REFILE-Manila c.bank orders banks to adjust capital for property exposure

Wed Jun 11, 2014 11:24pm EDT

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(Corrects second last paragraph to show that data was released last month)

MANILA, June 12 (Reuters) - Philippine lenders can have greater real estate exposure as long as they have enough capital buffers to stem risks identified in an industry stress test, the central bank said, as it issued new rules aimed at reducing risks arising from a growing property market.

The new regulation, which came ahead of a rate policy review on June 19, is a "preemptive macro-prudential policy measure" to ensure that banks' real estate exposure remains healthy, the central bank said in a statement late on Wednesday night.

But it said the new measure "does not reflect any imminent vulnerability among banks with exposure to the real estate sector."

Stress tests will be conducted under the new prudential guideline to determine whether banks' capital is sufficient to absorb credit risk related to real estate lending and investments.

At present, Philippine banks are required to meet a capital adequacy ratio of 10 percent, higher than a Basel II requirement of 8 percent.

Under the new rules, banks must meet the same capital adequacy ratio of 10 percent after adjusting for the stress test results, the central bank said.

Also factoring in the stress test, universal and commercial banks and their thrift lending units must have 6 percent of their qualified capital classified as common equity tier 1 (CET1), or the safest and highest quality capital that can absorb shocks excluding preferred shares or non-controlling interests.

The CET1 requirement is also higher than a minimum set under the Basel III framework.

Stand-alone thrift banks must maintain a 6 percent total tier 1 capital of their qualified capital.

Prior to the new rule, banks' real estate lending was capped at only up to 20 percent of their total outstanding loans.

"These stress tests are ... preferred over absolute limits because they do not prejudice the development of the real estate industry. Instead, banks can have greater exposures to real estate for as long as they manifest their increased ability to absorb these risks vis-à-vis their capital position," the central bank statement said.

Banks which do not meet the new requirements will be required to explain why they breached the limit. If authorities are not satisfied with the explanation, the lenders will need to submit an action plan to reach the proper thresholds within a "reasonable time frame", the central bank also said.

Last month, Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco said banks will be asked to submit stress test reports that include an assessment of how interest rate changes affect their balance sheets in relation to their real estate exposure.

The central bank is also firming up plans to introduce a real property price index to better monitor the sector.

Banks' exposure to the real estate sector as of end-December 2013 climbed 7.1 percent against the previous quarter to 1.006 trillion pesos ($23.06 billion), central bank data released last month showed.

Property-related loans made up slightly more than a quarter of banks' total loan portfolio. (Reporting by Siegfrid Alegado and Rosemarie Francisco; Editing by Kim Coghill)

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