Philippine banks still at risk of continued property sector slump

A view of residential condominium buildings in Mandaluyong, Metro Manila, Aug. 22, 2016. — REUTERS

Luz Wendy T. Noble, Reporter

PHILIPPINE BANKS are still facing risks from a prolonged weakness in the property market, Fitch Ratings said.

“Fitch remains watchful of any signs of an undue rise in banks’ risk appetite when the economy recovers, as many banks had substantial residential mortgage loans with loan-to-value ratios that exceeded 80% prior to the crisis,” Fitch analysts Tamma Febrian and Willie Tanoto said in a note on Wednesday.

“Sustained weakness in the property market will continue to pressure the banks’ asset quality, which is already on a negative outlook,” they added.

Latest data from the Bangko Sentral ng Pilipinas showed residential property prices picked up in the fourth quarter of 2020 driven mainly by quicker increase in home prices outside Metro Manila.

The central bank’s residential real estate price index rose 0.8% year on year in the October to December period, reversing the 0.4% decline in the third quarter but a slower pace than the 10.4% growth a year earlier.

Home prices recovering at a time when economic recovery is not yet fully stabilized could affect banks’ buffers during the crisis, according to Fitch Ratings.

“Protracted economic weakness could expose the banks to lumpy impairments and diminish their loss-absorption buffers — given their high large-borrower concentration and the strong correlation of the property sector to the broader economy,” the analysts said.

The debt watcher said rated Philippine banks will continue to withstand moderate stress in the real estate sector, while many property developers boosted their liquidity last year to guard against the impact of the crisis.

“We expect the property market to remain soft in the near term, considering the sluggish economic recovery and weak housing affordability,” the analysts said, noting average property prices are nearly 15 times median household income which stands among the highest in Asia-Pacific.

BSP Governor Benjamin E. Diokno said in February that they do not expect “any undue surge in asset prices.”

“While we expect asset price inflation to remain manageable, the BSP continues to closely monitor market conditions for signs of imbalances or the potential presence of asset bubbles,” Mr. Diokno said.

Asset price bubbles occur when prices of stocks, bonds, properties, or commodities increase quickly without underlying fundamentals such as increased demand. Such incidents could be a threat to financial stability.