Truth always originates in a minority of one, and every custom begins as a broken precedent—Nancy Astor
In this issue:
Liquidity Under Pressure: Philippine Banks Struggle in Q1 2025 Amid a Looming Fiscal Storm
I. Introduction: A Financial-Political Economic System Under Increasing Strain
II. Liquidity Infusion via RRR Cuts: A Paradox: Declining Cash Amid Lending Boom
III. Mounting Liquidity Mismatches: Slowing Deposits Amid Lending Surge, Liquidity Ratios Flashing Red
IV. Government Banks and Broader Financial Systemic Stress
V. Mounting Liquidity Mismatches: Record Surge in Bank Borrowings and Repo Market Heats Up
VI. RRR Cuts as a Lifeline, Not Stimulus, Why the Strain? Not NPLs, Not Profitability
VII. Bank-Financial Index Bubble and Benchmark-ism: Disconnect Between Profit and Market Valuation
VIII. Financial Assets Rise, But So Do Risks; Spotlight on Held-to-Maturity Assets (HTM); Systemic Risks Amplified by Sovereign Exposure
IX. Brace for the Coming Fiscal Storm
X. Non-Tax Revenues: A High Base Hangover; Rising Risk of a Consecutive Deficit Blowout
XI. April 2025 Data as a Critical Clue of Fiscal Health
XII. Aside from Deficit Spending, Escalating Risk Pressures from Trade Disruptions and Domestic Economic Slack
XIII. Final Thought: Deepening Fiscal-Bank Interdependence Expands Contagion Risk Channels
Liquidity Under Pressure: Philippine Banks Struggle in Q1 2025 Amid a Looming Fiscal Storm
Behind the balance sheets: why Philippine banks are bleeding cash even as lending accelerates—and what the looming fiscal blowout means for systemic risk.
I. Introduction: A Financial-Political Economic System Under Increasing Strain
"However, the data suggests a different story: increasing leverage in the public sector, elite firms, and the banking system appears to be the real driver behind the BSP’s easing cycle, which also includes RRR reductions and the PDIC’s doubling of deposit insurance.
"The evidence points to a banking system under strain—record-low cash reserves, a lending boom that fails to translate into deposits, and economic paradoxes like stalling GDP growth despite near-record employment." (Prudent Investor, April 2025) [bold italics original]
The Bangko Sentral ng Pilipinas (BSP) released pivotal data in its April 2025 Central Bank Survey (MAS) and an updated balance sheet and income statement for the Philippine banking system.
The findings reveal a sector grappling with severe liquidity constraints despite aggressive monetary easing.
This article dissects these challenges, exploring their causes, implications, and risks to financial stability, while situating them within the broader economic and fiscal landscape.
II. Liquidity Infusion via RRR Cuts: A Paradox: Declining Cash Amid Lending Boom
Figure 1
The second leg of the BSP’s Reserve Requirement Ratio (RRR) reduction in March 2025 resulted in a Php 50.9 billion decrease in liabilities to Other Depository Corporations (ODCs) by April.
When combined with the first RRR cut last October, the cumulative reduction from October to April amounted to a staggering Php 429.4 billion—effectively unleashing nearly half a trillion pesos of liquidity into the banking system via freed-up cash reserves. (Figure 1, topmost window)
Even more striking was the BSP’s March report on the balance sheets of Philippine banks. The industry's "cash and due from banks" dived 28.95% year-on-year, from Php 2.492 trillion in 2024 to Php 2.09 trillion in 2025—its lowest level since at least 2014! (Figure 1, middle graph)
This sharp drop calls into question the effectiveness of RRR cuts while also exposing deeper structural issues within the banking system.
Ironically, this cash drain occurred alongside a robust expansion in bank lending. Yet, deposit growth stalled, which further strained liquidity and weighed on money supply growth.
The limited impact of RRR reductions may reflect banks using freed-up reserves to cover existing liquidity shortfalls rather than fueling new lending or deposit growth.
Meanwhile, the BSP’s move to double deposit insurance through the Philippine Deposit Insurance Corporation (PDIC) last March—nearly coinciding with the second phase of the RRR cut—signals growing concerns over depositor confidence, potentially foreshadowing broader financial stability risks
III. Mounting Liquidity Mismatches: Slowing Deposits Amid Lending Surge, Liquidity Ratios Flashing Red
The decline in cash reserves coincided with decelerating deposit growth, even as bank lending surged.
