Fitch cites BSP’s closer monitoring of lending growth

Fitch Ratings has noted the Bangko Sentral ng Pilipinas’ (BSP) move to increase the monitoring of Philippine banks’ real estate and project finance exposures but it would be more helpful if pertinent information will be disclosed for the guidance of the market and avoid “blind spots.”

“Greater monitoring of these lending activities has been hampered by limitations in system-wide data, and the new initiatives could help to address this, especially if more information is made available publicly,” said the credit rating agency.

Still, the closer scrutiny of both sectors which Fitch said were high-growth but vulnerable, would “make it easier to spot pockets of excess.” However, it has observed that “closer central bank scrutiny may make banks more cautious in lending to these sectors, but it does not amount to regulatory tightening to curb growth.”

Fitch also gave a warning that an unchecked high systemwide loan growth “could raise the risk of a credit bubble” if it is allowed to continue. “Bank loans have grown at roughly twice the pace of nominal GDP in the last four years – around 18 percent year-on-year on average. Bank credit to the private sector remains relatively low, at 45 percent of GDP at end-2016, but this ratio has risen from 32 percent at end-2011 and is likely to climb further in 2017,” it emphasized.

“Most banks appear to have maintained acceptable lending standards over this period and the NPL ratio has remained benign at around two percent,” Fitch added. “But in such a strong growth environment there is a risk that ‘blind spots’ may develop, where downside risks may not be adequately priced into lending decisions. Risks could crystallise into losses if, for example, the economy slows or interest rates rise significantly.”

The BSP recently revised banks’ disclosure requirements to enhance monitoring and assessments of risks on their real estate and project finance exposures. A bank’s project finance report must include all material information on the infrastructure project and the project phase.

The central bank said it wants to add dimension to the way banks report risks to improve the quality of BSP’s financial surveillance process and to come up with policy measures based on risk areas that warrant supervisory action.

Fitch said the BSP has yet to tighten “prudential standards” and it still has to contend with the “challenge of discerning unhealthy risk-taking from productive lending that supports economic growth.”

“Sustained rapid loan growth could create risks to the banking sector and the broader economy if left unchecked,” it added.

Fitch noted that the local banks’ real estate loans which are 20 percent of total lending portfolios, have grown by an average of 21 percent in the last four years. Project finance, on the other hand, has been on the rise and will continue to grow with the government’s accelerated infrastructure development.

“On the positive side, credit growth does not so far appear to be fuelling asset bubbles,” it added. But, it said, “rising volumes place pressure on banks’ risk management capability, systems and operations. Banks will also face the challenge of maintaining their capital, funding and liquidity ratios as their balance sheets expand, given the minimum regulatory hurdles placed on such metrics under the Basel 3 regime.”