October 22, 2014

BSP may lower LTV threshold for banks’ home financing

Quoting unnamed sources, the Philippine Daily Inquirer today reported that the BSP is mulling the implementation of a circular which will put a cap on bank lending to 60% of collateral value, down from 80% previously. Banks can still lend beyond 60% of the collateral value but if the loan turns sour, they will have to immediately provide for additional loan loss provisions to cover the gap. The BSP has yet to announce this supposed new circular and banks will be given two years from the release of the circular to comply with the new rule, according to the news report.

Our take: If the news report is accurate, the planned lowering of loan-to-value threshold may have adverse impact on the velocity of presales by property companies as buyers will need to put in more equity for their home purchases. This can potentially raise down payment requirements from the current 10-20% of contract price by most property companies.

On the other hand, a higher down payment requirement will be good for cash flows of property developers given that a bigger portion of development costs will be financed from higher preselling proceeds.

However, the new rule will have a greater impact on property companies with a greater of proportion of buyers who rely on bank loans to finance their purchases. These include Vista Land and Lifescapes (~70%), Robinsons Land Corp (~60%) and Filinvest Land Inc (~52%). We note however that RLC has a good stream of cash flows from its mall and office assets which can enable it to support its residential business if push comes to shove. FLI is also actively growing its BPO office income stream through a more aggressive expansion plan.

On the other hand, Megaworld Corp has the most conservative down-payment scheme which requires buyers to put in about 40-50% of the contract price prior to turnover. Meanwhile, about 76% of Ayala Land Inc’s buyers pay in cash or through the deferred cash scheme. However, ALI is vulnerable to this impending new role only to the extent of its mid- to low-end brands (Avida, Amaia and Bellavita) which follow the traditional scheme that require a 20% downpayment prior to turnover. In 2013, these brands contributed about 64% of ALI’s total presales.

Since the loan will be based on the collateral value, buyers of ALI and MEG projects have a better chance of securing a higher valuation by the time the units they are acquiring are completed. This is due to the ability of ALI and MEG to enhance the values of their projects over a period of time by putting in retail, leisure and other commercial components into their developments. ALI’s projects also stand a good chance of securing a higher valuation from banks, especially the projects in areas which should benefit from ongoing infrastructure buildup. – Ricardo Puig

For the banks, the impending move of the BSP to lower loan-to-value (LTV) ratios comes in as a stringent and determined move to tighten lending standards and steer the banking sector away from a potential property bubble. The upcoming change in policy also aims to drive banks to focus on the cash flow and paying capacity of their borrowers instead of collateral values. For their part, borrowers will have to offer better collaterals in order to ensure steady access to credit. On the other hand, banks will probably experience slower growth of their property loans and charge higher interest rates to compensate for the tighter lending standards that will result from this policy change. – WealthSec