Fitch: Philippine banks face higher impairment risk

MANILA, Philippines — Philippine banks are facing higher impairment risk amid a correction in property prices and a much weaker recovery from the recession caused by the pandemic, according to Fitch Ratings.

In a report, Fitch said asset quality stress appears high in the Philippines due to the property price correction.

“The risks may weigh on the viability ratings of banks in regions with high household leverage that limits our operating environment assessment,” the debt watcher said.

Fitch said the non-performing loan (NPL) ratio in housing surged the most among Asia Pacific banks to around nine percent in 2020 from three percent in 2019 as the pandemic-induced shock and sluggish job conditions led to a correction in property prices.

It said property prices corrected by about 12 percent from the second quarter of 2020.

However, Fitch said total Philippine residential mortgage exposure as a percentage of total assets is the lowest in the region.

“We believe the major Philippine private banks have sufficient earnings and capital buffers to withstand rising asset-quality risks from property-price fluctuations,” Fitch said.

Based on the latest Residential Real Estate Price Index (RREPI) released by the Bangko Sentral ng Pilipinas (BSP), property prices declined for the second straight quarter, slipping by 9.4 percent to 138.5 in the second quarter from a year-ago level of 152.8.

Fitch expects residential mortgages to remain the backbone of property lending across Asia Pacific banking systems, increasing by an average of nine percent versus the seven percent growth in commercial property lending from 2017 to 2020.

It said the outlook remains less optimistic and the risk could be higher for commercial property lending in some markets, as a prolonged pandemic could continue dampening borrowing appetite for commercial properties such as offices and shopping malls.

“We believe drawdowns could be delayed until there is more concrete evidence of a sustained economic recovery,” it said.

Data showed total property lending accounted for about 21 percent of total assets by end-2020 on average, with residential mortgages making up around 70 percent of total property lending.

“The Philippines is the exception as its retail loan market is relatively underdeveloped while demand for office space had been driven by offshore gaming and call centers,” Fitch said.

The debt watcher pointed out most Philippine conglomerates – to which banks have concentrated exposure – also have sizable real-estate businesses, which support higher commercial property lending.

It warned stress in the property sector could weigh on the conglomerates and pose indirect contingent risks that are not reflected in the currently low direct exposures shown on the banks’ loan portfolios.

Fitch said emerging markets including the Philippines have fewer property-related policies, higher risk appetites or lower absorption buffers.

Real estate loans disbursed by universal and commercial banks went up by 7.2 percent to P1.82 trillion in end-September and accounted for 19.7 percent of the total loan book. Bank lending grew for the second straight month, increasing at a faster rate of 2.7 percent to P9.25 trillion as the economy continued to recover from the pandemic-induced recession.