Economists are like soldiers selected and trained for only rituals and parades. But they are very good with rituals and parades—Nassim Taleb
In this issue
PSYEi Bank Profits Surge in 2Q But Savings Deposit Growth Halves in June to Drag Bank Deposits and Liquidity Lower and The Silent Bailout!
-BSP’s Diokno Befuddled by Liquidity Strains, Treasury Boom Spurs Profit Surge of PSYEi 30 Banks Only!
-Tumbling Interest Margins and Sinking Loan Growth Portfolio
-Treasury Boom Inflates Bank Assets, The Silent Bailout of the Banking System!
-Despite Interest Rate and RRR Cuts, Financial Liquidity Remains Strained
-Savings Deposits Growth Crashes to 2% Pulls Down Total Bank Deposit Growth! Bank Bond Borrowings Rockets Anew!
-Savings are Finite, Expect BSP’s QE Soon
-Tail Pieces: Historic Mark-The-Close Pump, $16 Trillion of Negative Yielding Bonds, 50% of Global Bonds Inverted!
PSYEi Bank Profits Surge in 2Q But Savings Deposit Growth Halves in June to Drag Bank Deposits and Liquidity Lower and The Silent Bailout!
BSP’s Diokno Befuddled by Liquidity Strains, Treasury Boom Spurs Profit Surge of PSYEi 30 Banks Only!
Before the 2nd rate cut last August 8th, the BSP Chief expressed puzzlement over the lack of positive response by the financial system to the stimulus implemented by BSP involving the reduction in Reserve Requirement Ratio (RRR) and policy interest rate.
Here is a striking excerpt from the Inquirer (August 5) [bold added]: “As the Philippines’ inflation rate eased early this year, thecountry’s banking industry lobbied the central bank to ease monetary policy and—after a short period of regulatory hesitation —got what it asked for. But almost three months after the Bangko Sentral ng Pilipinas cut its key interest rate by 25 basis points and more than two months after it initiated a multiphase 200-basis-point reserve requirement reduction, the latest data showed that liquidity growth in the local financial system remained sluggish. Now BSP Governor Benjamin Diokno wants to know why. “I share your concern,” the central bank chief told the Inquirer, when asked about the last week’s money supply and bank lending growth data for June, which showed the former being flat and the latter slowing down on an annual basis. In particular, Diokno said he wanted to know where the almost P200 billion in extra cash went since it was freed up by the monetary-easing moves as well as the expectations for more easing created by his clear statements favoring the infusion of more liquidity into the system.”
Haven’t we have been discussing this for the longest time?
It’s either the incumbent BSP Chief has little clue about the actual health conditions of the banking system, unlike his predecessor, or his remark evaded the issue. Why has liquidity in the financial system been depleting, an ongoing trend since 2013?
Nevertheless, media headlines have recently screamed about the extraordinary rate of net income growth posted by banks.
Figure 1
True, net income of all listed banks roared by 22.43% in the 2Q and surged by 20.92% in the 1H. (Figure 1, upper table)
But that’s almost entirely been from the PSYEi bank’s which spiked 35.12% and 29.45% over the same period. The meager net income growth of non-PSYEi banks at 2.2% and 5.6% exhibits such highly skewed or distorted distribution.
The numbers tell that the big 4 raked in a boatload of moolah, while the rest jostled for the crumbs. So has the big-4 banks been more efficient in handling their portfolios, or has the boom in profits been really about puffing up the income growth of the PSYEi?
Bank profits zoomed 26.35% in the 2Q following a 22.89% spike in the 1Q, the highest profit rate since 2013, as per BSP’s data. (Figure 1, lower window)
Interest income jumped 31.74% in the 2Q, but this was down from 36.13% in 1Q, both growth rates are at multi-year highs. Net interest income expanded 15.32% and 18.32% over the same period, which represented 2014 highs.
Tumbling Interest Margins and Sinking Loan Growth Portfolio
Great stuff right?
Figure 2
Only if one considers the headlines.
You see, while interest income growth performed spectacularly, interest expense growth outclassed it; the latter rocketed 82.47% 1Q and 89.11% in 2Q, as a consequence, operating interest margins slipped to 2010 levels even as net interest income outperformed. (figure 2, upmost window)
That’s not all. Listed banks interest margins fell 14.4% in the 2Q and 15.25% in the 1H. PSYEi banks saw their margins contract 10.49% and 10.47% respectively, lower than their peers.
