MANILA, 22 October — Some Philippine commercial banks are shouting in their press releases that they are keeping their income targets this year despite the bleak outlook for the banking sector. These banks may have solid reasons to stick to their goals, such as anticipated income from certain business transactions. However, the reported increase in bad loans of commercial banks dampened investors’ mood. As a result, share prices headed further south as market players evaded the sector last week.
It was unfortunate that one bad news from the banking industry wiped away expectations of corporate recovery. Ironically, the stock market hoped to stage a rebound last week after the Bangko Sentral ng Pilipinas (BSP) released data showing a sharp increase in portfolio investments in September. BSP data showed a net inflow of $22 million in portfolio investments for the month. From January to September, the BSP recorded some $1.02 billion in portfolio investments. BSP sources said last month’s inflow of hot money could have been caused by attractive interest rates. “Philippine rates are now attractive to these investors because the US Federal Reserve has been slashing rates while the BSP has kept local rates unchanged,” BSP sources said. They said the BSP’s move to increase banks’ reserve requirements by four percentage points and the abolition of the overnight rate tiring system also contributed to higher yields for peso-denominated investments.
The losses in bank shares last week stemmed from a BSP announcement that bad loans for the commercial banking sector reached 18.03 percent in August, from 17.72 percent in July. Bad loans are debts that have remained unsettled 90 days past their due dates. The BSP said bad loans increased by 2.5 billion pesos in August even as total loan portfolio of commercial banks dropped by 13.3 billion pesos during the period. The BSP earlier set a 10 percent loan growth rate target for the industry this year. So far, commercial banks posted loan growth rates of less than 5 percent, or half the BSP’s goal.
This spells bad news for the industry because the absence of quality borrowers would further shrink the banks’ loan portfolio. If loan growth continues to decline, bad loan ratio will go up in the balance sheet. The BSP, however, could help improve the picture by initiating measures to liquefy some of the non-performing assets in the banking industry.
Analysts said the government’s announcement that it missed its budget deficit target in September would likely be used by market players to push interest rates up in this week’s Treasury bill auction. The government reported last week that as of September, its budget gap has reached 122.15 billion pesos, or 1.9 billion pesos more than its target for the period. The government said it failed to meet its goal because of poor revenue collection in the first nine months. A bank official said there might be some pressure to increase interest rates in the near term because of the negative news. However, he expressed doubts that the Bureau of Treasury would allow interest rates for 91-day Treasury bills to go beyond 10 percent.
To stem the tide, the Bureau of Treasury announced last week it generated 10 billion pesos from its issuance of 10-year zero-coupon bonds. A zero-coupon bond is a debt instrument sold at a deep discount from its face value. For example, in this case the government sold 35 billion pesos worth of zero-coupon bonds but it only got 10 billion pesos in cash because of the discounted rate of the debt paper, which matures in 10 years. The government plans to issue another set of zero-coupon bonds by year-end.
Meanwhile, the government will tap small investors in its fund raising activities starting this week with the reopening of a retail bond facility. The government will initially sell 5 billion pesos worth of Retail Treasury Bonds (RTBs). Investors could buy RTBs government securities for small investors such as family members of overseas Filipino workers with a minimum 5,000 pesos investment. For the new RTBs, the government has tapped the services of BPI Capital Corp., BDO Capital & Investment Corp., First Metro Investment Corp. and the Land Bank of the Philippines as selling agents. This means interested parties could buy RTBs from any of these financial institutions.
Through these RTBs, the government hopes to give small investors the chance to invest their savings in a high-paying financial instrument. In April, the government sold 15.2 billion pesos worth of RTBs at a coupon rate of 14.25 per annum, which is definitely better than the highest time deposit rate offered by private commercial banks. Unfortunately, traditional investors such as insurance companies, financial institutions, and corporations gobbled up the RTBs issued in April. This time, the government hopes to sell at least 50 percent of the RTBs to the retail market.