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Fitch warns banks of risks from falling property prices

Fitch said private banks led by BDO Unibank, Metropolitan Bank & Trust Co., Bank of the Philippine Islands and Philippine National Bank have the capacity to absorb moderate shock in the property sector as the low interest rate regime could prop up real estate demand.

MANILA, Philippines — Fitch Ratings has raised a red flag about the possible continued decline in property prices which may further aggravate the impairment risks of Philippine banks amid the pandemic-induced recession.

Fitch said private banks led by BDO Unibank, Metropolitan Bank & Trust Co., Bank of the Philippine Islands and Philippine National Bank have the capacity to absorb moderate shock in the property sector as the low interest rate regime could prop up real estate demand.

“Nevertheless, we see rising impairment risks for the banks should prices continue to decline and weak economic conditions persist, as some banks have a sizeable proportion of mortgages with loan-to-value ratios in excess of 80 percent,” the debt watcher said.



It warned the 14 percent quarter-on-quarter drop in aggregate property price in the third quarter of last year exposes banks to higher risks in the real estate sector.

According to Fitch, the property sector accounts for roughly 20 percent of the banking industry’s loan book.

The debt watcher also said banks that were actively underwriting mortgage loans at the height of the property boom in late 2019 and early 2020 are more vulnerable to heightened provisioning risks from the recent price correction.

It said the property values of some of these loans may already be underwater, raising the incentive for borrowers to default or reduce collateral recovery rates as the impact of the pandemic rages on.

“We think further moderation is probable given the rapid price appreciation before the crisis,” Fitch said.

The debt watcher said the once booming Philippine offshore gaming operators (POGO) paved the way for the rapid expansion in aggregate condominium prices which surged by more than 40 percent between 2017 and the second quarter of 2020.

“The economic deterioration brought about by the pandemic is likely to lead to a correction in the property market,” Fitch said.

Fitch expects the non-performing loan (NPL) ratio of Philippine banks worsening to a range of 4.5 to five percent this year after climbing to a seven-year high of 3.61 percent in end-December last year.



“The expiry of the repayment grace periods should lead to higher credit impairment in the first half and we expect the system’s total non-performing-asset ratio, which includes real and other properties acquired, to rise to 5.5 to six percent by end-2021,” Fitch said.

Fitch said RA 11523 or the Financial Institution Strategic Transfer (FIST) Act, similar to RA 9182 or the Special Purpose Vehicle Act (SPV) of 2002, would help curb NPL ratios and positions the banking industry to a recovery path by allowing banks to divest bad loans from their balance sheets through FIST corporations and amortize any losses from these sales for up to five years.

“Fitch expects the Philippine banking system’s asset quality to remain under pressure in the near term, notwithstanding the enactment of the SPV Act, as relief measures taper off and the operating environment remains challenging,” Fitch associate director Tamma Febrian said.


Article and Photo originally posted by Philippine Star last March 10, 2021 12:00am and written by Lawrence Agcaoili.