Nothing astonishes men so much as common sense and plain dealing—Ralph Waldo Emerson
In this issue:
I. Philippine Maharlika Fund Suspension: Economics Exposed the Pretense of Politics, PSEi 30: Will the Center Hold? Have PSE’s Financials Peaked?
II. PSEi 30: Will the Center Hold? Have PSE’s Financials Peaked?
A. Withering Momentum for PSE's Financials?
B. Uneven Dispersion of or Divergent Bank Share Trading Activities
C. Other Financial Corporation’s Massive Pump of Share Prices of the Biggest Three Banks?
D. Can the Center Hold? Are Financials Tipping Over?
Philippine Maharlika Fund Suspension: Economics Exposed the Pretense of Politics, PSEi 30: Will the Center Hold? Have PSE’s Financials Peaked?
Economic realities exposed the inherent vulnerabilities of the Philippine Maharlika Fund and the banking system. Will the inflection of the PSE financials weigh on the PSEi 30?
I. Maharlika Fund Suspension: Economics Exposed the Pretense of Politics
Inquirer.net, October 18: Soon after, both state-run banks sought relief from compliance with the rules of the Bangko Sentral ng Pilipinas on capital requirements. De Jesus said the request for relief was preemptive, considering that the contribution — if not considered part of DBP’s capital—would undermine DBP’s ability to comply with BSP regulations.
For starters, a brief backdrop on the MIF.
Days before the Maharlika Investment Fund (MIF) came into suspension, the executive branch authorized a cut in Land Bank's dividends to the government in 2022.
Last September, the Land Bank and the Development Bank of the Philippines (DBP) remitted Php 25 billion and Php 50 billion to the nation's Sovereign Wealth Fund (SWF).
Fast forward to the post-suspension of the MIF.
Possibly in response to the public's reaction, the leadership waffled and declared that they are "still working to have it operational within the year."
Why is this important?
First, it exposed the inherent fragility of the government banks.
Even the mainstream credit rating outfit, the Fitch Ratings, noticed it.
Inquirer.net, October 20: The credit strength of Land Bank of the Philippines (Landbank) and Development Bank of the Philippines (DBP) may weaken after their hefty contribution to the Maharlika Investment Fund (MIF) if no mitigating measures are put in place to help the two state-run banks shore up their defenses against potential losses, Fitch Ratings warned on Thursday.
Second, this event revealed the lack of research and consultation with affected agencies before putting the MIF in place. Lawmakers presumed that these banks had sufficient liquidity/reserves.
Third, the MIF's gorging on the liquidity and capital of the LBP and DBP would impact the general banking system.
LBP and DBP, ranked 2nd and 9th in total assets (as of Q2 2023), are among the ten biggest domestic banks.
Figure 1
Lastly, having railroaded the MIF into law, as I recently tweeted, "What protests and petitions failed to do, the health of public financial institutions did." (Figure 1)
And though authorities may find a workaround, e.g., borrow funds, get investors, or twist rules, this episode only revealed the MIF’s fundamental flaws.
Economics bared the pretense of politics.
II. PSEi 30: Will the Center Hold? Have PSE’s Financials Peaked?
Things fall apart; the centre cannot hold- William Butler Yeats
Continuing from Part I's Critical changes in the banking system's business model.
A. Withering Momentum for PSE's Financials?
Banks comprise the center of the PSEi 30.
This representation applies even to the economy exhibited by the money supply level, expressed via total financial resources, which presently constitutes an unprecedented share of the GDP.
The outperforming share prices of the nation's three biggest banks represent the critical factor why the PSEi 30 remains above the 6,000 level.
Figure 2
While other mainstream sectors have stagnated or fumbled, financials have outperformed since the BSP's historic bailout of the industry in 2020. (Figure 2, upper graph)
The sectoral share of the PSEi 30 exhibits their relative performance. The biggest members of these indices are also constituents of the PSEi 30.
That the share price performance of Philippine Financials even topped the world in Q1 2023 was a surprise!
