One of the saddest lessons of history is this: If we’ve been bamboozled long enough, we tend to reject any evidence of the bamboozle. We’re no longer interested in finding out the truth. The bamboozle has captured us. It’s simply too painful to acknowledge, even to ourselves, that we’ve been taken. Once you give a charlatan power over you, you almost never get it back—Carl Sagan
In this issue
Non-Bank Quasi-Bank (NBQB) 2Q Cash Reserves Plunge 14.6% as Distress Assets Growth Spiked!
-Non-Banks and Banks are Joined to the Hip
-The Great Divergence: Philippine Treasury Boom Boosted Non-Bank Investments as Lending of Financials Sputter
-The Sustained Stagnation in Net Interest Income as Concentration Risks Mounts from Dependence on Leasing Income
-Profitability Woes: 2Q Net Interest Margins Narrowed as Loan Volume Declined
-NBQB’s Cash Reserves Plummet 14.6% in 2Q Fueled by Growth Spike in Distress Assets!
-Cash Crunch also from Lower Borrowing; Has the Subsidy from the Philippine Treasury Boom Climaxed?
Non-Bank Quasi-Bank (NBQB) 2Q Cash Reserves Plunge 14.6% as Distress Assets Growth Spiked!
Non-Banks and Banks are Joined to the Hip
If the core banks are having a difficult time, why would the conditions of its ancillaries not reflect the same ordeal?
The Bangko Sentral ng Pilipinas belatedly released 2Q financial conditions of Non-Banks with quasi-banking functions (NBQBs). The corresponding links exhibit the raw data on its income statements, balance sheets, and select performance ratios.
According to the Bangko ng Sentral ng Pilipinas, “Non-bank financial institutions (NBFIs) are financial institutions supervised by BSP. These do not have a full banking license but they facilitate bank-related financial services, i.e., investment, risk pooling, contractual savings and market brokering. In the Philippines, NBFIs are composed of the non-banks with quasi-banking functions and non-banks without quasi-banking functions. Non-banks with quasi-banking functions (NBQBs) consist of financial institutions engaged in the borrowing of funds from 20 or more lenders for the borrower’s own account through issuances, endorsement or assignment with recourse or acceptance of deposit substitutes for purposes of re-lending or purchasing receivables and other obligations.”
Non-banks are joined to the hip with the core banks, as revealed by BSP’s policies.
As previously pointed out*, the BSP’s Monetary Board (MB) extended regulatory relief or bailout through the Countercyclical Capital Buffer (CCyB) reporting rule on capital ratios of the financial sector, including the NBQBs.
*Regulatory Bailout 2.0: BSP Launches Countercyclical Capital Buffer (CCyB) Intended to Ease Capital Reserves! December 16, 2018
In the meantime, NBQBs were also included by the BSP in the recent Reserve Requirement Ratio cuts. Therefore, the 2Q Financial Reports included only the 100 bps representing the first of the three-phase reduction in the RRRs.
The Great Divergence: Philippine Treasury Boom Boosted Non-Bank Investments as Lending of Financials Sputter
Recall that in the 2Q, earnings from Philippine banks revealed a bipolar disorder or split personality? The earnings of the big four banks, which are members to the headline index, zoomed 35.12% while the non-elite banks reported only 2.2% growth. [see PSYEi Bank Profits Surge in 2Q But Savings Deposit Growth Halves in June to Drag Bank Deposits and Liquidity Lower and The Silent Bailout! August 18, 2019]
Aside from the abetment through accounting magic, the big-four got a herculean boost from the boom in prices of Philippine Treasuries, which had been supported by the panic bid on global treasury markets, in spite of falling loan volumes and interest margins plaguing the industry.
Well, income growth from NBQBs in the 2Q depicted a similar divergence: non-bank investments spiked, but non-bank financials suffered.
Net income growth of investment banks catapulted 61.95% in the 2Q from 25.37% in the 1Q. That boom emanated from the sector’s trading income, which spiked 268.1% from 228.8% covering the same quarters.
However, financials endured a 6.83% loss, which was slightly larger than the 5.83% deficit over the same period. And since the net income of financials constituted 83% of the aggregate, total net income group for the NBQBs barely increased in 2Q +.6% compared to a loss of 1.14% in the 1Q. (figure 1, upper window)
That is to say, the humungous gains from Philippine fixed income asset boom offset losses from the industry’s core operations. Stated otherwise, the mounting fragility from the industry’s emaciating fundamentals had been camouflaged by an artificial asset boom.
The Sustained Stagnation in Net Interest Income as Concentration Risks Mounts from Dependence on Leasing Income
Despite the mixed performance of the two subsectors, the industry’s net interest income has stagnated in the 2Q.
