Q2 2025. 

And in a more sobering global perspective, on July 10 BusinessWorld cited findings from the 2025 ULI Asia-Pacific Home Attainability Index: 

"The Philippine capital was identified as one of the most expensive livable cities in the Asia-Pacific region. Condominium prices in Metro Manila are now 19.8 times the median annual household income, far exceeding affordable levels. Townhouses are even more unattainable at 33.4 times the average income." (bold added) 

More striking still, price inflation has persisted amid record oversupply. 

I. C. Multiverse Economic Logic, Pandemic Pricing Without Mobility

Figure 2

The old RREPI captured the downturn in NCR condo units—four straight quarters of deflation in 2020–2021 and again in Q3 2024. But the new RPPI virtually erased this distress. According to its logic, speculative frenzy thrived even during ECQ lockdowns. (Figure 2, topmost graph) 

But real estate isn’t like equities. Its transactions require physical inspection, legal documentation, and bureaucratic transfer procedures. To suggest booming prices during lockdowns implies buyers magically toured properties, exchanged notarized documents, and signed title transfers—while under mobility restrictions. 

Only statistics can conjure such phenomena. 

When vacancies surged again in Q3 2024, RPPI recorded a +5.3% gain. One quarter of mild contraction in Q4 2023 (-4.8%) is the lone blemish on its multiverse logic. 

RPPI now behaves as if oversupply has nothing to do with prices—either the law of supply and demand has inverted, or RPPI reflects a speculative parallel reality 

I. D. BSP’s Statistical Signaling as Policy: Reflation by Design 

This isn’t just mismeasurement. It’s perceptional distortion. 

The BSP’s policy appears aimed at hitting “two birds with one stone”: rescue the real estate sector—and by extension, shore up bank balance sheets. 

Via rate cuts, RRR adjustments, market interventions, and benchmark-ism, statistics have been conscripted into policy signaling. 

Part II: The Confidence Transmission Loop and Liquidity Fragility 

II. A. Confidence as Catalyst: BSP’s Keynesian Animal Spirits Playbook 

Steeped in Keynesian orthodoxy, the BSP continues to lean on “animal spirits” to animate growth. Confidence—organic or manufactured—is viewed as a tool to boost consumption, inflate GDP, and quietly ease the government’s debt burden. 

Having redefined its benchmark index, the BSP now uses RPPI not just as data, but as a signaling instrument. 

It projects housing resilience at a time of monetary easing, giving shape to a narrative of strength amid systemic stress. RPPI becomes a cornerstone of "benchmark-ism"—targeting real estate equity holders, property developers, and households alike. 

II. B. Benchmark Rate Cuts and the Wealth Effect Mirage 

The timing is telling. 

This narrative engineering coincides with the underperformance of real estate equities. With property stocks dragging the Philippine Stock Exchange, "benchmark-ism" functions as a tactical lifeline to inflate valuations, revive confidence, and activate the so-called "wealth effect." 

Rising property prices are meant to induce consumption—not only among equity holders but among homeowners who perceive themselves as wealthier. But this is stimulus by optics, not fundamentals. 

II. C. Developer Euphoria: Liquidity, Debt, and Overreach 

This ideological windfall extends to property developers. Easier financial conditions could boost demand, sales, and liquidity—justifying their ballooning debt loads and encouraging further capital spending. 

Or, developers, emboldened by statistical optimism, may pursue growth despite structural weakness, compounding risks already embedded in their debt-heavy balance sheets. 

For example, the published debt of the top five developers (SM Prime, Ayala Land, Megaworld, Robinsons Land and Vista Land) has a 6-year CAGR of 7.88%, even as their cash holdings grew by only 2.16% (Figure 2, middle image) 

Additionally, the supply side real estate portfolio of Universal-commercial bank loans has accounted for 24% of production loans, total loans outstanding 20.68% net of Repos (RRP) and 20.28% gross of RRPs. This excludes consumer real estate loans, which in Q1 2025 accounted for 7.54%.  (Figure 2, lowest chart) 

But this is where the Keynesian blind spot emerges: artificially inflated prices distort economic signals. 

II. D. Affordability Fallout: Mispricing New Entrants 

In equities, inflated valuations misprice capital, leading to overcapacity and overinvestment in capital-intensive sectors like real estate or malinvestments. 

In housing, speculative price increases distort affordability, widening the gap not only between renters and owners, but also between incumbent homeowners and prospective buyers—including those targeting new project launches by developers. 

As developers capitalize on inflated valuations, pre-selling prices rise disproportionately to income growth, pushing ownership further out of reach for middle-income and first-time buyers. 

This dynamic not only excludes a growing segment of the population, but also risks creating inventory mismatches, where units are sold but remain unoccupied due to affordability constraints. 

The ULI Asia-Pacific Home Attainability Index pointed to such price-income mismatches 

II. E. Vacancy vs. Real Demand: The Phantom of Occupancy, Market Hoarding and the Developer Divide 

Vacancies extrapolate to an oversupply. 

