S&P Global Ratings is wary about the rising exposure of Philippine banks to the volatile real estate market as the country gradually recovers lost ground from the impact of the COVID-19 pandemic.
S&P primary analyst Nikita Anand said that disruptions in the property market due to the global health crisis 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,” Anand said.
Latest data from the Bangko Sentral ng Pilipinas (BSP) showed that the 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 sector.
Even before the COVID-19 pandemic, the BSP has 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 countercyclical 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 the expansion of money and credit, along with fiscal stimulus and low interest rates, would provide underlying support to economic activity without leading to excessive future inflation and contributing to financial stability risks.
S&P sees the country’s gross domestic product (GDP) growth accelerate to 7.4 percent this year after exiting the pandemic-induced recession with a GDP expansion of 5.6 percent last year after contracting by 9.6 percent in 2020 due to the impact of the COVID-19 pandemic.
This is well within the seven to nine percent target set by the Cabinet-level Development Budget Coordination Committee (DBCC).