BSP says no bubble despite banks’ exposure to real estate loans

MANILA, Philippines - There is still no asset bubble in the Philippine property sector despite the sustained rise in banks’ lending to the real estate sector, according to the Bangko Sentral ng Pilipinas.

“Latest indicators still show that there is fundamental demand for housing and for real estate for industry and business, such as for BPOs (business process outsourcing companies), and that there are still no signs of over-stretched valuations in the sector,” BSP Governor Amando M. Tetangco Jr. said in an e-mail over the weekend.

“We continue to closely monitor developments in the real estate sector – bank exposures, as well as the trends in prices of and in the supply and demand for real estate,” he added.

Latest central bank data showed banks’ exposure to the real estate sector went up by 22 percent to P1.097 trillion in end-June from P900.148 trillion in the same period last year. It was also higher than the P1.035 trillion recorded in end-March.

“The BSP has not set prudential limits for the absolute level or nominal aggregate value of real estate exposures both under the old definition and under the new expanded definition.  But we monitor the trends. We indeed note that REE has been on an uptrend,” Tetangco said.

“However, in determining the relative risk to the banking sector, what we deem more important is to consider the exposures against a barometer,” he continued.

“In this case, total loan portfolios. Considering real estate exposures in this manner helps us determine if there is an undue concentration of bank lendings to this specific sector,” Tetangco said.

The bulk of the exposure during the period was in loans to the property sector, which grew 21 percent to P924.317 billion from year-ago levels, while the rest were in the form of investments which rose 26 percent to P172.907 billion.

“The ratio of REE (expanded definition) to total loans as of June is 21.8 percent, just very minimally up relative to the ratio as of March of 21.3 percent,” Tetangco said.

“It is worth noting that if we go by the traditional definition, the ratio is 18.3 percent, still well below the 20 percent prudential limit,” he said.

In 2012, the central bank implemented stricter rules in monitoring banks’ exposure to the property sector. The BSP expanded the reporting system which now covers loans to developers of socialized and low-cost housing, and to individuals, and credit supported by non-risk collaterals or Home Guarantee Corporation guarantee.

Banks are also now required to report investments in debt and equity securities that finance real estate activities.

Prior to that, real estate loans were capped at 20 percent of a bank’s total loan portfolio, a limit set in the aftermath of the 1997 Asian financial crisis.

The BSP in July this year introduced another set of tighter regulations to assess the banks’ exposure to the property sector. Under BSP Circular 839, banks will now undergo a separate stress test so the central bank can evaluate the impact of their exposure to the real estate sector once borrowers fail to service their loans.

The new rules require banks to maintain a common equity tier 1 capital ratio of at least six percent and a minimum risk-based capital adequacy ratio of 10 percent even if 25 percent of a lender’s exposure to the property sector has been written off.