Bank Lending Standards Maintained in Q2 2019

Results of the Q2 2019 Senior Bank Loan Officers' Survey (SLOS) showed that most of the respondent banks continued to maintain their credit standards for loans to both enterprises and households during the quarter based on the modal approach.1 This is the 41st consecutive quarter since Q2 2009 that the majority of respondent banks reported broadly unchanged credit standards (Chart 1).

Meanwhile, the diffusion index (DI) approach2,3 continued to indicate a net tightening of credit standards for both loans to enterprises and households. In the previous quarter, credit standards for loans to enterprises and households also 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 as well as conditions in asset markets, and the overall strength of bank lending as a transmission channel of monetary policy4. 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 Q2 2019 survey round, survey questions were sent to a total of 66 banks (42 universal and commercial banks and 24 thrift banks), 45 of whom sent in their responses, representing a response rate of 68.2 percent.

Lending to Enterprises

Most banks in the survey (81.0 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 business loans during the quarter, which was attributed by respondent banks to their perception of stricter financial system regulations and deterioration in profile of borrowers. In terms of specific credit standards,5 DI-based results pointed to wider loan margins, stricter collateral requirements and loan covenants as well as increased use of interest rate floors.

Banks' responses likewise highlighted 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 showed that more respondent banks expect overall credit standards for business loans to tighten over the next quarter compared to those that expect the opposite, on the back of respondent banks' expectations of stricter financial system regulations, reduced tolerance for risk, deterioration in borrower's profile, and less favorable economic outlook, among other factors.

Lending to Households

The results of the survey likewise indicated that most respondent banks (88.0 percent) kept their overall credit standards unchanged for loans extended to households during the quarter based on the modal approach. Meanwhile, results based on the DI approach reflected a net tightening of credit standards for household loans, particularly for housing, auto, and personal/salary loans.

The overall net tightening of credit standards for household loans reflected stricter collateral requirements and loan covenants, shortened loan maturities, and increased use of interest rate floors. Respondent banks attributed the tightening of overall credit standards for household loans largely to deterioration in the profile of 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 anticipated 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 lower tolerance for risk and stricter financial system regulations along with deterioration in borrower's profile and profitability of banks' portfolios.

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 (Chart 2). Using the DI approach, however, results showed a net increase in overall demand6 for both business and household loans. 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, lower interest rates, and banks' more attractive financing terms.

Over the next quarter, most of respondent banks expect unchanged overall loan demand from firms and households. However, results based on the DI approach 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 by respondent banks to their corporate clients' higher working capital requirements, among other factors. Meanwhile, the anticipated net increase in loan demand from households was attributed by respondent banks largely to expectations of higher household consumption and housing investment.

Real Estate Loans

Most of the respondent banks (86.7 percent) reported that credit standards for commercial real estate loans were maintained in Q2 2019. The DI approach, however, continued to point to a net tightening of overall credit standards for commercial real estate loans for the 14th consecutive quarter which was attributed by respondent banks to a less favorable economic outlook and a perceived deterioration in the profile of borrowers, among other factors. 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 credit standards for the said type of loan.

Demand for commercial real estate loans was also unchanged in Q2 2019 based on the modal approach. Meanwhile, DI-based results showed a net decrease in demand for commercial real estate loans, which respondent banks attributed largely to higher interest rates. Over the next quarter, although most of the respondent banks anticipate generally steady loan demand, more banks expect demand for commercial real estate loans to increase compared to those expecting the opposite.

For housing loans extended to households, results based on the modal approach pointed to unchanged credit standards while DI-based results indicated a net tightening of credit standards for housing loans. Respondent banks attributed the tighter credit standards for housing loans to their perception of stricter financial system regulations and deterioration in the profitability and liquidity of banks' portfolios as well as in the profile of housing loan borrowers. Over the next quarter, results based on the modal approach showed that respondent banks expect 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 Q3 2019 as respondent banks anticipate lower risk tolerance, stricter financial system regulations, and a deterioration in profile of borrowers for the said type of loan.

Most banks reported unchanged demand for housing loans in Q2 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 to higher household consumption, lower interest rates, and more 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 by expectations of higher household consumption and higher housing investment, among other factors.

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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.

5 The survey questionnaire asks banks to describe changes in six specific credit standards: (1) loan margins (price-based); (2) collateral requirements; (3) loan covenants; (4) size of credit lines; (5) length of loan maturities; and (6) use of interest rate floors. A loan covenant is an agreement or stipulation laid down in loan contracts, particularly contracts with enterprises, under which the borrower pledges either to take certain action (an affirmative covenant), or to refrain from taking certain action (a negative covenant); this is consequently part of the terms and conditions of the loan. Meanwhile, an interest rate floor refers to a minimum interest rate for loans. Greater use of interest rate floor implies tightening while less use indicates otherwise.

6 The DI for loan demand refers to the percentage difference between banks reporting an increase in loan demand and banks reporting a decrease. A positive DI for loan demand indicates that more banks reported an increase in loan demand compared to those stating the opposite, whereas a negative DI for loan demand implies that more banks reported a decrease in loan demand compared to those reporting an increase.

