Stricter property lending rules imposed by the Bangko Sentral ng Pilipinas (BSP) are bound to make the financial sector more careful about too much exposure to real estate credit risk, which should be credit-positive for the banks, Moody’s Investors Service said.
The global credit ratings agency was referring to the BSP’s new stress test requirements for banks that have real estate exposure.
Under the new measure, banks will undergo stress tests to determine whether their capital levels are sufficient to absorb the risk from their real estate lending. It requires banks to assume a write-off of 25 percent of their property exposure, and imposes minimum capital thresholds of a 6 percent common equity Tier 1 (CET1) ratio and a 10 percent total capital ratio after incorporating the effect of the stressed losses on the banks’ capital. The requirements will take effect starting July 19.
Higher minimum capital requirements
“These new requirements are credit-positive for Philippine banks because they will impose higher minimum capital requirements on banks that lend more heavily to the real estate sector, and will serve as a proactive measure to regulate banks’ lending to the sector,” Moody’s said in a statement released on Thursday.
Moody’s said it expects the stress test requirements will force the banks to be more disciplined in their real estate lending, and will act as a measure to regulate credit extended to the real estate sector and prevent imbalances created by oversupply or property prices from reaching unsustainable levels.
The ratings agency noted that real estate loans in the Philippines have grown rapidly over the past five years, fueled by robust economic growth and strong domestic demand.
Moody’s noted that the compound average growth rate of banks’ real estate loans over 2009 to 2013 was 22 percent, doubling the overall banking system loan growth of 11 percent.
In addition, according to HSBC Global Research, apart from potentially causing price and supply pressures in the real estate market itself, rapid growth in real estate lending could have inflationary effects on the larger economy as well if not carefully managed.
Meanwhile, citing property consultant Colliers International, Moody’s said property prices in the Philippines have so far generally risen in tandem with per capita gross domestic product, by an average of about 8 percent per year since 2009.
Despite the stricter requirements of the new BSP measure, the ratings agency does not anticipate banks failing the stress test. “The banks’ CET1 ratios as of the end of March 2014 were well in excess of the minimum capital requirements, including the additional capital required under the new stress test requirements,” it said.