Figure 1
In the 2Q, the NBQBs net interest income suffered its first decline, with a -.5% change, since December 2013. Net interest income posted a .2% increase in the 1Q. While non-interest income growth jumped 18.3% in the 2Q, this was slightly lower than 25.3% in the 1Q. Operating income growth moderated to 3.4% in the 2Q from 5.1% a quarter ago. (figure 1, lower window)
Figure 2
Meanwhile, the share of leasing income to total operating income remained at a staggering 112.34%, still a record, but was slightly lower from 112.67% a quarter ago. Leasing income growth expanded 14.24% marginally down from 14.96% over the same period. However, since peaking in September 2017 at a growth rate of 27.26%, leasing income growth has declined in 7-straight quarters! (figure 2, upper window)
Bluntly put, concentration risks have been escalating since NBQBs have fundamentally been placed their eggs in one basket!
Profitability Woes: 2Q Net Interest Margins Narrowed as Loan Volume Declined
The slowdown in the sector’s 2Q net interest income sprang from decreasing interest margins and sagging loan portfolio.
The trend compression in the industry’s net interest margin, or the ratio of net interest income to the average earning asset, persisted in the 2Q. Net interest income posted a scanty .7%, the third smallest after June 2018’s .6% and June 2017’s 0% since 2009. Perhaps, such quirks may have emanated from seasonal or calendar factors, but why only from 2017? What has triggered such forces? (figure 2, lower window)
A declining trend in the industry’s loan portfolio has likewise emerged since March 2017. Though net lending improved to 12.6% in the 2Q from 11.3% in the 1Q, current rate signifies a fraction to the March 2017’s zenith at a blistering 30.6% clip.
Figure 3
But here’s the thing.
The irony has been that in spite of the slowing trend in the industry’s loan growth rate, the segment’s share to total assets continued to hit record highs in the 2Q.
And while investments rebounded to 16.32% in the 2Q and 16.8% in the 1Q, the loan’s share to total assets jumped to 68.73% and 65.87%. And that’s because the share of cash to total assets shriveled to 10.8% and 13.23% over the same period. The ratio of investment to total assets climaxed at 41.45% in the 1Q of March and drifted downhill ever since. (figure 3, upper window)
As a result, the industry’s total asset growth fell to 8.31% in the 2Q from 9.12% a quarter ago. (figure 3, middle window)
At any rate, the BSP’s profitability Key Performance Indicators KPI for the sector reveals dire underperformance.
Like their banking contemporaries, the profitability ratio of the NBQBs has been trending south since its zenith in September 2013. NBQBs recorded marginal improvement in Return of Assets (RoA) in the 2Q to .8% from .7% in the 1Q, and also in the Return on Equity (RoE) to 3.7% from 3.5%, over the same period. (figure 3, lower window)
NBQB’s Cash Reserves Plummet 14.6% in 2Q Fueled by Growth Spike in Distress Assets!
Figure 4
Not only have the downtrend in lending growth and the compression in interest margins have put pressure on profits, as noted above, but the industry’s cash reverses plunged by a whopping 14.63%, the steepest drop since 1Q 2013. Cash and due from Banks fell to Php 30.483 billion, a level last seen in the 1Q of 2015. (figure 4, upper window)
Such a dramatic decrease in cash conditions has been the reason behind the surge in the loan to total assets ratio.
Stagnating net income from a considerable moderation in the growth of loan portfolio and a margin squeeze has contributed to the shortfall in the industry’s liquidity. But there’s more to these. In the 2Q, published distressed assets of NBQBs spiked to 22.8%, a level second only to the apex reached during the 4Q of 2014 at 28.4%! (figure 4, lower window)
Yes, the ongoing liquidity vortex afflicting the industry is attributable in part to the elevated level of distress assets. And 2Q’s crash in cash reserves has been coincidental with a growth spike in distress assets.
Cash Crunch also from Lower Borrowing; Has the Subsidy from the Philippine Treasury Boom Climaxed?
Figure 5
And on the liability side, with a slowing growth rate of Bills Payable to 5.36% to Php 186.3 billion in the 2Q from 8.43% or Php 188.94 billion, that slack in funding—in the face of high distress assets plus stagnant income—played a significant role in the sector’s cash crunch. (figure 5, upper window)
And has the subsidy to the banks and non-bank sector climaxed (through sharply dropping bond yields/surging bond prices)? (figure 5, lower window) If so, how will these impact the sector’s liquidity, revenues, margins, NPLs/Distressed assets, and earnings?
Will more policy subsidies, through cuts in RRRs and interest rates, help? Or, will such induce indiscriminate lending that would aggravate the sector’s balance sheet impairment?
That said, the industry’s general revenue, margins, liquidity, and profitability trends reveal the evolution toward heightened fragility.
