The Philippine banking system may be well positioned to withstand the impact of further US economic stimulus tapering, having built strong capital buffers, but the local real estate and construction sectors show vulnerability to high credit risks, Moody’s Investors Service warns.
In a report released on Tuesday, the global credit rating agency said banking systems in the Association of Southeast Asian Nations (Asean), including the Philippines, are generally resilient to the financial impact of the reduction of United States Federal Reserve’s monetary stimulus program.
Moody’s pointed to the strengths of these banking systems being underpinned by their relatively strong capital buffers, modest levels of problem loans, high recurrent profitability and low reliance on foreign funding.
However, Moody’s warned that these banks could face “pockets” of heightened credit risk, such as rising debt burdens in some highly leveraged segments such as real estate.
The key downside risks were identified as a sharp rise in debt-servicing burdens in economies that have seen strong credit growth, and adverse asset price adjustments that could affect the banks’ capitalization position and loan quality.
In the case of the Philippines, the banking system was underscored as being particularly vulnerable to the performance of the real estate and construction sectors.
“As the credit cycle turns, corporate borrowers in cyclical industries will see greater pressure on their debt repayment capacities, as these sectors are by definition more sensitive to higher interest rates and slower economic growth,” it said.
Cyclical sectors include construction and real estate given their long investment cycles; metals and mining due to their export focus; and capital-intensive industrial manufacturing.
Non-cyclical sectors, on the other hand, are industries such as general commerce and financial services.
According to the Philippine central bank, the asset quality of local banks remains strong, with the share of their non-performing loans to total loans showing a downward trend.
The ratio of residential real estate loans (RREL) to the total loan portfolio of banks stood at 7.2 percent as of end-September 2013, but BSP figures also show that the ratio of non-performing RRELs to the total RRELs of universal and commercial banks, as well as thrift banks, had eased to 3.2 percent, from the previous year’s 4.3 percent.
BSP Governor Amando Tetangco earlier said that the central bank is closely monitoring real estate loans and the credit standards adopted by banks to prevent asset price bubbles.
“Our concern for any sector—including real estate—is part of our prudential oversight of bank exposures. Issues such as concentration risk, credit quality, underwriting practices and interconnectedness will always be recurring concerns for prudential reasons,” Tetangco said.
He explained that the phenomenon of bubbles is certainly a critical concern, given that economic history is replete with cases where bubbles caused massive dislocations and/or instigated further damage through the rest of the economy via further contagion.