Philippines to order banks to undergo property stress test

Bloomberg

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Construction workers labor on a building site in the district of Fort Bonifacio in Manila. Bangko Sentral ng Pilipinas is set to introduce a residential property-price index in the first half of the year as record-low borrowing costs spur demand for homes and offices.

The Philippine central bank is firming up steps to avert a property bubble, including requiring banks to undergo a stress test, Deputy Governor Nestor Espenilla said.
“Real estate exposure historically has been the trigger of problems in many banking systems. It’s quite natural for regulators including BSP to be particularly wary of this,” Espenilla, 55, said in an interview in his office in Manila today. “We’re implementing a risk-based type supervision,” he added, without specifying a timeframe for its introduction.
The central bank is set to introduce a residential property-price index in the first half of the year, Deputy Governor Diwa Guinigundo had said in March, as record-low borrowing costs spur demand for homes and offices. Officials will probably hold the benchmark interest rate at 3.5 percent at a meeting later today, according to a Bloomberg survey.
Property loans and investments rose 6.8 percent to a record 900.1 billion pesos ($20 billion) in the second quarter of 2013 from the previous three-month period, the central bank said in November. Property made up 22 percent of banks’ total loan portfolio, it said. More recent data haven’t been released.
“The BSP is being pre-emptive in addressing concerns of a potential real-estate bubble,” said Michael Wan, a Singapore-based economist at Credit Suisse Group AG. “The impact on property lending will depend on how stringent the stress test will be. I suspect it will be moderate, as they won’t come out with a rule that will massively curtail real-estate lending.”
Cool prices
Shares in Ayala Land Inc., the nation’s largest developer by revenue, have risen about 45 percent in the past two years, outpacing a 29 percent gain in the benchmark index. Its shares were little changed today, while Bank of the Philippine Islands, the largest lender by market value, fell O.7 percent. The peso was little changed at 44.213 against the dollar as of 12:18 p.m. local time.
Greater oversight in the Philippines comes as China strengthens monitoring of credit extended to real estate developers and after Hong Kong and Singapore took steps to cool property prices. Bangko Sentral caps banks’ real-estate lending at 20 percent of total outstanding loans, with some exclusions.
The price of land in the financial district of Makati surged 28 percent from 2010 to 2013 to the highest level since 1997, according to U.K.-based Colliers International Plc. The monetary authority is closely monitoring the middle-market segment in residential housing, Espenilla said, while declining to comment on today’s policy decision.
Business model
“Real estate is prone to asset-price inflation,” Espenilla said. At the same time, “you just can’t tell banks to stop real estate lending; it’s part of their business model,” he said, adding that the proposed measure is designed primarily to test lenders’ ability to withstand a defined stress scenario.
Real estate and construction activity together account for a fifth of the Philippine economy, the Oxford Business Group said in a report Feb. 27. Policy makers should closely watch the residential market as low interest rates and rising money supply may spur demand, Credit Suisse’s Wan said in February.
“When you look at the economic drivers, they continue to be favorable for our business,” Ayala Land President Bobby Dy said this week, citing the low interest rates, higher remittances from Filipinos overseas and increasing demand from the business-process outsourcing industry.
The central bank in 2012 widened its scope for monitoring the real estate sector. It ordered banks to report loans to developers of low-cost housing, investments in securities to finance real-estate activities, and exposure of banks’ trust departments to the property sector.
“Since there’s no certainty in the world, you have to have a buffer,” Espenilla said of the need for greater vigilance. “Despite your best plans, you should have something to fall back on in case something goes wrong.”

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