Source: Bangko Sentral ng Pilipinas (BSP)

Bank Lending Standards Maintained in Q2 2019

Results of the Q2 2019 Senior Bank Loan Officers' Survey (SLOS) showed that most of the respondent banks continued to maintain their credit standards for loans to both enterprises and households during the quarter based on the modal approach.1 This is the 41st consecutive quarter since Q2 2009 that the majority of respondent banks reported broadly unchanged credit standards (Chart 1).

Meanwhile, the diffusion index (DI) approach2,3 continued to indicate a net tightening of credit standards for both loans to enterprises and households. In the previous quarter, credit standards for loans to enterprises and households also 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 as well as conditions in asset markets, and the overall strength of bank lending as a transmission channel of monetary policy4. 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 Q2 2019 survey round, survey questions were sent to a total of 66 banks (42 universal and commercial banks and 24 thrift banks), 45 of whom sent in their responses, representing a response rate of 68.2 percent.

Lending to Enterprises

Most banks in the survey (81.0 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 business loans during the quarter, which was attributed by respondent banks to their perception of stricter financial system regulations and deterioration in profile of borrowers. In terms of specific credit standards,5 DI-based results pointed to wider loan margins, stricter collateral requirements and loan covenants as well as increased use of interest rate floors.

Banks' responses likewise highlighted 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 showed that more respondent banks expect overall credit standards for business loans to tighten over the next quarter compared to those that expect the opposite, on the back of respondent banks' expectations of stricter financial system regulations, reduced tolerance for risk, deterioration in borrower's profile, and less favorable economic outlook, among other factors.

Lending to Households

The results of the survey likewise indicated that most respondent banks (88.0 percent) kept their overall credit standards unchanged for loans extended to households during the quarter based on the modal approach. Meanwhile, results based on the DI approach reflected a net tightening of credit standards for household loans, particularly for housing, auto, and personal/salary loans.

The overall net tightening of credit standards for household loans reflected stricter collateral requirements and loan covenants, shortened loan maturities, and increased use of interest rate floors. Respondent banks attributed the tightening of overall credit standards for household loans largely to deterioration in the profile of 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 anticipated 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 lower tolerance for risk and stricter financial system regulations along with deterioration in borrower's profile and profitability of banks' portfolios.

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 (Chart 2). Using the DI approach, however, results showed a net increase in overall demand6 for both business and household loans. 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, lower interest rates, and banks' more attractive financing terms.

Over the next quarter, most of respondent banks expect unchanged overall loan demand from firms and households. However, results based on the DI approach 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 by respondent banks to their corporate clients' higher working capital requirements, among other factors. Meanwhile, the anticipated net increase in loan demand from households was attributed by respondent banks largely to expectations of higher household consumption and housing investment.

Real Estate Loans

Most of the respondent banks (86.7 percent) reported that credit standards for commercial real estate loans were maintained in Q2 2019. The DI approach, however, continued to point to a net tightening of overall credit standards for commercial real estate loans for the 14th consecutive quarter which was attributed by respondent banks to a less favorable economic outlook and a perceived deterioration in the profile of borrowers, among other factors. 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 credit standards for the said type of loan.

Demand for commercial real estate loans was also unchanged in Q2 2019 based on the modal approach. Meanwhile, DI-based results showed a net decrease in demand for commercial real estate loans, which respondent banks attributed largely to higher interest rates. Over the next quarter, although most of the respondent banks anticipate generally steady loan demand, more banks expect demand for commercial real estate loans to increase compared to those expecting the opposite.

For housing loans extended to households, results based on the modal approach pointed to unchanged credit standards while DI-based results indicated a net tightening of credit standards for housing loans. Respondent banks attributed the tighter credit standards for housing loans to their perception of stricter financial system regulations and deterioration in the profitability and liquidity of banks' portfolios as well as in the profile of housing loan borrowers. Over the next quarter, results based on the modal approach showed that respondent banks expect 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 Q3 2019 as respondent banks anticipate lower risk tolerance, stricter financial system regulations, and a deterioration in profile of borrowers for the said type of loan.

Most banks reported unchanged demand for housing loans in Q2 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 to higher household consumption, lower interest rates, and more 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 by expectations of higher household consumption and higher housing investment, among other factors.

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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.

5 The survey questionnaire asks banks to describe changes in six specific credit standards: (1) loan margins (price-based); (2) collateral requirements; (3) loan covenants; (4) size of credit lines; (5) length of loan maturities; and (6) use of interest rate floors. A loan covenant is an agreement or stipulation laid down in loan contracts, particularly contracts with enterprises, under which the borrower pledges either to take certain action (an affirmative covenant), or to refrain from taking certain action (a negative covenant); this is consequently part of the terms and conditions of the loan. Meanwhile, an interest rate floor refers to a minimum interest rate for loans. Greater use of interest rate floor implies tightening while less use indicates otherwise.

6 The DI for loan demand refers to the percentage difference between banks reporting an increase in loan demand and banks reporting a decrease. A positive DI for loan demand indicates that more banks reported an increase in loan demand compared to those stating the opposite, whereas a negative DI for loan demand implies that more banks reported a decrease in loan demand compared to those reporting an increase.

Source: Bangko Sentral ng Pilipinas (BSP)