Deposit liabilities growth fell to just 5.42% in March—its lowest since August 2019. The deceleration was mainly driven by a slowdown in peso deposits growth, from 6.28% in February to 5.9% in March. Foreign currency (FX) deposits also remained a drag, despite a modest improvement from 2.84% to 3.23%. (Figure 1, lowest diagram)
In stark contrast, the banking sector’s total net lending portfolio (inclusive of RRPs and IBLs) surged to 14.5% in March from 12.31% in February.
Figure 2
As a result, the ratio of "cash and due from banks" to total deposits has collapsed to 10.37% in March 2025, levels below those seen in 2013—underscoring an escalating liquidity mismatch! (Figure 2, upper pane)
This divergence highlights a critical tension: despite BSP’s aggressive monetary easing, lending is not translating into deposit growth. Instead, it has created a liquidity conundrum—intensifying balance sheet strain.
Beyond cash, the liquid assets-to-deposits ratio has fallen back to levels last seen in April 2020, effectively reversing the gains achieved during the BSP’s pandemic-era historic liquidity rescue.
This indicates a depletion of liquid assets—comprising cash and net financial assets excluding equities—which are crucial for meeting withdrawal demands and regulatory requirements, making this decline a critical vulnerability.
Curiously, cash positions reported by publicly listed banks on the PSE showed a 4.43% YoY increase, with only five of the 16 banks reporting a cash decline. This apparent contradiction prompted deeper scrutiny. (Figure 2, lower table)
The divergence between lending and deposit growth indicates a breakdown in the money multiplier effect, where loans typically generate deposits as borrowers spend.
Two critical factors likely driving the erosion of savings.
First, steep competition arising from the financing crowding-out effect of government borrowing (via record deficit spending), which competes with banks and the non-financial sector for access to public savings, has been a key force in suppressing savings.
Second, extensive debt accumulation from malinvestments in 'build-and-they-will-come' sectors further consumes savings and capital, exacerbating the decline.
IV. Government Banks and Broader Financial Systemic Stress
Our initial suspicion pointed to government banks (DBP and LBP) as potential sources of the cash shortfall.
Figure 3
However, BSP data revealed that liquidity pressures were widespread—not only affecting universal and commercial banks but also impacting thrift and rural-cooperative banks. (Figure 3)
Interestingly, these smaller banking institutions (rural-cooperative banks) displayed relatively better liquidity positions than their larger peers.
This discrepancy could reflect differing reporting standards between disclosures to the public and to the BSP.
Diverging indicators could also signal "benchmark-ism"—where worsening problems are obscured through embellished reporting.
V. Mounting Liquidity Mismatches: Record Surge in Bank Borrowings and Repo Market Heats Up
Another red flag is the record-high bank borrowing.
Figure 4
Total bank borrowings soared by 40.3% in March to an all-time high of Php 1.91 trillion. This pushed the borrowing-to-liabilities share to 7.89%—its highest level since the pandemic’s onset in March 2020. (Figure 4, topmost chart)
The sharp rise was driven by bills payable, which skyrocketed by 65.4% in March.
In contrast, bonds payable grew by just 4.12%. As a result, bills payable now make up 5.5% of total liabilities—almost double the 2.9% share of longer-term bonds. (Figure 4, middle image)
This asymmetry is mirrored in listed banks’ financials. Excluding BPI (which lumps bills under "other borrowed funds"), bills payable surged by 69.4% in Q1 2025 to Php 1.345 trillion.
MBT alone reported a 214% increase to Php 608 billion—representing 45.21% of the aggregate from PSE-listed banks.
Repo transactions also surged in March. (Figure 4, lowest diagram)
Interbank repos hit an all-time high, while repo trades with the BSP reached the third highest level on record. This reflects increasing reliance on short-term funding mechanisms, a hallmark of tightening liquidity conditions.
This reliance on short-term borrowing for bridge financing, while cost-effective in the near term, exposes banks to refinancing risks, particularly if interbank rates rise or market confidence falters.
All this underscores that liquidity stress is not confined to a single quarter—it is deeply embedded in bank balance sheets.
VI. RRR Cuts as a Lifeline, Not Stimulus, Why the Strain? Not NPLs, Not Profitability
In hindsight, both legs or phases of the RRR cut were not preemptive monetary tools but reactive measures aimed at alleviating a growing liquidity crisis.
