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Saturday, April 27, 2013

Is There a Real Estate Bubble in the Philippines? - June 2012

Editor's Note: This is an update of three previous blog posts: "Is There a Real Estate Bubble in the Philippines - Part II""The Philippine Banking System's True Exposure to Real Estate", and "Is There a Real Estate Bubble in the Philippines?"

Last July 25, 2012, the BSP encouraged banks, particularly Universal and Commercial Banks that continue to reflect unbooked losses or "deferred charges" arising from the 1997 Asian Financial Crisis on their balance sheets, to charge those losses against retained earnings.  This implies that the banks have a lot of "legacy assets" from a crisis that began more than 15 years ago.  Considering that the Asian Financial Crisis was primarily due to a real estate bubble, most of these so-called "legacy assets" consist of past real estate loans gone bad that are still on the books of the Philippine Banking System.

ROPOA

Our previous estimate on the true exposure of the Philippine Banking System to Real Estate (See "Is There a Real Estate Bubble in the Philippines") is inadequate because it does not include the bank's ROPOA or acquired real estate. As seen on the chart below, ROPOA as a percentage of GDP peaked at 5.18% by December 2002.  At that point in time, ROPOA comprised almost half the Philippine Banking System's total real estate exposure of 10.88% as of December 2002.  Since then, ROPOA has steadily declined as a percentage of GDP and now comprises only 1.45% of GDP as of June 2012.  However, Real Estate Loans as a percentage of GDP has been rising gradually since establishing a low of 3.75% of GDP as of March 2008.  As of June 2012, Real Estate Loans now comprise 6.79% of GDP - a level not seen since September 1999.  As a result, the Philippine Banking Industry's true exposure to Real Estate now stands at 8.24% of GDP as of June 2012.  This indicates that the Philippine Banking System's exposure to Real Estate is approaching December 2006 levels.








Distressed Assets

But ROPOA does not make the entire picture.  The banking system's true legacy assets are distressed assets which largely includes ROPOA as well as other bad bank assets.  Again, distressed assets as percentage of GDP peaked at 14.65% of GDP as of December 2001.  This ratio has steadily declined since then.  As of June 2012, distressed assets amount to only 2.49% of GDP.  When using distressed assets instead of ROPOA, the banking system's true exposure to the real estate sector peaked at an eye-popping 21.32% of GDP as of December 2000.  That number has declined to less than half the peak rate.  As of March 2012, the banking system's true exposure to the real estate sector now stands at 9.28%, slightly elevated above the low of 8.72% as of March 2008 but nowhere near its peak levels.





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