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Fitch: Philippines banks remain at risk
Exposure to weak property market could diminish banks’ buffers Debt watcher Fitch Ratings has warned the Philippine banking sector of heightened impairment risks from the property sector.
“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 emphasized in a report released on Wednesday.
The credit ratings agency said it expects the property market to remain weak in the near term, considering the sluggish economic recovery and soft housing affordability in the country.
This is despite property prices saw an uptick of 2.4 percent in the fourth quarter of 2020 and reversed some of the recent losses, although condominium prices in the National Capital Region – where banks have the most property exposure – remained 20 percent below the peak in the second quarter of last year.
“New lockdown measures announced in late-March 2021 for the capital region are likely to dampen business and consumer confidence, which could sap property demand and ultimately weigh on banking sector asset quality,” Fitch also remarked in a separate statement.
The recent surge in the daily coronavirus disease 2019 infection since the middle of this month has prompted the national government to place the National Capital Region and the adjacent provinces of Bulacan, Cavite, Laguna and Rizal under enhanced community quarantine (ECQ) until April 4.
“Lumpy asset impairments could arise should renewed economic weakness begin to result in the default of larger property developers that we do not currently expect under our base case,” Fitch also stressed.
In the report, the credit rater said real estate loan balances for most of its rated major banks in the country “barely increased in 2020, in reflection of tepid commercial property demand and the banks’ heightened risk aversion.”
This is in spite of the regulatory easing of real-estate loan limits to 25 percent from 20 percent, it underscored.
“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,” the credit watchdog continued.
It added default risks for some loans may have already materialized, with the residential mortgage non-performing loan ratio climbing to 8.4 percent by September 2020 from 3.1 percent at end-2019.
Fitch further said rising inflation is also posing another challenge for the monetary policy stance of the Bangko Sentral ng Pilipinas (BSP), especially if demand-pull inflation takes hold when the economy reopens.
The 4.7-percent inflation rate in February, which surpassed the central bank’s 2-4 percent target upper bound for the second month, suggests limited room for the BSP to maintain a dovish stance, it highlighted.
“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,” the debt watcher noted.
Lastly, it said sustained that weakness in the property market will continue to pressure the banks’ asset quality, which is already on a negative outlook.
Source: https://www.manilatimes.net/2021/04/02/business/business-top/fitch-ph-banks-remain-at-risk/858665/