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Fitch says Philippine banks at risk from weak property sector
MANILA, Philippines — Philippine banks remain at risk amid the prolonged weakness of the property sector despite the recovery in prices in the fourth quarter of last year, according to Fitch Ratings.
In a report, the debt watcher said the Philippines’ property market would remain weak amid the impact of the pandemic.
“We expect the property market to remain soft in the near term, considering the sluggish economic recovery and weak housing affordability,” Fitch said.
It said the sustained weakness in the property market would continue to pressure banks’ asset quality, which is already on a negative outlook. A downgrade of the asset quality scores may likely to lead to a downgrade in banks’ viability ratings.
Despite the steady drop in the prices of condominium units, data from the central bank showed the residential real estate price index (RREPI) reverted to positive territory, inching up by 0.8 percent to 134.4 percent in the fourth quarter of last year from 133.3 in the same quarter in 2019.
“Philippine property prices retraced some of the recent losses in the fourth quarter of 2020, although condo prices in the National Capital Region – where banks have the most property exposure – remained 20 percent below the peak in the second quarter of 2020,” Fitch said.
The debt watcher said average property prices are nearly 15 times median household income, among the highest in Asia Pacific.
Fitch also said Philippine banks would be able to withstand moderate stress in the property market as large real estate developers boosted their liquidity last year to help weather the COVID-19 crisis.
“Nevertheless, 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,” it said.
Fitch sees the Philippines recovering from the pandemic-induced recession with a gross domestic product (GDP) growth of 6.9 percent this year from a record contraction of 9.5 percent last year as the economy stalled then the country imposed the longest and strictest lockdown in the world.
It added quickening inflation over the past few months suggests limited room to maintain a dovish stance after the Bangko Sentral ng Pilipinas (BSP) slashed the benchmark interest rates by 200 basis points to a record low of two percent to soften the blow of the COVID-19 pandemic on the economy.
“Higher interest rates could sap housing demand further and dent recovery in property, although any tightening should be measured as the central bank is likely to maintain an expansionary monetary policy to support the economic recovery,” Fitch said.
Real estate loan balances for most rated major banks in the Philippines barely increased last year, reflecting tepid commercial property demand and the banks’ heightened risk aversion.
As part of its COVID-19 response measures, the BSP’s Monetary Board raised the loan limit to the real estate sector by universal and commercial banks to 25 percent of total loan portfolio from the previous 20 percent in August last year to free up P1.2 trillion for lending to the sector.
“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 percent prior to the crisis,” Fitch said.
The credit rating agency said residential mortgage non-performing loan (NPL) ratio soared to 8.4 percent in end-September last year from 3.1 percent in end- 2019, showing default risks for some loans may have already materialized,
Data from the BSP showed real estate loans increased by 5.5 percent to reach P1.77 trillion and accounted for 19.8 percent of the total loan disbursements in end-February.
Source: https://www.philstar.com/business/2021/04/01/2088377/fitch-says-philippine-banks-risk-weak-property-sector