If interest margins fell, could it be that the banking system’s loan portfolio experienced a frenzied growth rate to have substituted for it?
The short answer is no.
With a 58.5% share of total assets, Total Loan Portfolio inclusive of Interbank Loans and Repos grew at 10.16% in June slower than 10.27% in May and 12.54% in April.
Shortly put, the Banks were lending less in 2Q. Since peaking in May 2018 at 23.5%, bank lending growth rate continues to head south. June lending growth rate of 10.27% represents a 56.7% decline from the May 2018’s growth rate zenith of 23.48%! (figure 2, middle window)
Treasury Boom Inflates Bank Assets, The Silent Bailout of the Banking System!
On the other hand, with about 22.06% share of total assets, banks total investment growth in June registered jumped 17.18% but was slightly lower than 19.75% in May and 20% in April, the latter signifying a 10-year high.
That’s right. The superb growth in interest income had been generated, not by loans but from the boom in Treasuries.
The BSP defines interest income as referring to “to interest earned and/or actually collected from the following financial assets: (a) Due from BSP, (b) Due from Other Banks, (c) Financial Assets HFT, (d) Financial Assets DFVPL, (e) AFS Financial Assets, (f) HTM Financial Assets, (g) UDSCL, (h) Loans and Receivables, (i) LRARA, (j) Derivatives with Positive Fair Value Held for Hedging, (k) Sales Contract Receivable, and (l) Others”
Total asset growth was down to 9.8% in June, the slowest growth since 2015. Having peaked in May 2018, Total asset growth has been trending down. It registered 9.88% in May, 11.12% in April and 10.99% in March.
Of the BSP’s Net investments, Financial assets DFVPL having been expanding the fastest. Growth of Financial assets designated at fair value through profit or loss (DFVPL) jumped 32.04% in June, slower than 36.5% in May and 23.7% in April. Financial assets are defined by the BSP “debt instruments as measured at fair value through profit or loss in accordance with the conditions mentioned under PFRS 9”.
Growth in Held for Trading (HFT) assets has likewise been booming, growing at a frenzied rate of 26.3%, 28.8% and 18.52% in the 3-months of the 2Q compared to 10.95% in March, .45% in February and 10.87% in January.
Growth in Available for Sale (AFS) assets likewise expanded 16.6% in June, 12.94% in May and 12.43% in April compared with 21.12% in March, 24.58% in February and 9.54% in January.
Accounting deficits were camouflaged less through HTMs. Growth in Held to Maturity (HTM) assets continued to moderate at 18.45% in June, 24.15% in May, and 26.51% in April. Culminating with a 57.36% clip in November 2018, HTM growth has fumbled fast in 7-months. (figure 2, lowest window)
Still, HTMs accounted for most of Total Net Investments with 60.4% share, AFS followed with 25.07% share, next, were equity investments in Joint Ventures 7.7%, Held for Trading 6.27% and DFVPL .51% share as of June.
The record cash hoarding by the National Government through restrained public spending looks likely an engineered bailout of the banking system.
A silent bailout of the banking system it has been.
As the former BSP chief, the late Nestor Espenilla Jr. led FSCC wrote in their 2017 Financial Stability Report: “While there is no definitive evidence of a looming crisis, it is also clear that shocks that have caused dislocations of crisis proportions have come as a surprise. What is not debatable is that repricing, refinancing and repayment risks (3Rs) are escalated versus last year and this could result in systemic risk if not properly addressed in a timely manner.”
Despite Interest Rate and RRR Cuts, Financial Liquidity Remains Strained
Figure 3
Despite oozing profits from the Treasury Boom, the BSP’s RRR and policy cuts implemented last May, cash reserves to deposit ratio continues to hemorrhage to highlight sustained liquidity strains in the banking system.
Also, the magic from the Treasury boom appears to manifest signs of corrosion. Following a peak in March, Liquid Assets to Deposits ratio has declined in the last 3-months. Cash and due banks contracted by 2.02% or by Php 48.8 billion in June and fell Php 46.5 billion month-on-month. (figure 3, upmost window)
And interestingly, the sustained depletion in cash reserves and deposits have been prompting banks to obtain more funding from the capital markets, which has resulted in a spike in funding cost, which hit a record last June. (figure 3, middle window)
And it doesn’t end there. The treasury incited profit boom has barely eased the banking system’s Net NPLs, which fell slightly but remains at multi-year highs last June. (figure 3, lowest window)
Savings Deposits Growth Crashes to 2% Pulls Down Total Bank Deposit Growth! Bank Bond Borrowings Rockets Anew!
