Results of the Q4 2016 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 31st 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 net tightening of credit standards for loans extended to both enterprises and households. In the previous quarter, credit standards for both corporate lending and household loans also showed 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 demand conditions as well as conditions in asset markets, and the strength of 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 35 commercial banks,5 31 of whom sent their responses to the latest survey, representing a response rate of 88.6 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 (89.7 percent of banks that responded to the question) indicated that credit standards for loans to enterprises remained unchanged during the quarter using the modal approach. However, results based on the DI approach indicated a net tightening of credit standards for business loans, which was attributed by respondent banks to their less favorable economic outlook, deterioration in the profitability of banks’ portfolio, and perceived stricter financial system regulations. In terms of specific credit standards, DI-based results indicated stricter collateral requirements and loan covenants as well as increased use of interest rate floors amid narrower loan margins, increased credit line sizes, and longer loan maturities.7
In terms of borrower firm size, banks’ responses showed net tighter overall credit standards for large middle-market enterprises while those for top corporations, small and medium enterprises (SMEs), and micro enterprises were unchanged based on the DI approach.
Results based on the modal approach showed that most of the respondent banks anticipate unchanged credit standards over the next quarter. Meanwhile, the DI approach showed that some respondent banks expect credit standards to tighten over the next quarter largely on account of banks’ less favorable outlook on the economy as well as expectations of a deterioration in profitability of portfolios of banks, stricter financial system regulations, and lower tolerance for risk.
Lending to Households
The results of the survey also showed that most of the respondent banks (95.0 percent) continued to report unchanged overall credit standards for loans extended to households. The DI approach, however, showed a net tightening of overall credit standards for household loans in Q4 2016 as banks that reported tighter credit standards outnumbered those that reported an easing of credit standards during the quarter. The tighter credit standards were attributed by respondent banks largely to their reduced risk tolerance and deterioration in borrowers’ profile. In terms of loan categories, banks’ responses indicated a net tightening of overall credit standards for housing loans and auto loans during the quarter. Meanwhile, overall credit standards for credit card loans showed net easing while those for personal/salary loans were unchanged based on the DI approach.
Over the next quarter, results based on the modal approach indicated that the majority of the respondent banks continue to anticipate unchanged overall credit standards. However, the DI approach showed expectations of net easing of overall credit standards for Q1 2017 across all types of household loans (except credit card loans), as respondent banks expect higher tolerance for risk, improvement in borrowers’ profiles, and more aggressive competition from banks and non-bank lenders among others.
Responses to the survey question on loan demand indicated that the majority of the respondent banks continued to see stable overall demand for loans from both enterprises and households (see Chart 2). Using the DI approach, however, results showed a net increase in loan demand8 across all firm sizes and all types of household loans. The net increase in loan demand of firms was largely attributed by banks to higher requirements of borrower firms for working capital and accounts receivable financing. Meanwhile, the net increase in demand for household loans largely reflected banks’ more attractive financing terms and higher household consumption.
Over the next quarter, 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. Respondent banks cited expectations of higher working capital needs of borrower firms along with improved economic outlook of clients as the key factors behind the expected increase in demand for business loans. Meanwhile, the anticipated net increase in household loan demand was attributed by respondent banks largely to expectations of more attractive financing terms offered by banks.
Real Estate Loans
Most of the respondent banks (90.0 percent) also indicated unchanged credit standards for commercial real estate loans in Q4 2016. The DI approach, however, continued to indicate a net tightening of overall credit standards for the fourth consecutive quarter. The tighter overall credit standards for commercial real estate loans reflected respondent banks’ wider loan margins, reduced credit line sizes, stricter collateral requirements, and increased use of interest rate floors.
Demand for commercial real estate loans was also unchanged in Q4 2016 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 and accounts receivable financing needs of borrowers, and clients’ improved economic outlook. 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 continue to increase.
Meanwhile, in the case of housing loans extended to households, most of the respondent banks (94.1 percent) reported unchanged credit standards. Using the DI approach, however, a net tightening of credit standards for housing loans was noted for the third consecutive quarter in Q4 2016. The net tightening of credit standards for housing loans was attributed by respondent banks largely to lower risk tolerance and deterioration in profile of borrowers. Over the next quarter, results based on the modal approach showed expectations of broadly unchanged overall credit standards for housing loans. However, results based on the DI approach indicated expectations of a net easing of credit standards for housing loans in Q1 2017 largely due to respondent banks’ anticipation of an increase in their tolerance for risk. At the same time, results continued to show increased demand for housing loans in Q4 2016 as well as expectations of a continued increase in demand for the said type of loan in the next quarter.
1 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.
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 exceeds 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 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 Thirty-five out of the total 41 U/KBs as of June 2016 are currently included in the survey.
6 As of end-October 2016, U/KB loans accounted for about 86.9 percent of the banking system’s total outstanding loans net of BSP reverse repurchase agreements.
7 The survey questionnaire asks banks to describe changes in six specific categories of 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 Table | Chart 1 | Chart 2