Philippine banks finish real estate stress test

Find out what's the verdict.

The Philippine central bank (BSP) gave the banking system a passing mark on the real estate stress test (REST) it initiated in July 2014.

According to a research note from Maybank Kim Eng, the REST covered exposure at end-June 2014 and end-September 2014 and assumes 25% write-off on real estate loans.

BSP Governor Armando Tetangco also said all of the banks passed the REST although some were close to the threshold level.

The report said the result is not surprising as average common equity Tier 1 of the industry is at 13.74% on solo basis and 14.48% on consolidated basis, well above the REST limits of 6% after adjusting for the write-off.

Maybank Kim Eng's banking universe CET1 ranges from 9-15% at end-2014, with East West Bank and Metrobank having the lowest ratios. Both have announced capital-raising plans this year.

Here's more from Maybank Kim Eng:

In a recent meeting with the BSP, we learned the banking system's real estate exposures are well under control even as the property sector continues to grow strongly.

REST is expected to support and not be detrimental to the development of the property industry.

While we understand some banks would like to see the assumed write-off at varying levels, we sensed from the meeting the 25% assumption will be maintained, whether loans are secured or unsecured.

The rationale is to subject the system to a worst-case scenrario. At the peak of the Asian financial crisis, actual NPL ratio reached ~19-20%.

If a bank fails the REST by having its CET1 fall below 6%, the BSP requires an explanation on credit standards, loan administration and other risk controls.

Sanctions may or may not be imposed depending on whether the BSP is satisfied by the responses.

Sanctions may include boosting capital, cutting real estate exposure or in the extreme, limiting loan exposure.