Bank Lending Standards Remain Steady in Q3 2019

Results of the Q3 2019 Senior Bank Loan Officers' Survey (SLOS) showed that most of the respondent banks continued to maintain their overall credit standards for loans to both enterprises and households during the quarter based on the modal approach.1 This is the 42nd consecutive quarter since Q2 2009 that the majority of respondent banks reported broadly unchanged credit standards (Chart 1).

The diffusion index (DI) approach,2,3 meanwhile, continued to indicate a net tightening of credit standards for loans to enterprises while credit standards for loans to households were unchanged. In the previous quarter, credit standards for loans to both enterprises and households showed a net tightening based on the DI approach.

The BSP has been conducting the SLOS since 2009 to gain a better understanding of banks' lending behavior, which is an important indicator of the strength of credit activity in the country. The survey also helps the BSP assess the robustness of credit demand, prevailing conditions in asset markets, and the overall strength of bank lending as a transmission channel of monetary policy.4 The survey consists of questions on loan officers' perceptions relating to the overall credit standards of their respective banks, as well as to factors affecting the supply of and demand for loans to both enterprises and households.

The analysis of the results of the SLOS focuses on the quarter-on-quarter changes in the perception of respondent banks. Starting with the Q3 2018 survey round, the BSP expanded the coverage of the survey to include new foreign commercial banks and large thrift banks. Prior to Q3 2018, the survey covered only universal and commercial banks. In the latest Q3 2019 survey round, survey questions were sent to a total of 66 banks (42 universal and commercial banks and 24 thrift banks), 50 of whom sent in their responses, representing a response rate of 75.8 percent.

Lending to Enterprises

Most banks (81.6 percent of banks that responded to the question) indicated that they maintained their credit standards for loans to enterprises during the quarter using the modal approach. Meanwhile, results based on the DI approach pointed to a net tightening of credit standards for the quarter, which was attributed by respondent banks largely to their perception of a deterioration in the profile of borrowers, their reduced tolerance for risk, and less aggressive competition from banks and non-bank lenders. In terms of specific credit standards, the net tightening of overall credit standards was reflected in reduced credit line sizes; stricter collateral requirements and loan covenants; shortened loan maturities; and increased use of interest rate floors.

Banks' responses likewise pointed to a net tightening of credit standards across all borrower firm sizes, namely, top corporations, large middle-market enterprises, small and medium enterprises (SMEs) and micro-enterprises based on the DI approach.

Over the next quarter, results based on the modal approach showed that most of the respondent banks expect credit standards to remain unchanged. At the same time, results based on the DI approach indicated expectations of unchanged credit standards given the equal percentages of respondent banks that anticipate tightening and easing of overall credit standards for business loans. Respondent banks attributed their anticipation of unchanged overall credit standards to their stable economic outlook and expectations of no changes in terms of tolerance for risk, among other factors.

Lending to Households

The results of the survey likewise indicated that most respondent banks (81.3 percent) kept their overall credit standards unchanged for loans extended to households during the quarter based on the modal approach. Similarly, results based on the DI approach reflected unchanged credit standards for household loans given the equal percentages of respondent banks that reported tightening and easing of overall credit standards during the quarter.

The overall unchanged credit standards for household loans was attributed by respondent banks largely to their steady tolerance for risk and unchanged profile of banks' borrowers.

In terms of respondent banks' outlook for the next quarter, results based on the modal approach showed that the majority of the respondent banks anticipate maintaining their overall credit standards. Meanwhile, DI-based results indicated expectations of overall net tightening of credit standards for household loans as respondent banks anticipate a deterioration in profitability of banks' portfolios and a lower tolerance for risk.

Loan Demand

Responses to the survey question on loan demand indicated that the majority of respondent banks continued to see stable overall demand for loans from both enterprises and households during the quarter. Meanwhile, results based on the DI approach showed a net increase in overall demand for business loans (across all firm sizes) and household loans (except for housing and auto loans, which showed a net decrease). The overall net increase in loan demand from firms was attributed by banks largely to their customers' higher working capital requirements. Meanwhile, respondent banks attributed the overall net increase in household loan demand to higher household consumption and banks' more attractive financing terms.