Figure 4
Banks pulling back on lending has similarly caused a decline in money supply growth. With outsized or record debt exposure, a retreat in money supply growth has not only slowed businesses but also given rise to the banking system’s published Non-Performing Loans. (figure 4, upmost window) What of the non-published ones?
And since non-performing loans are inherently deflationary, the banking system has to look for new sources to reinflate its balance sheets. And the liquidity starved banking system lobbying for the easing of RRRs and rate cuts as cited by the BSP’s Diokno corroborates on such developments.
One of the cheapest sources of funding is deposits, aside from interbank loans. Unfortunately, overall bank deposit growth continues to emaciate.
Total deposit growth was 5.8% in June, a rate seen last in 2012, and lower than the 6.22% in May and 6.61% in April. Total deposits growth has been in a downtrend since 2013.
Growth in peso deposits clocked in at 6.01% in June, which likewise was a 2012 low, and was similarly lower than 6.58% in May and 6.7% in April. Peso deposits constitute 83.33% of total deposits. The downfall in June’s deposit growth was due primarily to the stunning crash in savings deposit growth, which tumbled to 2.16%, from 4.35% in May and 6.52% in April! Savings deposit growth rate halved in June! Savings deposit accounted for a 45% share of total deposits.
Meanwhile, foreign currency deposit rose marginally by 4.75% in June from 4.44% in May, but was down from 6.12% in April.
Banks have been shifting its source of funding from the short-term to the long-term.
Growth in bills payable grew 36.93% in June to Php 905 billion, slower from the 51.71% clip in May and 54.87% in April.
On the other hand, the booming growth in bond payable accelerated 160% to Php 423.8 billion from 117.91% in May and 112.31% in April.
As one would note, banks are borrowing from the public at a frantic pace.
The booming bank profits are no more than an accounting mirage.
Savings are Finite, Expect BSP’s QE Soon
With a growing black hole in the banking system’s balance sheets, competition for access to savings between the banking system and the National Government will only intensify.
And more easing and liquidity injections are unlikely to resolve the financial vortex plaguing the banking system.
Unfortunately, savings are finite. So unless banks begin to resume lending at the pace of the last 5-years, access to savings will become even more constrained. And so is the NG’s ability to raise financing coming at the cost of the real economy. The thing is, the current Treasury boom is unsustainable.
That leaves the BSP’s printing and digital press as the last option. When the BSP reopens its QE, it is likely to do it on aggressively, expect the USD should fly.
Tail Pieces: Historic Mark-The-Close Pump, $16 Trillion of Negative Yielding Bonds, 50% of Global Bonds Inverted!
Figure 5
Protecting the 9-month trend line is a must. Otherwise, a breakdown could unleash an avalanche of selling that would further wipe away a significant source of the banking system’s non-interest income revenues.
So, index managers launched the biggest ever one-day rescue of the headline index with a 102.84 points or 1.34% pump, which majestically erased 2.18% in losses for the benchmark to magically close down by only -.84%!!!
The aggressive-coordinated mark-the-close pump had been pulled off on some of the 15 largest market cap issues led by Meralco, JG Summit, Aboitiz Equity, and Security Bank. Of course, Sy companies SM and BDO were part of them but were eclipsed by their smaller peers. (figure 5, upmost window)
Nonetheless, index managers decided to pare down their support, on Friday, August 16. After a relentless intraday pump to the close, the headline index suffered an 85.02 points plunge to eradicate a .66% gain and close down by .42%! Another incredible pump and dump!
Only in the Philippines!!!
Next, negative-yielding global bonds rocketed to a record over $16 trillion last week on a bond panic bid on a worldwide scale! (figure 5, middle window) Additionally, distortions of the global bond markets have been intensifying as the “Percentage of yield curves inverted around the world now over 50%”! (figure 5, lowest window)
A yield curve may not always signal a recession, but how about half of them?
The Philippines just had its inverted curve in the 1Q. However, NG cash hoarding and global bond panic buying have helped inflated bank assets, profits, and steepen the curve.
Will the Philippines be immune from a global recession, as implied by some of the local experts?
