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Bank Lending Standards Kept Steady in Q1 2018

04.20.2018

Results of the Q1 2018 Senior Bank Loan Officers’ Survey (SLOS) showed that most 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 36th consecutive quarter since Q2 2009 that the majority of respondent banks reported broadly unchanged credit standards (Chart 1).
 
Meanwhile, the diffusion index (DI) approach3  also showed unchanged credit standards for loans extended to enterprises while a net tightening of credit standards was observed for household loans. In the previous quarter, credit standards for corporate lending and household lending showed a net easing 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 30 of whom sent their responses to the latest survey, representing a response rate of 85.7 percent.6 The analysis below focuses on the quarter-on-quarter changes in the perception of respondent banks.

Lending to Enterprises

Most banks (92.6 percent of banks that responded to the question) indicated that credit standards for loans to enterprises were maintained during the quarter using the modal approach. At the same time, results based on the DI approach pointed to unchanged credit standards due to the equal number of respondent banks that tightened and eased their credit standards for the quarter. The unchanged credit standards for business loans was largely attributed to respondent banks’ steady outlook for the economy as a whole and for major industries, as well as banks’ unchanged tolerance for risk and stable profile of borrowers. DI-based results in terms of specific credit standards7 pointed to a net narrowing of loan margins, net increase in credit sizes, and net easing of collateral requirements, although a net tightening of standards in terms of stricter loan covenants and increased use of interest rate floors was also observed. Meanwhile, banks’ responses also showed unchanged maturities of loans to enterprises, reflecting the unchanged overall credit standards for corporate loans.

In terms of borrower firm size, banks’ responses indicated unchanged credit standards for their loans to top corporations and micro-enterprises while their credit standards for large middle-market enterprises and small and medium enterprises (SMEs) showed a net tightening based on the DI approach.

For the next quarter, results based on the modal approach showed that most of the respondent banks anticipate unchanged credit standards. Meanwhile, the DI approach showed that more respondent banks expect overall credit standards for business loans to ease over the next quarter compared to those that expect the opposite, largely on account of banks’ more favorable economic outlook and expected improvement in the liquidity of banks’ portfolio.

Lending to Households

The results of the survey also showed that most respondent banks (78.9 percent) kept their overall credit standards unchanged for loans extended to households during the quarter based on the modal approach. Meanwhile, results based on the DI approach reflected a net tightening of credit standards. In particular, credit standards for housing loans and personal/salary loans tightened due mainly to respondent banks reduced tolerance for risk. In terms of specific credit standards, the overall net tightening of credit standards for household loans is reflected in the stricter loan covenants for housing loans and shorter loan maturities for personal/salary loans.

In terms of respondent banks’ outlook for the next quarter, results based on both the modal and diffusion index approaches indicated that the majority of the respondent banks anticipate maintaining their overall credit standards, on the back of banks’ unchanged tolerance for risk, stable economic outlook, and unchanged profile of borrowers.

Loan Demand

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 credit card and personal/salary loans). The net increase in loan demand for firms was attributed by banks to their customers’ higher working capital requirements and banks’ attractive financing terms, among others. Meanwhile, respondent banks attributed the net increase in loan demand from households to low interest rates, more attractive financing terms offered by banks, and increased 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 and household loans to increase in the next quarter relative to those who indicated the opposite. Respondent banks cited expectations of higher investment in plant or equipment, increased working capital needs, and low interest rates 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 more attractive financing terms offered to clients and low interest rates along with higher household consumption.

Real Estate Loans

Most of the respondent banks (78.9 percent) indicated unchanged credit standards for commercial real estate loans in Q1 2018. The DI approach, however, continued to indicate a net tightening of overall credit standards for commercial real estate loans for the ninth 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, shorter loan maturities, and increased use of interest rate floors. Over the next quarter, while majority of the respondent banks foresee maintaining their credit standards for commercial real estate loans, DI-based results point to expectations of continued net tightening of credit standards for the said type of loan.

Demand for commercial real estate loans was also unchanged in Q1 2018 based on the modal approach. A number of banks, however, indicated increased demand for the said type of loan on the back of increased investment in plant and equipment, banks’ more attractive financing terms and low 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.

In the case of housing loans extended to households, most respondent banks (92.9 percent) reported unchanged credit standards based on the modal approach. Meanwhile, DI-based results pointed to a net tightening of credit standards reflecting respondent banks’ reduced tolerance for risk. Over the next quarter, results based on both the modal and diffusion index approaches showed that banks foresee unchanged overall credit standards for housing loans on the back of their unchanged tolerance for risk, steady profile of housing loan borrowers and banks’ stable economic outlook. Most banks reported unchanged housing loan demand in Q1 2018 based on the modal approach while DI-based results pointed to a net increase in demand for housing loans during the quarter. Meanwhile, banks’ responses indicated expectations of sustained demand for housing loans over the next quarter.

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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.
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 January 2018 are currently included in the survey. 
6 As of end-January 2018, U/KB loans accounted for about 87.7 percent of the banking system’s gross total outstanding loans net of interbank loans and RRP agreements with BSP and other banks.
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 implies tightening while less use indicates otherwise.
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 1  |  Table 2  |   Chart 1  |  Chart 2

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