New stress test for banks credit positive – Moody’s

MANILA, Philippines - The Bangko Sentral ng Pilipinas’ newly-imposed stress test on banks amid an increasing exposure to the real estate sector is a credit positive for lenders, Moody’s Investors Service said yesterday.

 “These new requirements are credit positive for Philippine banks because they will impose higher minimum capital requirements on banks that lend more heavily to the real estate sector, and will serve as a proactive measure to regulate banks’ lending to the sector,” Moody’s said in a report.

Under BSP Circular 839, the stress test will require banks to maintain common equity Tier 1 capital ratio of at least six percent and a minimum risk-based capital adequacy ratio of 10 percent even if 25 percent of a lender’s exposure to the property sector has been assumed written off.

This new measure, which takes effect this month, is aimed at ensuring banks have enough capital to absorb any potential losses especially to the real estate sector.

“We expect the stress test requirements will force the banks to be more disciplined in their real estate lending, and will act as a measure to regulate the credit extended to the real estate sector and prevent imbalances created by over-supply or property prices from reaching unsustainable levels,” Moody’s said.

“Real estate loans in the Philippines have grown rapidly over the past five years, fueled by robust economic growth and strong domestic demand,” the debt watcher said.

Banks’ exposure to the property sector climbed to P1.006 trillion in end-2013 from P939.8 billion in the third quarter of last year, latest BSP data showed. Loans to commercial and residential properties accounted for six percent, while the remaining 16 percent are investments in the sector.

The BSP said the new rules will not put an additional burden on banks, even on those with increasing loans and investments in the property market.

 “It was never meant to be a constraint of anything. It’s meant to be a prudential framework so banks would know whether they have enough capital to sustain their lending,” central bank Assistant Governor Johnny Noe Ravalo said in a separate interview.

There would be a quarterly report submitted before the Monetary Board regarding the new stress test for banks. Those found non-compliance will be given the chance to explain and submit an action plan to address their shortcomings.