Fitch Ratings believes that the Philippine banking sector continues to face heightened impairment risks from the property sector due to the sluggish economy, despite a modest recovery in the real estate price index in 4Q20.
New lockdown measures announced in late-March 2021 for the capital region are likely to dampen business and consumer confidence, which could sap property demand and ultimately weigh on banking sector asset quality. Lumpy asset impairments could arise should renewed economic weakness begin to result in the default of larger property developers that we do not currently expect under our base case.
Average national property prices posted 2.4% growth in 4Q20, but condominium prices in the national capital region - where most of the banks' real estate exposures lie - remain 20% below the peak in 2Q20. The dip could already have pushed some of the banks' recently originated high loan-to-value mortgages under water, raising the likelihood of default and reducing recovery rates. We expect the property market to remain soft in the near term despite the low-interest-rate environment.
Rising inflation is also posing another challenge for the central bank's monetary policy stance, especially if demand-pull inflation takes hold when the economy reopens. Higher interest rates could further undercut housing demand, but we believe any tightening is likely to be measured as the central bank looks inclined to maintain accommodative policies to help support the economy.