PHILIPPINE BANKS’ “modest” property exposures and robust demand for real estate loans help mitigate risks from the sector amid a challenging operating environment, Fitch Ratings, Inc. said in a report.

The debt watcher said in a report titled “Asia-Pacific Banks: Rising Exposure to Property Risks” released on Tuesday said local banks’ exposure to the property sector clocked in at 12% of system assets as of first quarter from 8% in 2012.

“Real estate loans in the Philippines have expanded rapidly since 2014, driven by both housing and commercial-property loans…. Property-sector demand has been backed partly by strong GDP (gross domestic product) growth…and favourable demographics, but also lower borrowing rates amid competition for market share among banks and some level of speculation in the property market,” Fitch said in the report.

“The Philippines has relatively high commercial property exposure, which has been rapidly growing, but we expect the market to be well supported as domestic demand remains fairly robust and corporate leverage is generally not excessive,” it said.

The debt watcher said lenders’ “modest” exposure to the real estate has helped limit direct risks stemming from the property sector.

“Data seen by Fitch suggest that commercial property lending is similarly backed by satisfactory LTV (loan-to-value) ratios in most cases. This is despite what we perceive to be a gradual loosening of industry standards at the margin,” the report said.

On the other hand, mortgages only account for 4% of the system assets while “underwriting standards for Fitch-rated banks remain acceptable — taking into account bank-specific minimum income, debt servicing, loan-to-value and loan tenor criteria.”

Fitch said the Bangko Sentral ng Pilipinas’ (BSP) real estate stress tests for banks are expected to ensure that their loss-absorption buffers keep pace with their exposure to the sector.

Under the BSP’s stress tests, banks are required to hold common equity Tier 1 and total capital ratios of 6% and 10%, respectively, after writing off 25% of their real estate exposures and property holdings.

The BSP currently limits a bank’s real estate exposure to 20% of its total loan portfolio, which includes both residential and commercial properties.

The debt watcher noted that “limited industry-wide data inhibits more comprehensive analysis of demand-supply dynamics and underwriting standards across the system.”

“Banks and developers have been growing in areas where they may be less experienced (outside Metro Manila, SME lending for banks), and some property sub-markets have developed a concentration in industries exposed to policy risk (business-process outsourcing, replaced by Chinese online gaming companies which now occupy about 9% of Metro Manila office space by some accounts),” Fitch said.

The debt watcher said domestic leverage has been growing in recent years, with “more challenging operating conditions” likely to test banks’ credit quality due to slowing demand or higher borrowing rates.

“In a property downturn, the conglomerate group structure popular in the Philippines can be a double-edged sword — providing diversification for those exposed to multiple lowly-correlated industries, but carrying contagion risks from property arms to their broader conglomerate groups,” the report added.

Fitch said in the report that emerging markets, with the exception of Malaysia, generally have lower property-related exposure compared to their developed market counterparts.

“Accommodative monetary and economic policies should support the sector, but can also aggravate leverage. We believe regulatory oversight alongside macroprudential policies should contain the direct effect of a residential property downturn on banks, especially in developed markets where loss-absorption buffers tend to be higher,” the debt watcher said. — L.W.T. Noble