Regulatory initiatives to enhance oversight of property lending and project finance could make it easier to spot pockets of excess in these high-growth sectors, Fitch Ratings said.
Prudential standards, however, remain a concern and Fitch said the Bangko Sentral ng Pilipinas (BSP) was still facing the challenge of discerning unhealthy risk-taking from productive lending that supports economic growth.
The BSP last week ordered banks to submit “granular” or even more detailed information about their real estate loans. Covered banks will also have to report what kind of project they are financing.
“The new ruling by the Bangko Sentral ng Pilipinas targets two sectors where vulnerabilities could form amid strong loan growth,” Fitch said in a report on Thursday.
It said that real estate loans, which account for just over 20 percent of total bank lending, had risen by 21 percent on average over the last four years. Project finance, meanwhile, is likely to take off as the Duterte administration pushes ahead with its infrastructure investment drive.
“Greater monitoring of these lending activities has been hampered by limitations in system-wide data, and the new initiatives could help to address this, especially if more information is made available public,” the credit ratings agency said.
It pointed out that closer central bank scrutiny may make banks more cautious in lending to these sectors but it does not amount to regulatory tightening to curb growth.
Fitch noted that motor-vehicle loans had continued to grow strongly — at 24 percent in June 2017 — despite being subjected to similar measures since 2015.
However, the debt watcher said sustained rapid loan growth could create risks to the banking sector and the broader economy if left unchecked.
High system-wide loan growth could lead to a credit bubble and Fitch noted that bank loans had grown at roughly twice the pace of nominal gross domestic product (GDP) in the last four years or around 18 percent on average.
Fitch said bank credit to the private sector remains relatively low, at 45 percent of GDP at end-2016, but this ratio had risen from 32 percent at end-2011 and was likely to climb further in 2017.
“Most banks appear to have maintained acceptable lending standards over this period and the NPL (non-performing loans) ratio has remained benign at around 2 percent, but in such a strong growth environment there is a risk that ‘blind spots’ may develop, where downside risks may not be adequately priced into lending decisions,” it said.
Risks could crystallize into losses if, for example, the economy slows or interest rates rise significantly.
On the positive side, it said credit growth so far did not appear to be fuelling asset bubbles.
It said the BSP’s house price index showed that property price inflation remained moderate, averaging about 4 percent a year from the first-quarter of 2014 to the first quarter of this year.