Filipino banks have a lot on their plates. Some of the bigger institutions have been recapitalising to comply with Basel II, which began implementation here in July, as well as taking advantage of a favourable equity market before it collapsed in August.
Meanwhile, strong consumer lending, led by mortgages, is helping banks achieve their first decent loan growth in a decade. The Central Bank reported loan growth of 5.1% for the banking sector for the six months to June, but some banks have reported double-digit growth.
Another spin-off for banks is that a rising property market should help them sell off more distressed properties, further lowering their non-performing loan (NPL) ratios. Commercial banks’ NPL ratios fell to 5.3% for the first six months of 2007 and are expected to dip below 5% by year end, according to the Central Bank. This compares with a peak of 18% in 2001 in the wake of the Asian financial crisis.
The push into mortgages became more aggressive after interest rates tumbled, with the benchmark 90-day Treasury bill falling to below 3% at one point earlier this year (in August it was about 4%). This caused concern to banks that had previously been content to borrow from depositors at low rates and park most of their funds in high-yielding government securities, earning spreads of around 8%.
Mortgage rates
Banks jumped into the rising property market and began offering mortgage deals at unprecedented rates and maturities. One of the early movers was GE Money Bank, a relatively new and small foreign bank anxious to raise its profile. In September 2006, it offered a 9.25% two-year mortgage, lower than the competition by 125 basis points.
Shortly afterwards, Philippine Savings Bank, a subsidiary of leading bank Metrobank, offered the market’s first 25-year mortgage product as well as a pledge to process applications in five days.
Other banks followed and today rates are typically 11% fixed for long term or 8% to 9% for floating. Long-term maturities are available at 10, 15 or 25 years.
Philippine interest rates are still high compared with advanced economies, but they have been slashed to about half of what they were 10 years ago when rates were typically 16% and that for short to mid-term loans.
The Philippines is among the most under-mortgaged countries in Asia, with mortgage finance contributing 1.5% of gross domestic product (GDP). With large deposits required up-front and high interest rates, property buying in the past has been largely confined to the affluent.
But now a home purchase is within the grasp of mid-income people such as the 200,000-odd ‘yuppies’ employed in the expanding call-centre/BPO (business process outsourcing) sector and even lower income office workers who can meet monthly payments of about 10,000 pesos ($215).
“Housing is at its most affordable level ever,” says Richard Raymundo, head of research for Colliers International, the property services company. “Middle managers are going into condos [privately owned flats with jointly owed common areas], but the idea of buying property is still only trickling down among office workers.” Mr Raymundo expects the impact to widen significantly.
The remittance factor
However, the biggest driver in the property market is the overseas Filipino. The eight million professional and blue-collar Filipinos (10% of the population) who are working abroad are sending home remittances in record volumes, exceeding $1bn a month, and much of that is going into property.
Overseas Filipinos contribute more than half of the pre-sales of mid-level condos, priced upwards of 1.5m pesos and the fastest growing segment, according to property services company CB Richard Ellis in Manila. Pre-selling – which means putting down a deposit and paying instalments even before construction – is the most popular method of selling property.
The property upturn has also given rise to other innovative plays by banks. Medium-sized Security Bank pioneered a niche by linking up with a major developer, Megaworld, to provide home buyers with a mortgage product called ‘Home Lite’. This offers buyers a cheaper alternative to the developer’s in-housing financing and provides the developer with more liquidity. Security Bank hopes this product will help boost its share of consumer loans of total lending to 20% this year from 7% last year.
Recently, Banco de Oro, which has just become the country’s biggest bank in asset terms after taking over Equitable PCI, teamed up with property developer DMCI Homes to offer a similar mortgage product for a mid-level residential project.
Overall, the volume of banks’ residential property loans has risen more than 50% from 60bn pesos in early 2004 to 95.7bn pesos at end-June 2007.
Clearly, both banks and developers are reaping the benefits. The biggest mortgage lender among the big banks is the long-established Bank of the Philippine Islands (BPI), majority owned by the Ayala group. BPI reported that mortgage loans rose a hefty 18% for the first half of 2007, enabling it to retain its market leadership share of 23%.
Among developers, Megaworld, the biggest builder of ‘affordable’ and mid-income condos, reported a whopping 67% jump in net income for the first half of this year, with total revenues growing 81% over the same period. The performance, says Megaworld, was based mostly on a doubling of property sales.
Despite the property boom, analysts say the sector – reflecting the economy – is still at an early stage of recovery and see no signs yet of a repeat of the 1997 collapse.
In the condo market, “people are buying on actual need, not speculation. They are end-users,” says Victor Asunción, director of research at CB Richard Ellis in Manila. “Even if the buyer is a Filipino nurse in the US, she will ask a relative to look after the flat while she is away. She is not a speculator.”
Moreover, demand is keeping up with supply, with a take-up rate of between 60% and 80% on new condo projects offered on a pre-selling basis. In the low-cost and middle-income housing segment, the risk is even lower. For houses, a developer typically begins building only after a buyer begins paying for it.
One analyst also notes that, with population growth, some 350,000 Filipino households are entering the property market every year, further adding to demand.
Among high-end condos, where bubbles often start, rents for luxury three-bed units in Makati, Manila’s premier business district, increased 10% for the first six months of 2007, but even so are only approaching peak 1997 levels, according to the latest Collier report. In contrast, rents in Fort Bonifacio – the new ‘hot’ residential and business area three kilometres from Makati – are showing signs of cooling, due to many units coming onto the market over the next several months. Demand at the high end is fuelled by an increase in expatriate arrivals, many of them executives in the call-centre sector.
Another factor that mitigates against a bubble is the increased involvement of banks at an earlier stage of construction, which puts building projects on a more secure financial footing. In the run up to the last bubble, property deals were typically transacted between developers and buyers, with the result that, when developers went bankrupt, they left unfinished buildings and angry customers. This time around, banks are providing developers with about 30% of financing for construction as well as entering agreements with developers to provide much of the financing for home buyers.
“The presence of a bank guarantees completion of the project, the banks are verifying the creditworthiness of buyers, and developers have more cash to complete their projects, so the whole level of risk has come down,” notes CB Richard Ellis’ Mr Asunción.
Overall, favourable macroeconomic conditions and a stable currency outlook suggest that customer-friendly mortgage deals may be around for the long term. All this has other long-term implications for the economy.
“Tens of thousands of people commute for several hours a day from outside the city to work in Manila,” says Bob Bestani, head of the private sector department of the Asian Development Bank, which promotes mortgage financing in Asia. “If they can buy a small condo in Manila, think of productivity gains and the impact on traffic congestion and the environment.” In the broader picture, mortgage financing contributes less than 2% to Asia’s emerging economies, compared with more than 50% in Europe and the US, adds Mr Bestani, underscoring the massive potential for growth.
