THE local banking system’s exposure to real estate may heighten pandemic-related losses and risks this year, an international credit watcher warned.
In its latest assessment on the local banking system, Fitch Ratings said the weakness in the property sector, evidenced by falling price valuations, may eventually affect the balance sheets of local banks.
“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 as the property values of some of these loans may already be underwater, raising the incentive for borrowers to default or reducing collateral recovery rates,” Fitch Ratings said.
In the third quarter of 2020, the aggregate Philippine property prices dropped 14 percent quarter on quarter. Real estate loans account for roughly 20 percent of banking system loans.
“We think further moderation [in prices] is probable given the rapid price appreciation before the crisis, reinforcing our June 2020 view in our report, Philippine Banks’ Real Estate Stress Test, that the economic deterioration brought about by the pandemic is likely to lead to a correction in the property market,” Fitch Ratings said.
“This takes into account the rapid expansion in aggregate condominium prices, which surged by more than 40 percent over 2017 to the second quarter of 2020, in large part due to the once-booming offshore gaming sector,” it added.
Despite the risks, Fitch Ratings said local banks have the capacity to absorb a moderate shock in the property sector, and the low interest rate environment could help to 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 sizable proportion of mortgages with loan-to-value ratios in excess of 80 percent,” Fitch Ratings said.
Fitch Ratings has recently put a negative outlook on the Philippine banks’ asset quality, as further deterioration is likely on the back of expected rise in bad loans for the year.
This comes after the S&P Global Ratings recent assessment that the local banking system will continue to be under pressure in 2021 on account of rising bad loans.
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