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Bank Lending Standards Remain Broadly Unchanged in Q4 2015

01.22.2016

Results of the Q4 2015 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.1,2   This is the 27th consecutive quarter since Q2 2009 that the majority of banks reported broadly unchanged credit standards (see Chart 1).

Meanwhile, the diffusion index (DI) approach3, pointed to a slight net easing of overall credit standards for loans to both enterprises and households in Q4 2015 as respondent banks reporting more accommodative credit standards outnumbered those reporting tighter credit standards. In the previous quarter, credit standards for corporate lending were unchanged while those for household loans eased slightly 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 demand conditions, potential risks in asset markets, and possible strains in bank lending 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 34 banks responding in the latest survey, representing a response rate of 97.1 percent.6  The analysis in the survey is based on the quarter-on-quarter changes in the perception of respondent banks.

Lending to Enterprises

Most banks (90.3 percent of banks that responded to the question) indicated that credit standards for loans to enterprises remained steady during the quarter using the modal approach. Meanwhile, a slight net easing was observed using the DI approach. The slight net easing of credit standards reflected respondent banks’ increased tolerance for risk as well as their improved outlook on certain industries. In terms of specific credit standards, respondent banks reported narrower loan margins, increased credit line sizes, and longer loan maturities.7

In terms of borrower firm size, overall credit standards eased across all firm sizes, except for micro enterprises based on the DI approach. Meanwhile, credit standards for micro enterprises were unchanged.

For the next quarter, results based on both modal and DI approaches show expectations of overall unchanged credit standards, particularly for large middle-market enterprises and small and medium-sized enterprises. Respondent banks cited their stable economic outlook and unchanged tolerance for risk as among the key reasons behind the expected unchanged credit standards.

Lending to Households

The survey results likewise showed that most of the respondent banks (81.8 percent) continued to report unchanged overall credit standards for loans extended to households. However, the DI approach showed a slight net easing of credit standards for household loans in Q4 2015. Respondent banks attributed the easing of credit standards largely to banks’ increased tolerance for risk and improved profile of borrowers. In particular, banks’ responses indicated overall increased credit line sizes and less strict loan covenants for loans extended to households.

Most of the respondent banks foresee maintaining their overall credit standards over the next quarter. However, some banks expect overall credit standards to ease slightly, particularly for housing and auto loans, due largely to expectations of banks’ increased tolerance for risk and less strict financial system regulations.

Loan Demand

Responses to the survey question on loan demand indicated that the majority of the respondent banks continued to see unchanged overall demand for loans from both enterprises and households. Using the DI approach, however, results showed a net increase in overall loan demand8  from both enterprises and households. The net increase in loan demand of firms was attributed by banks to increased accounts receivable financing needs of borrower firms and clients’ improved economic outlook. Meanwhile, the net increase in overall demand for household loans reflected higher household consumption and banks’ more attractive financing terms.

Looking ahead, most of the respondent banks expect unchanged loan demand from both firms and households. However, a larger proportion of respondents expect overall demand for corporate loans to increase further in the next quarter relative to those who indicated the opposite. Improved economic outlook of clients along with expectations of higher working capital and accounts receivable financing needs of borrower firms were cited by respondent banks as key factors behind the anticipated increase in demand for business loans. Meanwhile, the expected net increase in household loan demand was attributed by respondent banks to more attractive financing terms, higher household consumption, and lower interest rates.

Real Estate Loans

Overall credit standards for commercial real estate loans were unchanged in Q4 2015 based on both the modal and DI approaches as all of the respondent banks (100.0 percent) indicated basically unchanged overall credit standards for the said type of loan. The unchanged overall credit standards for commercial real estate loans reflected respondent banks’ stable economic outlook and unchanged tolerance for risk as well as unchanged profile of borrowers, among others. In terms of specific credit standards for commercial real estate loans, banks’ responses showed unchanged loan covenants but with wider loan margins, stricter collateral requirements, and increased use of interest rate floors. For the next quarter, most of the respondent banks expect to maintain their credit standards for commercial real estate loans. However, based on the DI approach, a slight net tightening of overall credit standards for commercial real estate loans is seen.

Demand for commercial real estate loans was also unchanged in Q4 2015 based on the modal approach. A number of banks, however, indicated increased demand for the said type of loan on the back of clients’ improved economic outlook and increased customer inventory financing needs, among others. Over the next quarter, although most of the respondent banks anticipate generally steady loan demand, a number of banks expect demand for commercial real estate loans to increase further.

Similarly, in the case of housing loans extended to households, most of the respondent banks (76.5 percent) reported unchanged credit standards. Using the DI approach, however, a slight easing of credit standards for housing loans was noted in Q4 2015. The net easing of credit standards for housing loans was attributed by respondent banks to their increased tolerance for risk and the improvement in the overall profile of borrowers. For the next quarter, although most respondent banks foresee maintaining their credit standards for housing loans, a number of banks expect a slight easing of credit standards for this type of loan largely on expectations of higher tolerance for risk. At the same time, results continued to show increased demand for housing loans in Q4 2015 as well as expectations of a continued increase in demand for the said type of loan in the next quarter.

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1 From Q1 2010 to Q4 2012 survey rounds, the BSP used largely 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.
2 In the modal approach, the results of the survey are analyzed by looking at the option with the highest share of responses.
3 In the DI approach, a positive 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”). 
4 This is consistent with the surveys of bank lending standards of 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 Thirty-five out of the total thirty-seven U/KBs as of September 2015 are included in the survey. 
6 As of September 2015, U/KB loans accounted for about 86.9 percent of the banking system’s total outstanding loans.
7 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) 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 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.

View:  Tables  |  Chart 1Chart 2

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