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Bank Lending Standards Eased Slightly for Firms and Households in Q4 2012

02.08.2013

The BSP released today the results of the Q4 2012 Senior Bank Loan Officers’ Survey, which showed a slight easing of overall credit standards for loans to both enterprises and households. 1,2  In the previous quarter, credit standards for both business and household loans were unchanged.3

The survey consists of questions on the overall credit standards of commercial banks in the Philippines, as well as factors affecting the supply of and demand for loans by both enterprises and households. Survey questions were sent to all commercial banks,4  with 33 banks responding in the current survey round, representing a response rate of 91.7 percent. 5 The analysis in the survey is based on comparisons with data for the immediately preceding quarter. The BSP has been conducting this survey since Q1 2009 to enhance its 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 robustness of demand conditions, potential risks in the asset markets, and possible strains in the bank lending channel as a transmission channel of its monetary policy.

Lending to Enterprises

The slight net easing of credit standards for loans to firms reflected the improvement in the profitability and liquidity of the banks’ asset portfolio, more favorable outlook on the economy and certain industries, more aggressive competition from banks and non-bank lenders, increased deposit base of banks, and improvement in the profile of borrowers.

In terms of borrower firm size, the results of the survey showed a slight easing of credit standards for top corporations and large middle-market enterprises for the second consecutive quarter. Meanwhile, credit standards for micro enterprises showed a slight tightening while standards for loans extended to small and medium enterprises (SMEs) were unchanged after a slight tightening recorded in the previous quarter.

Looking at specific credit standards,6 the overall slight easing of credit standards for enterprises can also be traced to increased credit line sizes and less use of interest rate floors7  along with unchanged loan covenants across all firm sizes. Loans with longer maturities were also provided to enterprises, except SMEs. Meanwhile, respondent banks reported wider loan margins for top corporations and SMEs and tighter standards on collateral requirements across firm sizes, except for top corporations.

Over the next quarter, respondent banks expect some tightening of credit standards for loans across all firm sizes given expectations of deterioration in the profitability of banks’ asset portfolio, decreased deposit base of banks, decreased access of banks to money or bond market financing, and banks’ reduced tolerance for risk.

Lending to Households
 
Survey results likewise pointed to a slight easing of credit standards for household loans in Q4 2012 after being unchanged in the previous quarter. This was attributed largely to the perceived improvement in the profitability of the banks’ asset portfolio, more aggressive competition from banks and non-bank lenders, banks’ increased tolerance for risk, improvement in the profile of borrowers, and increased deposit base of banks.

With regard to specific types of household loans,8 banks’ responses indicated a slight easing of standards on housing, credit card, and personal/salary loans. On the other hand, survey results showed unchanged credit standards for auto loans.

In terms of specific credit standards, survey results showed increased credit line sizes across all types of household loans along with overall unchanged standards on collateral requirements and loan covenants. Banks’ responses also showed no change in loan maturities and in the use of interest rate floors. However, respondent banks also reported wider loan margins across all types of household loans.

Over the next quarter, banks’ responses indicated a continued slight easing of credit standards, particularly those for housing and personal/salary loans, in contrast with the expected slight tightening of lending standards for enterprises in the next quarter. Respondent banks attribute the expected overall easing of standards on household loans to expected less strict financial system regulations, less uncertain economic outlook, more aggressive competition from banks and non-bank lenders, and improvement in borrowers’ profile.

Loan Demand

The survey results also indicated increased overall demand 9 for loans from both enterprises and households. For loans to businesses, the higher loan demand was attributed to increased accounts receivable financing and working capital needs, lower interest rates, and improved economic outlook. Meanwhile, the increased demand for household loans reflected higher household consumption, lower interest rates, banks’ more attractive financing terms, higher housing investment, and lack of other sources of funds.

The positive net change in demand for both business and household loans was consistent with data showing robust bank lending growth during the quarter.

Looking ahead, respondent banks expect demand for credit from both firms and households to increase further in the next quarter. Banks foresee an increase in loan demand from businesses owing largely to expectations of increased accounts receivable financing and working capital needs of borrowers in the next quarter, improvement in clients’ economic outlook, and sustained low interest rate environment. Similarly, the expected increase in households’ demand for credit was due largely to the increase in household consumption and investment as well as low interest rates.

Special Questions on Commercial Real Estate Loans

Respondent banks reported a slight tightening of overall credit standards for commercial real estate loans in Q4 2012 for the second consecutive quarter. This is in line with the expected tightening of standards recorded in the previous quarter.

The slight tightening of credit standards for commercial real estate loans can be attributed largely to the deterioration in the profitability and liquidity of respondent banks’ asset portfolio, reduced tolerance for risk of banks, and deterioration in borrowers’ profile. In terms of specific credit standards, banks’ responses pointed to tighter standards on collateral requirements and stricter loan covenants as well as shorter loan maturities for commercial real estate loans. Meanwhile, respondent banks indicated no change in the use of interest rate floors along with unchanged loan margins and credit line sizes for this type of loan. Respondent banks’ loan-to-value ratios also remained steady during the quarter.

Demand for commercial real estate loans in Q4 2012 showed a net increase given clients’ improved economic outlook and increased working capital and accounts receivable financing needs as well as banks’ more attractive financing terms and lower interest rates.

Moving forward, respondent banks expect credit standards for commercial real estate loans to tighten further, while demand for the said type of loan is still expected to increase slightly.

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1 In the diffusion index approach, a positive diffusion index (DI) for credit standards indicates that more banks have tightened their credit standards compared to those that eased (“net tightening”), whereas a negative DI for credit standards indicates that more banks have eased their credit standards compared to those that tightened (“net easing”). 
2  Prior to the Q1 2010 survey, the BSP looked only at the mode of responses in interpreting the results of the survey, i.e., the number of banks that tightened, loosened, or maintained credit standards. Since Q1 2010, the BSP started analyzing the results of the survey by looking at the percentage difference (“diffusion index”) between banks reporting that credit standards have been tightened and those reporting that they have been eased. 
3 Meanwhile, most banks indicated generally unchanged bank credit standards for the fourteenth consecutive quarter starting Q2 2009, based on the percentage of responding banks indicating whether they tightened, loosened, or maintained their credit standards.
4 Out of the 37 universal/commercial banks, only 36 banks are included in the survey because one bank requested not to be included in the survey given a loan portfolio that is dominated by loans to its own employees.
5 As of March 2012, commercial banks’ loans accounted for around 85.9 percent of the banking system’s total outstanding loans. Meanwhile, the banks that responded to the Q4 2012 survey accounted for about 95.3 percent of the total outstanding loans of universal and commercial banks for November 2012.
6 The survey questionnaire identified 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) interest rate floors.  
7 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.
8 Loans extended to households include: (1) housing loans; (2) credit card loans; (3) auto loans; and (4) personal/salary loans.
9 “Diffusion index (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.

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