Results of the Q3 2017 Senior Bank Loan Officers’ Survey (SLOS) showed that a majority 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.1,2 This is the 34th consecutive quarter since Q2 2009 that the majority of respondent banks reported broadly unchanged credit standards. (Chart 1).
Meanwhile, the diffusion index (DI) approach3 pointed to a net tightening of credit standards for loans extended to enterprises while those for households were unchanged. In the previous quarter, credit standards for corporate lending likewise showed a net tightening while those for household lending were also unchanged 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 conditions as well as conditions in asset markets, and the overall 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 their respective banks, as well as to factors affecting the supply of and demand for loans to both enterprises and households.4 Survey questions were sent to 35 commercial banks,5 29 of whom sent their responses to the latest survey, representing a response rate of 82.9 percent.6 The analysis below focuses on the quarter-on-quarter changes in the perception of respondent banks.
Lending to Enterprises
Most banks (88.9 percent of banks that responded to the question) indicated that their credit standards for their 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 attributed to respondent banks’ less favorable economic outlook, perceptions of stricter financial system regulations, and banks’ reduced tolerance for risk as well as a decline in borrowers’ profiles. In terms of specific credit standards, the observed net tightening of overall credit standards is reflected in respondent banks’ stricter loan covenants and increased use of interest rate floors particularly for loans to large middle-market enterprises and small- and medium-sized enterprises (SMEs).7
In terms of borrower firm size, banks’ responses indicated a net tightening of overall credit standards for loans to large middle-market enterprises and SMEs, while overall credit standards for loans to top corporations and micro-enterprises showed a net easing based on the DI approach.
Results based on the modal approach showed that most of the respondent banks anticipate unchanged credit standards in the next quarter. Meanwhile, the DI approach showed that some respondent banks expect their overall credit standards for business loans to tighten over the next quarter largely on account of banks’ less favorable economic outlook and a decrease in the profitability of banks’ portfolio.
Lending to Households
The results of the survey also showed that most respondent banks (90.0 percent) kept their overall credit standards unchanged for loans extended to households during the quarter based on the modal approach. Likewise, results based on the DI approach reflected unchanged credit standards, given the equal number of respondent banks that indicated a tightening of credit standards and those that answered easing of credit standards. In particular, credit standards for housing loans were unchanged based on the DI approach. The maintained overall credit standards were attributed by respondent banks to their unchanged tolerance for risk and stable profile of their household borrowers, among others. In terms of specific credit standards, results based on the DI approach indicated overall unchanged collateral requirements, loan covenants and use of interest rate floors.
Over the next quarter, results based on the modal approach indicated that the majority of the respondent banks anticipated maintaining their overall credit standards. Meanwhile, the DI approach showed expectations of an overall net easing of credit standards, particularly for housing, credit card and auto loans, on the back of respondent banks’ increased tolerance for risk and anticipated improvement in the profitability of their portfolio, along with a more favorable economic outlook.
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 (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 (except personal/salary 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, respondent banks attributed the net increase in demand for household loans largely to low interest rates and banks’ more attractive financing terms.
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 and household loans to increase further in the next quarter relative to those who indicated the opposite. Respondent banks cited expectations of higher working capital and accounts receivable financing needs of borrower firms 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 to expectations of more attractive financing terms offered to clients and continued low interest rates along with higher household consumption.
Real Estate Loans
Most of the respondent banks (84.2 percent) also indicated unchanged credit standards for commercial real estate loans in Q3 2017. The DI approach, however, continued to indicate a net tightening of overall credit standards for commercial real estate loans for the seventh 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 loan covenants, and increased use of interest rate floors. Over the next quarter, while the majority of the respondent banks foresee maintaining their credit standards for commercial real estate loans, DI-based results point to expectations of a continued net tightening of credit standards for the said type of loan.
Demand for commercial real estate loans was also unchanged in Q3 2017 based on the modal approach. A number of banks, however, indicated increased demand for commercial property loans on the back of increased working capital needs, banks’ more attractive financing terms and lower interest rates. 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 (88.9 percent) reported unchanged credit standards. Likewise, results based on the DI approach reflected unchanged credit standards, given the equal number of respondent banks that indicated a tightening of credit standards and those that answered easing of credit standards for housing loans. The maintained credit standards for housing loans was attributed by respondent banks largely to their unchanged tolerance for risk and stable profile of borrowers. Over the next quarter, results based on the modal approach showed that a large majority of banks expects unchanged overall credit standards for housing loans. However, the DI approach pointed to expectations of a net easing of overall credit standards for housing loans as respondent banks expect to have higher tolerance for risk and also see an improvement in the profitability of their respective portfolios. At the same time, results continued to show increased demand for housing loans in Q3 2017 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 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 Thirty-five out of the total 43 U/KBs as of June 2017 are currently included in the survey.
6 As of end-July 2017, U/KB loans accounted for about 87.6 percent of the banking system’s gross total outstanding loans net of interbank loans and RRP agreements with BSP and other banks.
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) 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 is associated with tighter credit standards while less use indicates the opposite.
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 1 | Chart 2