S&P flags risks from lending to real estate sector

MANILA, Philippines — S&P Global Ratings has flagged risks from the exposure of Philippine banks to the volatile property sector.

Nikita Anand, primary analyst at S&P, said in a webinar that property market disruptions arising from the impact of the COVID-19 pandemic is a risk to the country’s full economic recovery.

“It’s a structural risk for the banking sector; around 20 percent of the loans are related to real estate markets. So any sharp property market slowdown will affect the financial performance of banks,” she said.

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed growth of real estate loans extended by big banks accelerated to 9.1 percent in December from 8.2 percent in November.

Lending to real estate activities extended by universal and commercial banks amounted to P1.93 trillion in end-2021 from P1.77 trillion in end-2020, and accounted for 20.1 percent of the total P9.6 trillion loans extended by the banks.

Even before the pandemic, the BSP had already implemented various macroprudential measures that would safeguard against property price bubbles.

As part of its pandemic response measures, the central bank hiked the real estate loan limit of big banks to 25 percent, from 20 percent in August 2020, to free up P1.2 trillion in additional liquidity for lending to the sector.

Aside from placing a cap on real estate loans and loan-to-value ratio, other safeguard measures include the introduction of new monitoring tools such as the real estate stress test (REST) and the residential real estate price index (RREPI), helping curb the real estate exposure of banks.

Moreover, authorities also adopted the counter-cyclical capital buffer on big banks as well as their subsidiary banks and quasi-banks to prevent excessive credit growth.

However, the BSP needs to ensure that the expansion of money and credit, along with fiscal stimulus and low interest rates, will provide underlying support to economic activity without leading to excessive future inflation and contributing to financial stability risks.

Aside from risks from the property sector, Anand said other risks include new COVID-19 variants on top of the more contagious Omicron variant that could lead to the reimposition of strict lockdown measures, as well as the rapid rise in interest rates in response to the looming rate hikes led by the US Federal Reserve.

“A rapid rise in interest rates in response to global interest rates can reduce demand for credit and can increase the interest burden on borrowers. Some of the highly indebted borrowers and lower-rated borrowers can find it difficult to repay, which can result in asset quality pressure on the banking sector,” Anand said.