"Indeed, he who has the gold makes the rules."
Total resources of the Philippine banking system (45 commercial banks) grew by a hefty P1.5 trillion or 10-percent to a record P16.8 trillion during the first half of 2019 ended June 30, 2019. The 10-percent growth is almost double the 5.5 percent real gain in the total output of goods and services or Gross Domestic Product during the period, January to June 2019.
This implies that banking remains a strong industry despite a seeming economic slowdown. Banking’s growth rates in the first half were in double digits.
For instance, the banking system’s liquid assets grew 10 percent (P561 billion), total investment in securities by 19 percent (P604 billion), total loan portfolio by 10 percent (P931 billion), and net customer loan portfolio by 10 percent or P869 billion.
Liquid assets include cash, due from the central bank and other banks, and investment in securities. Net customer loan portfolio is loans less provision for loss.
Banking business is awesomely profitable. Return on equity (at the parent bank level) is 9.87 percent in June 2019, up from 9.35 percent in June 2018 and 9.64 percent in March 2019. The 9.87 percent ROE is more than three times the June inflation rate of 2.7 percent, for a net gain of 7.17 percent. For each P100 of stockholders’ money, the banks made a profit of P9.87. With inflation, the real gain was P7.17.
In return on equity, among the most profitable banks are: East West Bank 12.10 percent ROE; BDO Unibank (11.71 percent), and Union Bank (10.91 percent ).
In peso value, in the first half (six months) of 2019 alone, BDO netted P20.14 billion; BPI P13.86 billion; Metrobank P13.4 billion; Security Bank P4.95 billion, Union Bank P4.79 billion, China Bank P4.22 billion, PNB P3.96 billion, East West P2.7 billion, RCBC P2.66 billion, and Asia United Bank P2.66 billion. The top three banks in profits make an average of P2.62 billion monthly in profits.
The banks make more money than the conglomerates who have much more complex and diversified businesses. A good chunk of the bank profits has nothing to do with banking—which is lending money, but from penalties. For instance, if you miss, just be one day, paying your credit card bills, the interest is 8.5 percent per month or 102 percent a year. Double their money.
Yet, the banks are not using their own money, which is the money of their owners. They use mainly other people’s money—to make more money and to penalize people without money.
Thus, the banking expansion was financed mainly by borrowings as deposits grew by only single digit or 6 percent (P697 billion). Equity grew 13 percent (P222 billion). This implies that the country’s big banks are growing, not because of the money put in by their owners, but by the money of the public (deposits were up P697 billion or 6 percent), and by lenders or creditors, P489 billion or up 13 percent, or deposits and borrowings combined of P1.186 trillion.
This P1.186 trillion exceeded the total loan portfolio of P931 billion, meaning the banks didn’t release all of the money they got from the public (deposits) and lenders (borrowings). For every P5.34 of deposits and borrowings, the banks’ owners put in only P1. In effect, the banks contributed just P15.77 in additional equity for every P100 of additional liabilities. That’s a ratio worse than what the banks require of their borrowers—25 for every 100.
So you can say banks follow the Golden Rule—he who has the gold (the banks) makes the rules. They are aided in this scheme by a complacent Bangko Sentral.
Bank borrowings expanded by a remarkable 47 percent or P489 billion to P1.53 trillion, slightly higher than the P1.5-trillion growth in assets of the system. Bank borrowings refer to bills payable, bonds payable, other debts, and special time deposits.
The banking system had P12.525 trillion of deposits of as of June 2019. To generate that much in deposits, the banks deployed only P1.932 trillion of equity. For every P100 of equity or stockholders’ money, the banks P648 in deposits, more than P6 of deposits for every P1 of capital.
The banks also had outstanding borrowings of P1.53 trillion against total equity of P1.932 trillion, a difference of P402 billion—the net amount the bank owners were risking to produce P16.843 trillion in assets (41.89 times net equity), P9.989 trillion in loans (24.8 times net equity), P12.523 trillion in deposits (31.15 times net equity).
Put another way, for every P1 the bank owners invested in their banks, they generated P42 of assets, P25 of loans, P12.50 of deposits. No other business can generate so much in resources and leverage so much in liabilities for very little money invested by owners.
Despite such massive undercapitalization, the banks have very low possibility of incurring losses through bank loans. The gross non-performing loans ratio (parent bank level) is 1.56 percent—only P1.56 of every P100 in money lent out has a chance of not being repaid. To think that the 1.56 is already a deterioration. In June 2018, the npl was 1.33 percent.
Of Forbes’ top 20 Filipino billionaires, at least seven families are bankers: That of Henry Sy (the richest family, which owns BDO), John Gokongwei Jr. (Robinsons Bank), the Ayala family (Bank of PI), Lucio Tan (PNB), Aboitiz family (Union Bank), Ramon Ang (Bank of Commerce), and the late Andrew Gotianun (East West Bank).
This report covers 45 universal and commercial banks, including Chang Hwa Commercial Bank and CIMB Bank which started local operations in July and December 2018, respectively.