Growing property exposure pose risks to Philippine banks

CAGR of real estate loans stand at 22% from 2012-2017 versus overall loan growth at 17%.

A widening exposure to the property sector poses considerable risks to the Philippine banking sector, according to credit rating agency Fitch.

Real estate loans have grown rapidly with a compound annual growth rate clocking in at 22% over 2012-2017 versus slower system loan growth of 17% over the same period.

Net gearing amongst property developers also increased although stable GDP levels have helped support banks’ debt-servicing capacity.

Bank credit is similarly on the rise after growing at almost twice the rate of nominal GDP over the last five years which raises credit risks in the sector.

“However, sustained rapid credit growth warrants close monitoring as it can disguise the build-up of asset-quality risks,” the credit rating agency noted. “Fitch believes the current rate of credit growth in the Philippines raises banking-sector credit risks which may only become apparent towards the end of the current upswing.”

Nevertheless, stringent regulatory real estate stress tests and prudential monitoring is set to taper risk appetite of banks for growing real estate exposure, Fitch added. Large developers also have alternative income streams other than property to turn to as shown when real estate loan growth has slowed more recently to 16% in 2017 versus the overall system’s 18%.