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RETAIL BANKING | Staff Reporter, Philippines
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Here's the latest on Philippine banks' real estate exposure

Philippine banks are now forced to submit a quarterly expanded report on real estate exposure from 30 January 2013.

Here's more from Maybank Kim Eng:

More comprehensive guidelines issued. Amid growing concern about a possible asset price bubble, the central bank (BSP) has released detailed reportorial guidelines on the expanded real estate exposure of banks. This supplements the reporting requirement under Circular 600, which imposes a 20% limit on universal and commercial banks’ real estate loans out of total loans. 

Now, the BSP is requiring all universal, commercial, and thrift banks and their trust departments to submit a quarterly expanded report on a solo and consolidated basis starting 30 January 2013 (covering October–December 2012 period).

Broader real estate exposure. Total real estate exposure shall now include (1) loans to individual households; (2) loans to developers for socialized and low-cost housing; and (3) investments in debt and equity securities for real estate financing.

Furthermore, banks now have to specify individual residential loans for condominium units. The broader measure also redefines real estate exposure as not only the acquisition, construction and improvement of real estate property, but also includes ancillary services such as buying, selling, rental, and management of real estate properties.

As such, the expanded report includes commercial loans to real estate brokers, lessors, property management firms and holding companies.

Real estate exposure against adjusted capital... Finally, banks have to measure their real estate exposure (real estate loans + investment securities) against adjusted capital.

According to the BSP, adjusted capital refers to the total of unimpaired paid-in capital, surplus, and undivided profits less unbooked valuation reserves, unsecured loans to subsidiaries and affiliates, deferred income tax and other capital adjustments that may be required by the BSP.

…results in higher ratios. Using available data from the BSP, we calculate probable ratios to be derived using the banking industry’s reported capital (proxy for adjusted capital). Under Circular 600 definition, universal and commercial banks’ (U/KB) real estate loans (RELs) reached PHP244b and was 8% of total loan portfolio (TLP) worth PHP3t as of end-March 2012.

Replacing denominator TLP with U/KB’s reported capital of PHP830b, the ratio of RELs increases to 29.5%. If we expand RELs further and include thrift banks’ real estate exposure as well as U/KB’s residential loans and investments, we have total real estate exposure worth PHP538b as of March 2012 which represents 15.6% of TLP.

Against combined reported capital of U/KB and thrift banks amounting to PHP905b, we have a much higher real estate exposure ratio of 59.5%. The actual ratio could be higher or lower next year but essentially, we believe the new guidelines provide a more complete view on whether banks’ capital is commensurate to credit risks.

Recalibration of real estate loan limits by the BSP may not be far behind once data is accumulated starting next year.

Precautionary measure amid low interest rates. We welcome the BSP’s action which we see as proactive given the prolonged low-interest rate regime. We have been concerned about the market’s ability to absorb the huge quantity of condominium units being supplied by property developers.

The expanded guideline sends a signal, albeit gentle, for banks to closely monitor their credit standards and growing property exposure. It is always difficult to time exactly the gestation of an asset bubble, but because consequences can be devastating, it remains better to err on the side of caution. 

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