Turbulence

It isn’t over yet. The banking industry is still in a period of turbulence.

After two medium-sized US banks collapsed earlier this month, Swiss authorities basically forced the country’s largest bank UBS to acquire troubled Credit Suisse at a deep discount. The acquisition was thought to help maintain stability in the banking industry, averting a domino effect on other distressed lending institutions.

But the aftershocks continued to rumble. Last week, it was the banking giant Deutsche Bank that seemed to be running into trouble. The bank’s stock prices dropped substantially while investors closely scrutinized the bank’s portfolio.

Everywhere, it seems, investors were pulling out of banking stocks and depositors were withdrawing their money from smaller banks and transferring it to bigger banks on the superstition that size translates into strength. That creates instabilities in the system by producing fear-driven liquidity problems where none should exist.

It appears the global banking industry needs to navigate through a minefield the coming months. The chief of the IMF warns that risks to financial stability have increased of late.

A few months ago, a major cryptocurrency venture failed spectacularly, due largely to substandard corporate governance. The impact of this failure on banks exposed to the venture has yet to be fully assessed.

Then there are mega borrowers running into financial trouble. The biggest of these is the property developer China Evergrande Group which holds over $300 billion in liabilities. Of this amount, $22.7 billion is in offshore debt.

Evergrande is trying to restructure its humongous debt in a post-pandemic environment where the market is weak and interest rates are high. Walking a tightrope might, by comparison, seem a much easier thing to do.

“Too big to fail” is a phrase usually applied to lending institutions. It might also be applied to large borrowers who now find themselves over-leveraged. Unlike the case of banks, where regulators can move swiftly and force acquisitions such as in the case of Credit Suisse, it is more challenging to rescue failing borrowers.

Even as the crisis afflicting global banking is like a slow-moving disaster, analysts point to a common failure underpinning the diverse cases of failure. This concerns the tendency to play down interest rate risks.

After the global financial crisis of 2007-2008, governments and central banks have tried to regrow their economies by pushing down the interest rate. The cheap money regime persisted for over a decade – producing robust economic expansion but also a lot of moral hazards. During this period, financial institutions began behaving as if cheap money would be forever.

One symptom of this risky behavior was when banks loaded up on low interest rate bonds that became financial time bombs when interest rates began rising sharply over the past year. These time bombs could yet produce more failures in the coming period.

The anxiety driving investors to sell down banking stocks and take out deposits from banks at the slightest hint of distress is not entirely misplaced.

Moving on

The past few months were extraordinarily challenging for telecoms giant PLDT.

Last December, a P48-billion budget overrun was discovered by auditors. There was unfounded speculation that the overrun was somehow a case of corporate fraud. Some shareholders in the US, in fact, filed a class suit against the company for mishandling corporate funds.

On top of that, the Makati LGU shut down the headquarters of Smart, claiming a large volume of unpaid corporate taxes. The matter was soon clarified and the closure was lifted.

Meanwhile, the comprehensive audit of the large budget overrun showed no fraud was committed. The budget overrun was due to “over-orders” of 5G technology that was programmed for over a much longer period in the company’s plans. It was plainly a case of capital expenditure occurring ahead of schedule.

A few days ago, PLDT released its yearend earnings report. The report dutifully carried a lower earnings number, reflecting the revenue hit incurred because of the P48-billion advanced capital expenditure last year. This brings to a close the controversy over the advanced capital expenditure.

The matter was, in the end, simply a case of capex carry over that still had to be fully reflected in the booking process. Company procedures have since been tightened and its managers are now even more determined to move on from this episode.

The capital expenditure incurred last year are now assets reflecting in the company’s growth. It is not spending that went to waste.

PLDT president Al Panlilio points out that the company’s earnings before interest, tax, depreciation and amortization (EBITDA) in fact grew by 4 percent last year to P100.48 billion. This is the first time in the company’s history that it posted an EBITDA breaching the P100-billion mark. It is an indication the company’s fundamentals remain as robust as ever.

PLDT is looking to increase its revenues by mid-single digit this year. This should be encouraging news for investors in the cutting edge technology company.

Capital expenditure, particularly in 5G technology, is vital in enabling the company to maintain its dominant market share. In the Philippines, the number of mobile devices outnumber the population. In order to keep the loyalty of its clientele, telecoms providers ought to keep abreast with rapidly advancing technology.

Despite the controversy, PLDT managed to retain the confidence of its subscribers even as competition in the industry becomes fiercer. This has to be the factor of fundamental importance.

Continuous improvements in both quality and cost of service is vital in keeping our whole economy competitive.