Results of the Q2 2014 Senior Bank Loan Officers’ Survey (SLOS) showed that most of the respondent banks maintained their credit standards for loans to both enterprises and households during the quarter based on the modal approach.1 This is the 21st consecutive quarter starting Q2 2009 that most banks reported broadly unchanged credit standards (see Chart 1).
The diffusion index (DI) approach,2,3 likewise showed unchanged overall credit standards for loans to enterprises with an equal number of banks indicating a tightening and an easing of their standards (see Chart 2). However, the DI approach pointed to a net tightening of overall credit standards for loans to households in Q2 2014 relative to the previous quarter, with the DI recorded at 5.0 percent. In the previous quarter, credit standards for corporate lending showed a slight net easing, while credit standards for loans to households showed a slight net tightening using the DI approach.
The BSP has been conducting the SLOS 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 the robustness of demand conditions, potential risks in the asset markets, and possible strains in the bank lending channel as a transmission channel of monetary policy. The survey consists of questions on loan officers’ perceptions relating to the overall credit standards of universal/commercial banks (U/KBs) in the Philippines, as well as to factors affecting the supply of and demand for loans by both enterprises and households.4 Survey questions were sent to all commercial banks,5 with 31 banks responding in the latest survey, representing a response rate of 88.6 percent.6 The analysis in the survey is based on comparisons with data for the immediately preceding quarter.
Lending to Enterprises
Most banks (85.7 percent of banks that responded to the question) indicated that credit standards for loans to enterprises were kept steady during the quarter using the modal approach. Overall credit standards were unchanged as banks’ tolerance for risk remained steady. Their outlook on the domestic economy as well as specific industries, such as real estate, renting and business activities, wholesale and retail trade, manufacturing, financial intermediation, and utilities likewise remained unchanged. At the same time, banks’ responses indicated unchanged loan margins across all firm sizes and unchanged use of interest rate floors.7
By borrower firm size, overall credit standards for top corporations were unchanged for the fourth consecutive quarter based on the DI approach. By contrast, credit standards for large middle-market enterprises showed a net tightening for the fourth consecutive quarter, while credit standards for loans to small and medium enterprises (SMEs) and micro enterprises have eased based on the DI approach.
For the next quarter, most of the respondent banks still expect credit standards for loans to enterprises to remain unchanged. However, the percentage of banks foreseeing a slight easing of credit standards for loans to businesses was higher compared to those expecting the opposite. A more favorable outlook on the domestic economy, expected improvements in the profitability and liquidity of banks’ asset portfolios, and anticipated improvement in borrowers’ profile were among the reasons behind the expected net easing of credit standards of respondent banks.
Lending to Households
Using the modal approach, the survey results likewise showed that most of the respondent banks (95.0 percent) continued to report unchanged credit standards for loans extended to households. The DI approach, however, indicated a net tightening of credit standards for household loans owing to banks’ reduced tolerance for risk and perception of stricter financial system regulations. In particular, banks’ responses indicated stricter collateral requirements for all types of household loans except credit card loans and more stringent loan covenants for auto loans and personal/salary loans. By type of household loans, a net tightening of overall credit standards was reported for housing loans for the 2nd consecutive survey round.
Most of the respondent banks foresee maintaining their credit standards for household lending over the next quarter. However, some banks expect overall credit standards to tighten slightly due to perception of sustained strict financial system regulation and reduced tolerance for risk.
Responses to the survey question on loan demand indicated that the majority of the respondent banks continue to see unchanged overall demand for loans from both enterprises and households. Using the DI approach, however, a net increase in overall demand8 for loans from both enterprises and households was observed. For loans to businesses, the net increase in loan demand was attributed by respondent banks to increased working capital needs and fixed-capital investment of borrower firms as well as lower interest rates and clients’ improved economic outlook. Meanwhile, the net increase in demand for household loans reflected the low interest rate environment and more attractive financing terms offered by banks.
Looking ahead, most of the respondent banks expect unchanged loan demand for loans to firms and households over the next quarter. However, a larger proportion of respondents expect demand for loans to increase further in the next quarter relative to those who indicated the opposite. For loans to enterprises, the net increase in loan demand was attributed by respondent banks to higher inventory and working capital financing as well as fixed-capital investment needs of borrower firms. For loans to households, meanwhile, banks’ more attractive financing terms, lower interest rates, and expectations of higher household consumption were cited by respondent banks as key factors behind the anticipated increase in loan demand.
Special Questions on Commercial Real Estate Loans
Most of the respondent banks (83.3 percent) indicated unchanged overall credit standards for commercial real estate loans using the modal approach. However, based on the DI approach, a net tightening of overall credit standards was noted for commercial real estate loans for the 8th consecutive quarter in Q2 2014. The net tightening of overall credit standards for commercial real estate loans was attributed by respondent banks to stricter oversight of banks’ real estate exposure along with banks’ reduced tolerance for risk. In particular, respondent banks reported stricter collateral requirements and loan covenants, increased use of interest rate floors, reduced credit line sizes, shorter loan maturities, lower loan-to-value ratios, and wider loan margins for commercial real estate loans.
Demand for commercial real estate loans was also unchanged in Q2 2014 based on the modal approach. A number of banks, however, indicated increased demand for the said type of loan on the back of increased working capital financing needs of clients, more attractive financing terms of banks, and lower interest rates.
For the next quarter, most of the respondent banks expect to maintain their credit standards for commercial real estate loans. However, banks that anticipate a tightening of their credit standards outnumbered those expecting the opposite. In terms of demand for this type of loan, although most of the respondent banks anticipate generally steady loan demand, a number of banks expect that demand for commercial real estate loans will continue to increase in the next quarter.
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 diffusion index approach, a positive diffusion index (DI) for credit standards indicates that the proportion of banks that have tightened their credit standards are greater 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”).
3 From Q1 2010 to Q4 2012 survey rounds, the BSP used largely the DI approach in the analysis of survey results. Beginning in Q1 2013, the BSP used both the modal and DI approaches in assessing the results of the survey.
4 This is consistent with the surveys of bank lending standards of other central banks, namely, the US Federal Reserve, the European Central Bank, the Bank of England, the Bank of Canada, and the Bank of Japan.
5 Of the 36 U/KBs, only 35 banks are included in the survey because one bank requested not to be included in the survey since it does not engage in corporate and retail lending.
6 As of March 2014, U/KB loans accounted for about 86.4 percent of the banking system’s total outstanding loans.
7 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. 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.
8 “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.
View Tables | Chart 1 | Chart 2