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Banks tighten standards for real estate loans

By Lawrence Agcaoili (The Philippine Star) | Updated July 27, 2015 - 12:00am
Philstar.com/File
MANILA, Philippines - Banks further tightened their lending standards for commercial real estate loans in the second quarter, a year after the Bangko Sentral ng Pilipinas (BSP) introduced stricter rules on bank’s real estate exposure.
Results of the second quarter 2015 Senior Bank Loan Officers’ Survey showed a net tightening of overall credit standards for commercial real estate loans for the 12th consecutive quarter. 
“The net tightening of overall credit standards for commercial real estate loans was attributed by respondent banks to perceived stricter oversight of banks’ real estate exposure along with banks’ reduced tolerance for risk,” the BSP said. 
The central bank said banks reported stricter collateral requirements and loan covenants along with wider loan margins, shorter loan maturities, and increased use of interest rate floors for commercial real estate loans. 
For the next quarter, the BSP survey showed most of the respondent banks expect to maintain their credit standards for commercial real estate loans. 
The survey also revealed the demand for commercial real estate loans was also unchanged in the second quarter based on the modal approach. 
“A number of banks, however, indicated increased demand for the said type of loan on the back of clients’ improved economic outlook and banks’ more attractive financing terms,” the central bank added. 
Over the next quarter, a number of banks expect demand for commercial real estate loans to continue increasing in the following quarter. 
Similarly, credit standards for housing loans extended to households showed net tightening in the second quarter due to perceived stricter financial system regulations along with banks’ reduced tolerance for risk and deterioration in the profile of borrowers. 
Data showed banks’ exposure to real estate increased 23 percent to P1.27 trillion in the first quarter of the year from P1.03 trillion in the same period last year. Real estate loans, which accounted for the bulk of the banks’ exposure to the sector, jumped 26 percent to P1.09 trillion from P866.62 billion. 
In June last year, the BSP introduced stricter rules on banks’ real estate exposure to ensure lenders have enough capital to absorb any potential losses. 
The central bank said the new measure simply reinforces the prudential policy that banks must have sufficient capital to absorb any potential shock on its credit exposures. 
The pre-emptive macroprudential policy measure approved by the Monetary Board required stress tests for banks to determine if their capital will be enough to absorb credit risk that may arise from their exposure to the property sector.
The BSP explained that universal, commercial, and thrift banks would need to meet a capital adequacy ratio of 10 percent of their qualifying capital following the stress test results. 
Moreover, universal and commercial banks, along with their thrift bank subsidiaries will also need to keep a Common Equity Tier 1 level of at least six percent of their qualifying capital. Stand-alone thrift banks, meanwhile, are required to maintain a Tier 1 ratio of six percent of their qualifying capital. 
Banks that fail to comply would need to explain formally to the BSP why they should not be given any further remedial action.
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