The Exante Data explained last March, "Financials stocks in the Eurozone are still up 1.7% year to date despite the recent pullback. US financials are down 9% in 2023, however. The best performing financials ytd are in Philippines, Mexico and Spain." (Figure 2, lower chart)
Figure 3
This momentum persisted as the Philippine Financial Index raced to its November 2019 highs last July 2023, but retreated after touching its 2019 resistance level. (Figure 3, upper window)
Nota bene: The composition of the Financial Index continues to change. The incumbent membership comprises 7-banks, namely, BDO Unibank [PSE: BDO], Bank of the Philippine Islands [PSE: BPI], China Banking Corporation [PSE: CHIB], Metropolitan Bank & Trust [PSE: MBT], Philippine National Bank [PSE: PNB], Rizal Commercial Bank [PSE: RCB] and Security Bank [PSE: SECB] and the Philippine Stock Exchange [PSE: PSE]. Like the PSEi 30, the constant changing of members, even at the margins, influences pricing dynamics. Or, the present values of the index reflect not only dissimilar conditions from the past but also diverse fundamentals as a result of membership changes.
Yet, this runup had a backdrop of a typical bull market: The sector's 9-month % peso volume share of the total hit a record high this year! (Figure 3, lower graph)
This divergence means financials absorbed a significant share of the volume even as the main board volume shrank. Or, the concentration of trading activities in this sector came at the expense of the others.
B. Uneven Dispersion of or Divergent Bank Share Trading Activities
The irony of skewed distribution has been evident even in the share price performance of firms in the industry.
Figure 4
Two of the top three banks, BDO and BPI, were the primary beneficiaries of the liquidity-specific pumps.
Consequently, these two issues have captured the third and the fourth spot in the PSEi 30's free float market cap rankings as of October 20th.
Though the third bank, MBT, initially benefited from the spillover, the uplift in its share price momentum stalled and began to depart from its bigger peers in Q1 2023 (Figure 4, topmost pane)
Former PSEi 30 member SECB also gained but experienced a shorter honeymoon from the BSP injections. Its trailing performance spurred its exclusion from the PSEi 30 on August 8, 2022. The SECB shares are now lower than the March 2020 panic low levels!
Union Bank [PSE: UBP] joined the PSEi 30 with share prices at their pinnacle in February 2023, then crashed. It had a very short 8-month stint on the PSEi 30. (Figure 4, middle window)
Except for CHIB, other banks (such as PNB and RCB, which are also members of the Financial Index) neither gained nor generated much of the market's attention. (Figure 4, lowest chart)
The takeaway, the concentration of share price gains, momentum, and volume share activities towards the top two banks cushioned the PSEi 30 from plunging below 6,000.
C. Other Financial Corporation’s Massive Pump of Share Prices of the Biggest Three Banks?
What fueled this dynamic?
The thing is, the BSP announced in its survey of Other Financial Corporations (OFC) that this sector was accumulating bank shares in Q4 2022 and Q1 2023.
BSP, July 31, 2023: The growth in the OFCs’ domestic claims in Q1 2023 was due to higher claims on the depository corporations (DCs), the central government and the other sectors.2 In particular, the OFCs’ claims on DCs expanded significantly, owing mainly to the growth in the sector’s deposits in banks and holdings of bank-issued equity shares. (bold added)
The release of the 2Q OFC survey will be on October 31.
Figure 5
Though "claims on the private sector" (CoPS) rose by 5% from the end of Q3 2022 to Q1 2023, this amounted to some Php 194 billion.
The sector's cumulative peso trading volume was Php 146 billion, which could mean that most of the increase in the CoPS allocation was mainly on PSEi 30 bank shares, and a portion of it was on deposits. (Figure 5, topmost chart)
But when these bank shares lose their luster, what happens to their balance sheets? Will this not worsen the industry's existing liquidity strains?
Was this an organized pump by the industry? Or was this at the behest of the BSP?
D. Can the Center Hold? Are Financials Tipping Over?
At any rate, share price corrosion has become apparent in the Philippine Financial Index, where decadent breadth appears to be weighing on the top performers.
The market cap share of BDO and the aggregate of the top three appear to be rolling over, dragged by elevated inflation and "higher for longer" yields, a slowing economy, and the rampaging global bond vigilantes (as previously explained). (Figure 5, middle and lowest charts)
Figure 6
In the meantime, as a barometer, rising yields of USTs (10-year TNX) have started to hurt US banks (BKX). (Figure 6, topmost chart)
Likewise, Asian bank-financial shares (MSCI AC Asia ex Japan Financials) have been underperforming. (Figure 6, lower graph)
Without real savings growth, the impact from the local version of China's "national team" to bolster prices of the PSEi 30 will have a longer-term cost—exacerbating capital consumption.
So, domestic markets will continue to deviate from the prevailing Overtone Window that focuses on tooth fairies about the economy and financial markets.
Stagflation and the global war economy are upon us.
Can the center hold?
