Rise of banks’ real estate exposure has BSP on edge

The incidence of bad loans may be at a record low in the country, but the Bangko Sentral ng Pilipinas (BSP) is not taking any chances as it closely watches the financial sector for signs of instability.

The central bank said it was working on various measures to ensure that banks would remain prudent in their lending practices. Special focus would also be given to the real estate sector, given its historically volatile nature.

“The BSP will remain alert to possible threats to financial stability, including those associated with the buildup of leverage among households and firms, as well as banks’ exposure to the real estate sector,” BSP Governor Amando M. Tetangco Jr. said in a speech late Friday.

Latest data showed loans secured from universal and commercial banks grew by 16.8 percent in December last year—the slowest expansion in 12 months.

Universal and commercial banks make up about 90 percent of the country’s banking system.

Data also showed that banks’ funding for real estate reached a record high P1.15 trillion, or the equivalent of 21.29 percent of the sector’s total loan portfolio at the end of September.

The banking sector’s exposure was higher than the 21.06 percent recorded in June.

Exposure to real estate, which includes both loans and investments in real estate firms’ debt and equity securities, was up by 23.3 percent at the end of September—faster than the 20-percent growth recorded for all types of loans during the same period.

The biggest risk from rapid growth in lending is a rise in bad loans, in case borrowers find it hard to repay obligations.

So far, local banks have been prudent in lending. At the end of December, the level of nonperforming loans as a ratio of the total loan portfolio declined to 1.81 percent from 2.04 percent in September 2014.

Despite the record low level, the BSP’s guard is still up.

“To mitigate risks, the BSP will continue to work on its mix of micro- and macro-prudential tools, as well as surveillance mechanisms, taking in consideration their potential impact on liquidity and overall financial conditions,” Tetangco said.

The BSP, he said, was also watching out for risks coming from heightened regulation in a more integrated Southeast Asian region.

Tetangco said the priority was to ensure that local banks would be strong enough to take on their rivals in the region.

“To this end, we have already adopted several measures, including raising the minimum capital requirements for banks and implementing a comprehensive credit risk management framework,” he said.