BANKS MAINTAINED LENDING STANDARDS IN Q4 2020
Results of the Q4 2020 Senior Bank Loan Officers’ Survey (SLOS) showed that majority of respondent banks maintained their overall credit standards for loans to both enterprises and households during the quarter based on the modal approach.[1] The latest survey results reflected a slight improvement compared to the Q3 2020 survey where almost half of the respondent banks stated that they tightened credit standards amid the continued economic and business disruptions caused by the ongoing COVID-19 pandemic.
Meanwhile, results based on the diffusion index (DI) approach,[2],[3] continued to indicate a net tightening of overall credit standards for both loans to enterprises and households in Q4 2020 similar to the results in Q3 2020.
ABOUT THE SURVEY
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, prevailing conditions in asset markets, and the overall strength of bank lending as a transmission channel of monetary policy.[4] 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.
The analysis of the results of the SLOS focuses on the quarter-on-quarter changes in the perception of respondent banks. Starting with the Q3 2018 survey round, the BSP expanded the coverage of the survey to include new foreign commercial banks and large thrift banks. Prior to Q3 2018, the survey covered only universal and commercial banks. During the Q4 2020 survey round, survey questions were sent to a total of 64 banks (42 universal and commercial banks and 22 thrift banks), 45 of whom sent in their responses, representing a response rate of 70.3 percent.
It is important to note that the Q4 2020 survey was conducted within the government’s extension of general community quarantine (GCQ) measures in Metro Manila and various areas outside the National Capital Region (NCR). Responses from bank respondents for the SLOS were consolidated between 25 November 2020 and 11 January 2021.
DETAILS OF THE SURVEY RESULTS
Lending to Enterprises
More than half of the respondent banks (63.4 percent) indicated unchanged overall credit standards for loans to enterprises during the quarter using the modal approach. The DI-based results, however, pointed to a net tightening of lending standards across all borrower firm sizes, specifically, top corporations, large middle-market enterprises, small and medium enterprises, and micro enterprises. As indicated by respondent banks, the observed tightening of overall credit standards was largely due to less favorable economic outlook, deterioration in the profitability of bank’s portfolio and profiles of borrowers, and reduced tolerance for risk, among other factors. On specific credit standards, the net tightening of overall credit standards was reflected in terms of reduced credit line sizes; stricter collateral requirements and loan covenants; and increased use of interest rate floors.[5] Meanwhile, some form of easing was revealed in terms of narrower loan margins and longer loan maturities.
In the next quarter, while majority of the respondent banks expect unchanged overall credit standards for loans to enterprises, DI-based results showed that some banks continue to expect tighter standards due to a more uncertain economic outlook along with expected deterioration in borrowers’ profiles and profitability of banks’ portfolios, and banks’ lower tolerance for risk.
Lending to Households
Most of the respondent banks (77.8 percent) maintained their overall credit standards for loans extended to households during the quarter. Meanwhile, the DI-based results manifested a net tightening of overall credit standards for household loans particularly for housing and personal/salary loans. Respondent banks cited more uncertain economic outlook, a deterioration in borrowers’ profile, and reduced tolerance for risk as the major reasons that contributed to the overall tightening of credit standards for loans to households. By contrast, results based on the DI-approach reflected unchanged credit standards for credit card and auto loans given equal portions of respondent banks reporting that they tightened or eased their overall standards for said types of loans in Q4 2020.
In terms of specific credit standards, the overall net tightening of credit standards for loans to households was revealed in reduced credit line sizes and stricter loan covenants. Meanwhile, some easing of credit standards for loans to households was also observed in terms of narrower loan margins, less restrictive collateral requirements, longer loan maturities, and decreased use of interest rate floors.
Over the next quarter, majority of respondent banks expect to retain their overall credit standards based on the modal approach. Meanwhile, DI-based results showed respondent banks’ anticipation of tighter overall credit standards for household loans due to less favorable economic outlook, expected deterioration in borrowers’ profile, and reduced tolerance for risk.
Loan Demand
Latest survey results indicated that most of the respondent banks observed an unchanged overall loan demand from enterprises during the last quarter. On the other hand, banks’ responses to household loan demand varied widely. At the same time, DI-based results generated mixed results in Q4 2020 as the overall loan demand for businesses pointed to a net increase (specifically for top corporations) while loan demand from households conveyed a net decline across all types of consumer loans.
The overall net increase in loan demand from businesses was attributed by respondent banks to higher customers’ requirements for inventory financing as businesses reopen,[6] as well as to.higher accounts receivable financing needs amidst a decline in corporate clients’ internally-generated funds. Meanwhile, respondent banks cited lower household consumption and housing investment as the key factors that contributed to the observed decline in household loan demand.
Over the next quarter, most of the respondent banks anticipate broadly unchanged overall loan demand from both enterprises and households indicating an increase in confidence of firms and consumers amid the gradual rise of economic activities. DI-based results suggested expectations of a further net increase in overall loan demand from enterprises associated largely with corporate clients’ higher inventory financing and accounts receivable financing needs, improved economic outlook, and lack of other sources of funds. Similarly, the DI-approach pointed to banks’ expectations of a net increase in overall loan demand from households (specifically personal/salary loans) due largely to higher household consumption, lower income prospects, and lack of other sources of funds.
Real Estate Loans
The Q4 2020 survey results also showed that most of the respondent banks reported broadly unchanged overall credit standards for commercial real estate loans (CRELs). Meanwhile, DI-based results continued to indicate a net tightening of overall credit standards for CRELs for the 20th consecutive quarter. Respondent banks pointed to a less favorable economic outlook, a lower tolerance for risk, as well as deterioration in borrowers’ profile as the major contributors to the tightening of overall credit standards for CRELs. On specific credit standards, the net tightening of overall credit standards for CRELs continued to reflect wider loan margins, reduced credit line sizes, stricter collateral requirements and loan covenants, increased use of interest rate floors, and shortened loan maturities. Over the next quarter, banks’ responses point to expectations of net tighter credit standards for CRELs based on the DI-approach.
More than half of respondents reported unchanged demand for CRELs in Q4 2020, while DI-based results continued to indicate a net decline in loan demand reflecting a deterioration in customers’ economic outlook. In the following quarter, results based on the modal approach pointed to anticipation of a generally unchanged loan demand for commercial real estate loans while the DI-based results showed a net decline in demand for CRELs amid a deterioration in customers’ economic outlook.
For housing loans extended to households, most of the respondent banks (65.4 percent) reported unchanged credit standards while DI-based results pointed to a net tightening in Q4 2020. Over the next quarter, DI-based results likewise indicated expectation of net tighter overall credit standards for housing loans amid more uncertain economic prospects, deterioration in borrowers’ profile and profitability of bank’s portfolio, and lower risk tolerance of banks.
Meanwhile, two-thirds of the respondent banks saw either a decrease or unchanged overall loan demand for housing loans in Q4 2020. DI-based results, however, pointed to a net decline in loan demand for housing loans during the quarter which was expected to persist until Q1 2021, reflecting largely the consumers’ reduced appetite for housing investment.
