New BSP regulations on real estate loans cheered

New regulations requiring banks to maintain higher levels of capital to account for real estate loans are expected to make the local industry stronger, protecting it from any emerging stresses that threaten the sector’s well-being.

Moody’s Investor Service on Thursday described the new Real Estate Stress Test (REST) limits, announced by the Bangko Sentral ng Pilipinas (BSP) last week, as “credit positive.”

This comes as the BSP prepared rules mandating the quarterly reporting of real estate exposures of banks, in line with the new REST 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,” Moody’s said in a report.

REST limits, which take effect on July 19, were described as a “proactive measure to regulate banks’ lending to the (real estate) sector.”

Even if 25 percent of a bank’s real estate exposure has been written off, the bank must still be able to maintain a common equity tier 1 capital ratio of at least 6 percent. Its total capital adequacy ratio (CAR) must also stay above the required minimum of 10 percent.

A bank’s capital serves as buffer that absorbs losses from risk-weighted assets that are written off. CAR refers to the level of a bank’s capital relative to its assets.

This is made up of two types of capital: tier 1, which mainly refers to common equity of shareholders; and tier 2, which are debt securities that absorb part of the losses in case a bank is ordered shut and liquidated.

Banks that fail to meet the REST limits will be given several chances to explain and correct their deficiencies.

A bank that “persistently” fails to comply with the REST limits, or deviates from the commitments in its own action plan, “may be considered to be engaging in unsafe and unsound practice,” the BSP said.

BSP Assistant Governor Johnny Noe Ravalo this week said past real estate crises, usually fueled by excessive lending by banks that drive prices up to unreasonable levels, warranted the stricter monitoring of the industry.

Moody’s, for its part, tagged several banks that would have to work harder than others to meet the BSP’s new REST limits.

The rating firm said Metropolitan Bank & Trust Co. and Philippine National Bank would need to maintain the highest amount of additional capital buffer among the firm’s rated Philippine banks.

“However, our results show that the (tier 1) ratios of the Philippine banks are well positioned to meet the stress test requirements,” Moody’s said.  “We expect the stress test requirements will force the banks to be more disciplined in their real estate lending.”