Banks Rule the PSEi 30’s 3.85% Low Volume Weekly Rally (July 14)

The whole profit of the issuance of money has provided the capital of the great banking business as it exists today. Starting with nothing whatever of their own, they have got the whole world into their debt irredeemably, by a trick. This money comes into existence every time the banks ‘lend’ and disappears every time the debt is repaid to them. So that if industry tries to repay, the money of the nation disappears. This is what makes prosperity so ‘dangerous’ as it destroys money just when it is most needed and precipitates a slump. There is nothing left now for us but to get ever deeper and deeper into debt to the banking system in order to provide the increasing amounts of money the nation requires for its expansion and growth. An honest money system is the only alternative—Frederick Soddy, (1877-1956) British author, professor, Nobel Prize for Chemistry, 1921

In this issue

Banks Rule the PSEi 30’s 3.85% Low Volume Weekly Rally (July 14)

I. Financials Dominated the PSEi 30’s Low-Volume Rally

II. Divergent Performance Between PSEi 30 and Non-PSEi 30 Banks

III. Financial Index: The Roadblocks to a Sustained Trend Breakthrough

IV. Booming Bank Shares: Is This Time Different?

V. Why the Outperformance of the Financial Index? 

Banks Rule the PSEi 30’s 3.85% Low Volume Weekly Rally (July 14)

The Philippine PSEi 30 soared mainly from its banking components, which ironically deviated from the performance of non-PSE banks and the other non-financial sectors.  Is this sustainable?

I. Financials Dominated the PSEi 30’s Low-Volume Rally

Financials championed this week’s low volume 3.85% rally.

Figure 1

Financials rocketed by 6.75%, followed by the property and Industrial sectors which also jumped 3.67% and 2.8%. (Figure 1, topmost window)

Two issues, namely BDO Unibank [PSE: BDO] and Bank of the Philippine Islands [PSE: BPI], powered the gains of the PSEi 30 and the outperformance of the Financial Index with a weekly spike in returns of 8.76% and 8.59%, respectively.

Shares of most banking issues were up for the week, but only UBP (-1.47%) declined among the members of the PSEi 30 and the 9-issue Financial Index. (Figure 1, middle table)

This discussion excludes small-cap banks, City Savings Bank [PSE: CSB], Philippine Trust Bank [PSE: PTC], and the Philippine Stock Exchange [PSE: PSE] as the sole non-bank member of the Financial Index. 

Since BDO and BPI have the largest share weight in the Financial Index, with 38.6% and 28.24% as of July 14, their weekly gains resonated with the latter’s returns. 

Similarly, following the upsurge in the share prices of BDO and BPI, their aggregate weight, including MBT, now commands a stunning 20.3% share of the PSEi basket (as of July 14)! (Figure 1, lowest window)

The thing is, outside this week’s euphoria, only five of the 14 listed issues have delivered returns of over 12% YTD. Six issues have yielded losses YTD.

II. Divergent Performance Between PSEi 30 and Non-PSEi 30 Banks

Figure 2

The chart of the banks depicts the divergent performances of its members. (Figure 2)

The charts exclude the Philippine Bank of Commerce [PSE: PBC]—due to the lack of trading activities.

BDO, BPI, and CHIB are the only banks with share prices in an uptrend. The rest are drudging within their respective trading ranges. 

There’s no denying that a rising tide may lift all boats, but there are many reasons to doubt these, including the lack of savings/volume. 

III. Financial Index: The Roadblocks to a Sustained Trend Breakthrough 

To begin with, while the trio’s pie appears to be in a blowoff phase, the % share weight of the property sector operates in the opposite direction.  

Figure 3

The real estate sector remains the largest client of the banking system. 

Total bank loans to the supply-side sector reached Php 2.315 trillion last May.  Although the share of this supply-side loan portfolio has recently dropped, it remains the most significant (19.7% for Total Banks, 20.1% for Universal and Commercial banks). (Figure 3, topmost graph)

The thing is, should the real estate sector suffer from diminished sales, reduced liquidity, or the emergence of insolvencies, these should impact the banking system’s portfolio and financial standings. 

Second, the abrupt steepening of the Philippine yield curve—even before the Philippine CPI announcement—could have induced the binge buying on key bank issues. (Figure 3, second to the highest chart)

The idea is that an inclined slope translates to higher net margins for banks. 

But higher rates have started to impact the industry’s balance sheet.

As cash holdings continue to slide, bank lending and investment growth appear to have stalled. (Figure 3, second to the lowest window)

And with it, published NPLs have started to U-turn to the upside. (Figure 3, lowest chart)

Figure 4