Even when a single buyer or monopolist absorbs all the vacancies, this doesn’t guarantee increased occupancy. 

Demographics and socio-economic conditions—not speculative fervor—drive real demand. 

Meanwhile, rising property prices also translate to higher collateral values, encouraging further credit expansion and balance sheet leveraging in the hope of stimulating consumption. 

But this cycle of debt-fueled optimism risks compounding systemic fragility. 

Rising prices also create friction between small developers and elite firms, the latter leveraging cheap capital and financial heft to dominate the industry. 

Owners of large property portfolios can afford to hoard inventories, allowing prices to rise artificially while sidelining smaller players. 

II. F. The Squeeze on Small Property Owners: Valuation Taxes and Hidden Costs 

Beyond affordability, rising property prices carry compounding burdens for small-scale owners. 

As valuations climb, so do real property taxes, which are pegged to assessed values and can reach up to 2% annually in Metro Manila. 

Insurance premiums and maintenance costs—from association dues to repairs—rise in tandem. These escalating expenses disproportionately impact small owners, who lack the financial buffers of large developers or elite asset holders. 

The result is a quiet squeeze: ownership becomes not just harder to attain, but harder to sustain. 

II. G. Sentiment Engineering: Policy Windfalls, Redistribution, Inequality 

Governments reap fiscal windfalls via inflated valuations, using funds to back deficit spending. But these redistributions often fund projects detached from systemic equity or real productivity.

Despite the optics, only a sliver of the population truly benefits. 

Aside from the government, the other primary beneficiaries of asset inflation are the elite of the Forbes 100, not the broader population 

This "trickle-down strategy", rooted in sentiment and asset inflation, risks deepening inequality and fueling balance sheet-driven malinvestments. 

Part III: Policy Transmission: Consumer Debt, Market Dispersion, and the Mounting Fragility 

III. A. Capital Market Transmission: Where Confidence Becomes Signal 

Here is how the easing-benchmarkism policy is being transmitted at the PSE.

Figure 3

The PSE’s property index sharply bounced by 8.2% (MoM) in June 2025, while the bank-led financial index dropped 4.9%. This divergence reveals that asset reflation via statistical optics has buoyed developers—but failed to restore investor confidence in the banking sector. (Figure 3, topmost window) 

During the first inning of the ‘propa-news’ campaign that “Easing Cycle equals Economic Boom” in Q3 2024, both indices had surged—property by 16.41% and financials by 19.4%. But Q2 2025 tells a different story: while property stocks outperformed the PSE again, financial stocks weighed it down. (Figure 3, middle diagram) 

This magnified dispersion reflects the imbalance at play. As a ratio to the overall PSE, property stocks are gaining market cap dominance. At the same time, the free float market capitalization of the PSEi 30’s top three banks have declined—mirrored by the rising share of the two biggest property developers. (Figure 3, lowest visual) 

Unless bank shares recover, gains in the property sector will likely be capped. After all, property developers remain the biggest clients of the Philippine banking system. 

Put another way: whatever confidence boost the BSP engineers through easing and revised benchmarks, markets eventually push back against artificial gains. 

Signal may dominate short-term sentiment—but fundamentals reclaim price over time. 

III. B. Price Divergences and Latent Losses: Fort Bonifacio & Rockwell 

There is more.

Figure 4

The widening divergence in pre-selling and secondary prices of condominiums in Fort Bonifacio and Rockwell Center signifies a deeper signal: the BSP’s implicit rescue of banks via the property sector is being tested on the ground. (Figure 4, topmost window) 

The widening price gap implies mounting losses for pre-selling buyers—early investors who are now exposed to valuation markdowns in the secondary market.

So far, these losses have not translated into Non-Performing Loans (NPLs). Continued financing, sunk-cost inertia, buyer risk aversion, and an economy growing more through credit expansion than productivity have suppressed the impact.

But if these losses scale—or if the economy tips into recession or stagnation—underwater owners may surrender keys. This leads to cascading vacancies and NPLs, raising systemic risk. 

III. C. Liquidity Spiral: From Losses to Liquidation Risk 

Losses, once translated into constrained liquidity, spur escalating demand for liquid assets. This pressure breeds forced liquidations—not just by individual buyers of pre-selling projects, developers but among holders of debt-financed real estate. 

Banks, as financial intermediaries, face direct exposure. When collateral values fall, they may issue a ‘collateral call’—requiring borrowers to post more assets—or a ‘call loan,’ demanding immediate repayment.

If rising NPLs escalate into operational or capital deficits, banks themselves become sellers—dumping assets to raise cash. This synchronized selloff in a buyer’s market fuels fire sales and elevates the risk of a broader debt crisis.

III. D. Concentration Risk in Consumer Lending

Last week, the Inquirer cited a Singaporean fintech company which raised concern about the extreme dependence on credit card usage in the Philippines, noting: “The 425-percent debt-to-income ratio in the Philippines—the worst in the region—indicates a ‘severe financial stress.’” (Figure 4, middle image)

Downplaying this, an industry official clarified that since the total credit card contracts were at 20 million, credit card debt averaged 54,000 pesos per contract. Since the number of individuals covered by the contracts was not identified, a person holding multiple credit card debt contracts could, collectively, contribute to a debt profile resembling the 425% debt-to-income ratio (for contract holders).

