Thin

The dry and hot season we call our “summer” has officially begun. During this time of the year, we worry about energy shortages – a chronic problem we have never fully addressed.

Our energy officials try to convince us that we will have no brownouts – if no power plants break down. That is hardly any assurance. Our dilapidated power plants are chronically disposed to sudden outages.

The uncertainty of our energy supply is almost guaranteed by the fact that our reserves are uncomfortably thin. They have remained thin for many reasons. There are not enough investments in base load capacity. Also, it will be too expensive for us to maintain a large power reserve. We pay for the capacity even if it is not used. In the liberalized power situation we have, consumers pay for unused capacity.

If it is any consolation, the Department of Energy has the best possible team of managers recognized for their integrity and competence. Energy Secretary Popo Lotilla has held the post previously and is well versed in the issues.

Early in his current term, Lotilla acted swiftly to improve the reliability of the Malampaya gas project. He recognized the urgency of running this asset safely and reliably as our only source of natural gas approaches the exhaustion of its reserves.

Recall that the two oil multinationals involved in this pioneering project sold their stakes to a Filipino company. The DOE then approved the transfer of this huge energy asset to the Razon-led Prime Infrastructure Capital Inc., a company experienced with developing and operating large-scale projects. Lotilla put together a top-notch team of technical, financial and legal experts to oversee the Malampaya transaction and ensure the best protection for our consumers.

Prime Infrastructure retained the Filipino experts who have been part of the Malampaya operations over the past two decades. The new owners are bringing in even more experts to ensure optimal use of what is left of the gas reserves and possibly prepare to explore additional wells.

A large portion of our energy requirement is supplied by natural gas. This source is vital, especially in the light of restrictions on coal exportation in some of our traditional suppliers and the sky-high prices of oil over the past year.

Exploring and exploiting additional sources of natural gas are hampered by the large investments required to do so as well as by geopolitical concerns. The most readily available deposits, unfortunately for us, are located in the contested South China Sea.

To be sure, government will not have the billions to spare to fund upstream natural gas exploration and production. We will rely on the private sector to raise the investments needed to ensure our energy security.

The Razon-led Prime Infrastructure Capital is probably the best positioned to raise capital for exploration and manage a large natural gas extraction operation. Our energy future will be shaped by how effectively they can deliver new natural gas sources.

Tougher

The global banking saga continues as bank stocks retreat and investors seek sanctuary in the larger banks. But it is not size but capitalization that matters ultimately.

A unit of Fitch investor services, CreditSights, recently put out a report on Philippine banks. While expressing confidence in the large banking institutions such as BDO and BPI, the report expressed concerns about the profitability of medium-sized banks in the face of strong headwinds in the global financial market. Among the medium-sized banks mentioned in the report are Security Bank, Union Bank and the Philippine National Bank.

In the case of Security Bank, CreditSights mentioned the bank’s business unit that caters to small- and medium-scale enterprises. By contrast, however, Moody’s credit rating agency reiterated its stable outlook on Security Bank, awarding it a rather impressive rating of Baa2.

CreditSights appears to have made its evaluation without looking into the entirety of the bank’s operations. Security Bank has maintained a CET1 capital ratio of 16 percent, making it among the top two Philippine banks with the biggest capital buffers. The bank has the financial strength to navigate the current environment.

Furthermore, Security Bank’s liquidity ratios significantly exceeded stringent Philippine regulatory requirements. The bank announced it had a net stable funding ratio of 122 percent and a liquidity cover ratio of 144 percent. This means the bank has abundant resources to cover its operating needs.

Security Bank likewise enjoys an impressive credit quality profile. The bank closed 2022 with credit cost at 59.9 basis points. This puts the bank at among the best in the industry.

The bank should, in fact, be praised for its efforts to reach out to small and medium enterprises that comprise 99 percent of all registered businesses in the country. It has tailored its financial products, including cash management and digital payments systems, for financial inclusion. In the same manner, the bank cultivated a strong culture of credit responsibility among its clients.

As reiterated in the statement of the Bankers Association of the Philippines, Filipino banking institutions draw their strength from diversified deposits bases. Contrast this, for instance, with the failed Silicon Valley Bank whose deposit base was recklessly concentrated in tech start-up companies.

The BSP has always been among the toughest regulators. It conservatively enforces single-borrower limits and encourages diversity in bank clientele. For this, our banking system is proving tougher than counterparts abroad.

The ratings agencies ought to be more careful in its evaluation of financial institutions – particularly in the face of wobbly confidence in the banking industry brought about by a few mismanaged banks abroad.