Similarly, rate cuts—intended to reduce borrowing costs—only served to expose the structural weaknesses in the banking system.
Figure 5
According to the BSP, credit delinquency improved in March, with Gross and Net Non-Performing Loans (NPLs) as well as Distressed Assets showing a slight decline. (Figure 5, topmost pane)
Indeed, the banking system posted a 10.6% YoY increase in Q1 2025 profits—better than last year’s 2.95%, but still significantly weaker than 2022–2023. It was also a deceleration from Q4’s 20.7%.
While the profit rebound is positive, it may be artificially inflated by 'accounting acrobatics.' The slowdown relative to 2022–2023 suggests diminishing returns from lending—driven by weaker borrower demand, rising unpublished NPLs, or both.’
VII. Bank-Financial Index Bubble and Benchmark-ism: Disconnect Between Profit and Market Valuation
Despite slowing profit growth, the PSE’s Bank dominated Financial Index continued to hit record highs in Q1 and into May 2025. This signals a disconnect between bank valuations and their actual financial or ‘fundamental’ performance. (Figure 5, middle graph)
This growing divergence may reflect "benchmark-ism"—where inflated share prices are used to mask the sector’s internal fragilities, as previously discussed.
Despite a sharp slowdown in revenue growth (10.37% vs. 24% in 2024), listed banks still posted a 7.5% increase in ‘accounting profits.” (Figure 5, lowest diagram)
In theory, profits should enhance liquidity, not diminish it—unless those profits are largely cosmetic—"benchmark-ism."
For investors, the divergence between stock performance and fundamentals signals caution, as inflated valuations could unravel if liquidity pressures escalate.
VIII. Financial Assets Rise, But So Do Risks; Spotlight on Held-to-Maturity Assets (HTM); Systemic Risks Amplified by Sovereign Exposure
The rapid contraction in cash reserves cannot be fully attributed to lending, NPLs, or financial asset growth.
Figure 6
Bank financial assets (net) rose 11.8% to an all-time high of Php 7.89 trillion in March. Accumulated unrealized losses narrowed from Php 26.4 billion to Php 21.04 billion. (Figure 6, topmost chart)
Instead, held-to-maturity (HTM) assets, primarily government securities, offer insight.
After a period of stagnation, HTMs grew 1.7% in March—breaking the Php 4 trillion ceiling (since 2023) to reach a new high of Php 4.06 trillion. (Figure 6, middle image)
Despite lower interest rates, banks have not pared back HTM holdings. That’s because most HTMs are composed of government securities, particularly "net claims on the central government" (NCoCG), which surged to a record Php 5.58 trillion in March. (Figure 6, lowest diagram)
This spike aligns with the record Q1 fiscal deficit—and likely presages a similarly wide Q2 deficit.
IX. Brace for the Coming Fiscal Storm
As we’ve consistently argued, rising sovereign risk will amplify the banking system’s fragility.
A blowout fiscal deficit won’t just expose skeletons—such as questionable accounting practices used to inflate profits, understate NPLs, or distort share prices—it will likely push the BSP toward a more aggressive role in stabilizing the financial system.
This intervention could have sweeping implications for financial markets and the broader economy.
Figure 7
The public and the market's complacency over the government's deteriorating fiscal position has been astonishing.
In Q1 2025, a steep revenue decline triggered a record fiscal deficit blowout—comparable to historical first-quarter data. As a result, the deficit-to-GDP ratio surged to 7.3%, far above the government’s full-year target of 5.3% (DBCC). (Figure 7, topmost window)
Markets have largely dismissed these data, buoyed by two ‘available bias’ heuristics: the midterm election cycle and a steady stream of official reassurances.
Yet it is worth underscoring: the 7.3% deficit-to-GDP ratio masks the extent of dependence on deficit spending. That same deficit spending was a key driver behind Q1 2025’s 5.4% GDP growth—just as it has been in many previous quarters/years.
Also, it is crucial to distinguish the nature of government spending and revenue: while expenditures are programmed or mandated by Congress, actual disbursements are increasingly prone to executive discretion, with breaches of the enacted budget observed over the past six straight years—symptoms of centralization of power.
In contrast, revenues depend on both economic activity and administrative collection efforts.
Despite a 13.6% year-on-year increase in tax revenues in Q1, this gain failed to offset the collapse in non-tax revenues, which plunged by 41.2%. This drop severely weakened the overall revenue base.
