Banks’ bad loans seen to hit 21%

The level of non-performing loans (NPLs) or bad loans generated by the commercial banking sector is expected to reach its highest level ever, at around 21 percent of total loans, by the third quarter of the year.

At around 18 percent now, NPLs are already at their highest, amounting to around P290 billion. In fact, the ratio of NPLs to total loans has ballooned from 4.69 percent at the end of 1997 when the Asian financial crisis started to 17.35 percent as of end 2001.

Property consulting firm Colliers International, in its quarterly review of the Philippine property market, noted that this concern being raised on the level of bad loans will continue to dampen prospects for the sector.

It said the local property sector is in need of market clearing transactions to ‘nudge it out of the trough’ and hopes that the passage of the asset management company law would pave the way for such transactions.

It added that while it takes the passage of the bill to be generally positive, some points of contention and issues remain such as land ownership, valuation, and discounting.

Colliers explained that the constitutional ban on foreign land ownership is expected to drag the approval of the proposal. As far as valuation is concerned, it noted that banks at this point have not been willing to value the assets at levels which buyers are willing to pay. "Perhaps, the reluctance is not on the bank’s unrealistic views of capital values, but rather the trepidation to book losses," it said.

The firm also noted that reasonably, foreign asset management companies would invest in assets that are heavily discounted. "Given the usual loan-to-value ratio of 30 to 40 percent, it appears that banks could only accommodate a discount of up to 40 percent without booking losses," it pointed out.

The critical question, Colliers added, is whether banks would sell at discount levels which foreign AMCs have been accustomed to in other Asian countries. Banks in South Korea and Thailand discounted their bad loans by as much as 70 percent at the height of the crisis.

The report also stated that recent economic gains failed to reflect in corporate performance reports, with weak consumer sales being recorded by San Miguel (beer sales down nine percent year-on-year), La Tondeña (gin volume down six percent), Jollibee (single-digit negative same-store-sales), and Meralco (industrial sales down 6.3 percent0.

Colliers said it is looking at a U-shaped recovery of the property cycle as opposed to a V-shaped recovery, with the bottoming out period, including stagnation in rents and prices, to persist for the most of 2002.

Quarter to quarter, valuation for developable land in the Makati central business district and Ortigas have fallen by nearly five percent. Values in the Makati CBD fell by 4.9 percent during the first quarter of 2002 compared to the last quarter of 2001 to an average of P171,250 per square meter. At Ortigas, values declined 3.1 percent to an average of P77.500 per sq.m.

"We believe that values have largely bottomed out and expectations are for land prices to remain steady throughout 2002," it said.

The residential sector posted a 31.6 percent increase during the January-March 2002 period compared to the same period last year. The high-rise residential segment increased by 86.1 percent as more affordable residential projects such as Rockwell’s The Manansala and Ayala Land’s One Legaspi Park were launched.

In terms of vacancies, the worst appears to be over for the Makati CBD, the report said. After peaking at 17.2 percent at the close of 2001, vacancy is estimated at 16.8 percent as of March this year. By the end of the year, this vacancy rate is expected to improve to 1 percent.

As to rents, they are projected to remain at their current levels in the next 12 months due to a supply overhang, the report noted. During the first quarter, CBD rents fell by as much as 2. percent.