Over the next quarter, most of respondent banks expect steady overall loan demand from firms and households. However, DI-based results suggested expectations of a net increase in overall loan demand for both business and household loans. For business loans, the expected net increase in demand was associated largely with corporate clients' higher working capital requirements. Meanwhile, the anticipated net increase in loan demand from households was attributed to expectations of higher household consumption, lower interest rates, and more attractive financing terms offered by banks.

Real Estate Loans

Most of the respondent banks (93.8 percent) reported that overall credit standards for commercial real estate loans were maintained in Q3 2019. The DI approach, however, continued to point to a net tightening of overall credit standards for commercial real estate loans for the 15th consecutive quarter, which was attributed largely to reduced tolerance for risk and deterioration in the liquidity of banks' portfolios. The net tightening of overall credit standards for commercial real estate loans reflected respondent banks' wider loan margins; reduced credit line sizes; stricter collateral requirements and loan covenants; shortened loan maturities; and increased use of interest rate floors. Over the next quarter, while most of the respondent banks anticipate maintaining their credit standards for commercial real estate loans, DI-based results point to expectations of continued net tightening of overall credit standards for the said type of loan.

Demand for commercial real estate loans was also unchanged in Q3 2019 based on the modal approach. However, DI-based results showed a net decrease in demand for commercial real estate loans for the third consecutive quarter, which respondent banks attributed to lower working capital requirements and investment in plant or equipment of clients; increase in customers' internally generated funds; deterioration in economic outlook; availability of other sources of funds; banks' less attractive financing terms; and high interest rates. Over the next quarter, although most of the respondent banks anticipated generally steady loan demand, more banks expected demand for commercial real estate loans to increase compared to those expecting the opposite.

For housing loans extended to households, most of the respondent banks (88.5 percent) reported maintaining their credit standards, while the DI approach pointed to a slight net easing of overall credit standards, reflecting a net narrowing of loan margins and net increase in credit line sizes. The slight net easing of overall credit standards for housing loans was attributed to banks' more favorable economic outlook, more aggressive competition from banks and non-bank lenders, and increased tolerance for risk. Over the next quarter, results based on the modal approach showed that respondent banks expect overall credit standards for housing loans to remain unchanged. However, using the DI approach, survey results suggested expectations of a net tightening of credit standards for housing loans in Q4 2019 as respondent banks anticipate a deterioration in the profitability of banks' loan portfolio and a decline in risk tolerance.

Most banks reported unchanged demand for housing loans in Q3 2019 based on the modal approach while DI-based results pointed to a net decrease in demand for housing loans, which was attributed by respondent banks largely to high interest rates and less attractive financing terms offered by banks. Furthermore, banks' responses indicated expectations of a net increase in demand for housing loans over the next quarter supported largely by higher household consumption, lower interest rates, and more attractive financing terms offered by banks.

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1 In the modal approach, the results of the survey are analyzed by looking at the option with the highest share of responses.

2 In the DI approach, a positive DI for credit standards indicates that the proportion of respondent banks that have tightened their credit standards exceeds those that eased (net tightening), whereas a negative DI for credit standards indicates that more respondent banks have eased their credit standards compared to those that tightened (net easing).

3 During the Q1 2010 to Q4 2012 survey rounds, the BSP used the diffusion index (DI) approach in the analysis of survey results. Beginning in Q1 2013, the BSP used both the modal and diffusion index (DI) approaches in assessing the results of the survey.

4 The SLOS is similar to the surveys of bank lending standards conducted by other central banks, such as the US Federal Reserve, the European Central Bank, the Bank of England, the Bank of Canada, and the Bank of Japan.\

Source: Bangko Sentral ng Pilipinas (BSP)