Based on BSP’s Q4 2023 financial inclusion data, only a significant minority—just 8.1% of the population as of 2021 (World Bank Findex)—carry credit card debt. Even if this figure has doubled or tripled, total exposure remains below 30%, highlighting mounting concentration risks among debt-laden consumers. (Figure 4, lowest table)

III. E. Credit-Led Growth: Ideology and Fragility

The seismic shift toward consumer lending has been driven not only by interest rate caps on credit cards, but by ideological faith in a consumer-driven economy.

Universal and commercial bank consumer credit surged 23.7% year-on-year in May. Credit card loans alone zoomed by 29.4%, marking the 34th consecutive month of 20%+ growth.

Figure 5

From January 2022 to May 2025, consumer and credit card loan shares climbed from 8.8% and 4.4% to 12.7% and 7.5%, respectively. Last May, credit card debt represented 59% of all non-real estate consumer loans. (Figure 5, upper chart) 

Yet how much of credit card money found its way into supporting speculative activities in the stock market and real estate? 

What if parts of bank lending to various industries found their way into asset speculation? 

Once disbursed, banks and the BSP have limited visibility on end-use—adding opacity to the cycle they’re stimulating. 

III F. Employment Paradox and Inflation Disconnect 

Interestingly, this all-time high in debt coincides with near-record employment rates. The May employment rate rose to 96.11%, not far from the all-time highs of 96.9% in December 2023 and 2024, and June 2024. The employed population of 50.289 million last May was the second highest ever. (Figure 5, lowest graph) 

Yet CPI inflation remains muted. Despite collapsing rice prices driven by the Php 20 rollout, inflation ticked up only slightly in June—from 1.3% to 1.4%. 

With limited savings and shallow capital market penetration, the Philippines faces a precarious juncture. What happens when credit expansion and employment reverses from these historic highs? 

And this won’t affect only residential real estate but would worsen conditions of every other property malinvestments like shopping malls/commercial, ‘improving’ office, hotel and accommodations etc. 

III G. Fragile Banking System: Liquidity Warnings Flashing 

Beneath the surface, bank stress is already visible.

Figure 6

Even as NPLs remain officially low—possibly understated—liquidity strains are worsening:

-Cash and due from banks posted a modest 3.4% MoM increase in May—but fell 26.4% YoY

(Figure 6, topmost image)

-Deposit growth edged from 4.04% in April to 4.96% in May

-Cash-to-deposit ratio bounced slightly from 9.68% to 9.87%, yet remains at its lowest level since at least 2013

-Liquid assets-to-deposit ratio fell from 48.29% in April to 47.5% in May

-Bank investment growth slowed from 8.84% to 6.5% (Figure 6, middle diagram)

-Portfolio growth dropped from 7.82% to 5.25% 

Despite these constraints, banks continued lending. 

Interbank lending (IBL) surged, pushing the Total Loan Portfolio (inclusive of IBL and Reverse Repos) from 10.2% to 12.7%, sending the loan-to-deposit ratio to its highest level since March 2020. 

Beyond Held-to-Maturity (HTM) assets, underreported NPLs—particularly in real estate lending—may be compounding the liquidity strain and masking deeper fragility. The surge in HTMs has coincided with a steady decline in cash-to-deposit ratios, signaling stress beneath the statistical surface. (Figure 6, lowest visual) 

IV. Conclusion: The Dangerous Game of Inflating Asset Bubbles 

Despite the Q3 2024 surge in the Property Index—helping power the PSEi 30 upward—combined with a 6.7% rebound in the old real estate index in Q4, vacancy rates soared to record highs in Q1 and remain near all-time highs as of Q2 2025. 

This unfolds amid surging consumer and bank credit, all-time high public liabilities fueled by near-record deficit spending, and peak employment rates. 

Ironically, the distortions in stock markets—and the engineered statistical illusions embedded in the old property index—have barely moved the needle against real estate oversupply, as measured by vacancy data.  

Not only has the BSP sustained its aggressive easing campaign, it is now amplifying statistical optics to reignite animal spirits—hoping to hit two birds with one stone: rescuing property sector balance sheets as a proxy for bank support. 

Yet inflating asset bubbles magnifies destabilization risks—accelerating imbalances and expanding systemic leverage that bank balance sheets already betray. 

Worse, the turn toward benchmark-ism and sentiment engineering in the face of industry slowdown signals more than strategy—it reeks of desperation.

When monetary tools fall short, propaganda steps in to fill the gap—instilling false premises to manufacture resilience.

And the louder the optimism, the deeper the dissonance. 

____

References 

Bangko Sentral ng Pilipinas BSP's new Residential Property Price Index more accurately captures market trends June 27, 2025 bsp.gov.ph