Bank Lending Standards Broadly Unchanged in Q4 2019

Results of the Q4 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. This is the 43rd consecutive quarter since Q2 2009 that the majority of respondent banks reported broadly unchanged credit standards (Chart 1).

The diffusion index (DI) approach,1,2 meanwhile, indicated a net tightening of overall credit standards for loans to enterprises and households. In the previous quarter, overall credit standards for loans to enterprises showed a net tightening while those for loans to households were unchanged 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.3 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 Q4 2019 survey round, survey questions were sent to a total of 65 banks 42 universal and commercial banks and 23 thrift banks), 48 of whom sent in their responses, representing a response rate of 73.8 percent.

Lending to Enterprises

Most banks (84.8 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 stricter financial system regulations, deterioration in the profitability and liquidity of banks' portfolios as well as in the profile of borrowers, and lower risk tolerance of respondent banks. In terms of specific credit standards, the net tightening of overall credit standards was reflected in the reduced credit line sizes; stricter collateral requirements and loan covenants; and the increased use of interest 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. Meanwhile, results based on the DI approach indicated expectations of net tightening of overall credit standards in the next quarter. Respondent banks attributed their anticipation of net tighter overall credit standards largely to expectations of a deterioration in the profitability of banks' portfolios, stricter financial system regulations and reduced tolerance for risk, as well as banks' less favorable economic outlook.

Lending to Households

The results of the survey likewise showed that most respondent banks (89.7 percent) kept their overall credit standards unchanged for loans extended to households during the quarter based on the modal approach. However, results based on the DI approach reflected net tightening of credit standards for household loans.

The overall net tightening of credit standards for household loans was attributed by respondent banks largely to their more uncertain economic outlook, perceptions of stricter financial system regulations, and reduced tolerance for risk, along with a deterioration in borrowers' profile.

In terms of respondent banks' outlook for the next quarter, results based on both the modal and DI approaches indicated expectations of unchanged overall credit standards for household loans largely on account of respondent banks' unchanged tolerance for risk and steady economic outlook, as well as expectations of unchanged profile of banks' borrowers.

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 auto loans, which showed a net decrease). The overall net increase in loan demand from firms was attributed by respondent 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, banks' lower interest rates and 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 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 expected net increase in loan demand from households was attributed largely to expectations of higher household consumption and more attractive financing terms offered by banks.

Real Estate Loans

Most of the respondent banks (93.1 percent) reported that overall credit standards for commercial real estate loans were maintained in Q4 2019. The DI approach, however, continued to point to a net tightening of overall credit standards for commercial real estate loans for the 16th consecutive quarter, which was attributed largely to perceived deterioration in the liquidity of banks' portfolios and reduced tolerance for risk. 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 unchanged in Q4 2019 based on both the modal and DI approaches. 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 (87.5 percent) reported maintaining their overall credit standards, while the DI approach pointed to a net tightening of overall credit standards attributed largely to respondent banks' perception of stricter financial regulations. Over the next quarter, results based on the modal approach showed that respondent banks expect overall credit standards for housing loans to remain unchanged. Meanwhile, DI-based results suggested expectations of a net tightening of credit standards for housing loans in Q1 2020.

Most banks reported unchanged demand for housing loans in Q4 2019 based on the modal approach while DI-based results pointed to a net increase in demand for housing loans, which was attributed by respondent banks largely to higher household consumption, more attractive financing terms offered by banks, and lower interest rates. Furthermore, banks' responses indicated expectations of a net increase in demand for housing loans over the next quarter supported largely by lower interest rates, more attractive financing terms offered by banks, and higher household consumption.

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1 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).

2 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.

3 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)