X. Non-Tax Revenues: A High Base Hangover; Rising Risk of a Consecutive Deficit Blowout
Non-tax revenues surged by 57% in 2024, lifting their share of total collections to 13.99%—the highest since 2007’s 17.9%. (Figure 7, second to the highest chart)
With a long-term average of 11.7% since 2000, current levels are markedly elevated. Moreover, 2024 figures significantly exceeded the exponential trend, indicating the potential for a substantial retracement.
While the official breakdown or targets for collection categories remain undisclosed, it is plausible that non-tax revenue targets for 2025 were benchmarked against last year’s elevated base—potentially complicating fiscal planning and exacerbating volatility in public revenue performance
Authorities expect total revenues to reach 16.5% of GDP in 2025. Yet, in Q1, the revenue-to-GDP ratio slipped to 15.15%, reflecting the substantial shortfall in non-tax collections.
This implies that the Bureau of Internal Revenue (BIR) and Bureau of Customs (BOC)—which posted 16.7% and 5.7% year-on-year growth respectively in Q1—would need to significantly accelerate collections to bridge the gap.
But the Q1 data suggests that current tax growth trends are unlikely to be sufficient.
If tax revenue growth merely holds steady—or worse, underperform—then Q1’s historic deficit may not be a one-off.
Instead, it risks being carried into Q2, leading to a second consecutive quarter of elevated deficits.
This would reinforce perceptions of fiscal slippage or ‘entropy’, with direct implications for financial markets, interest rates, and banking sector dynamics.
XI. April 2025 Data as a Critical Clue of Fiscal Health
The Bureau of the Treasury is expected to release the April 2025 National Government Cash Operations Report (COR) in the final week of May.
Due to the shift in VAT filing from monthly to quarterly, April’s figures will be the first major test of whether tax receipts can rebound sharply enough to counterbalance the Q1 shortfall.
April is typically one of the stronger months for collections. For instance, in January 2024, the government recorded a Php 87.95 billion surplus—the highest since 2023—following changes in the VAT reporting regime. (Figure 7, second to the lowest graph)
To keep the 2025 full-year deficit ceiling of Php 1.54 trillion within reach, the government would need to secure multiple monthly surpluses—or at least significantly smaller deficits.
A hypothetical Php 200 billion surplus in April would be required to partially offset Q1’s Php 478 billion fiscal gap and keep the official trajectory on track.
XII. Aside from Deficit Spending, Escalating Risk Pressures from Trade Disruptions and Domestic Economic Slack
However, this fiscal balancing act is made more difficult by worsening external and domestic conditions.
The global trade slowdown—exacerbated by ongoing trade tensions and supply chain fragmentation—will likely weigh on the Philippines’ external trade.
Meanwhile, intensifying signs of slack in the domestic economy further threaten revenue generation, especially for the BIR and BOC.
These pressures highlight the structural reliance on debt-financed deficit spending.
Rising fiscal shortfalls increase sovereign risk, which can ultimately be transmitted into the broader economy through multiple channels—elevated inflation or stagflation risks, weakening credit quality or credit risks, liquidity pressures in the banking system and more.
Contagion risks may also emerge in financial markets, manifesting through a surge in the USD/Php exchange rate (currency risk), rising bond yields (currently diverging from declining ASEAN counterparts) or interest rate risk, and amplified volatility in the stock market (including related markets—market risk). (Figure 7, lowest image)
All these factors align with—and reinforce—the deteriorating liquidity and funding conditions apparent in bank balance sheets.
The nexus between fiscal fragility and banking stress is no longer theoretical; their growing interdependence is symptomatic in slowing deposit growth, increased reliance on repo markets, and rising bank borrowing.
XIII. Final Thought: Deepening Fiscal-Bank Interdependence Expands Contagion Risk Channels
As fiscal risks mount, so too does the potential for cross-sectoral contagion and cascading effects. The banking system—already struggling with liquidity depletion—faces heightened exposure due to its expanding claims on sovereign securities (implicit quantitative easing).
Again, though partially obscured, stagflationary pressures, deteriorating credit quality, and rising funding costs may converge, amplifying broader macro-financial instability.
In short, the fiscal storm is no longer a distant threat—it is approaching fast, and its first casualties may already be visible in the cracks forming across the financial system.
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Reference
Prudent Investor, BSP’s Fourth Rate Cut: Who Benefits, and at What Cost?, April 13,2025, Substack
