BANKS kept credit standards steady in Q2 2022

THE Latest results of the Q2 2022 Senior Bank Loan Officers’ Survey (SLOS) showed that a higher number of bank respondents retained their overall credit standards for loans to enterprises and consumers as indicated by the modal approach.^[1]

However, the diffusion index (DI) results^[2],[3]  revealed diverse trends as lending standards for businesses generally reflected a net tightening while a net easing of credit standards is observed for consumer loans.

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.

For the Q2 2022 survey, questionnaires were sent to a total of 64 banks (42 universal and commercial banks and 22 thrift banks), 49 of whom sent in their responses, showing a response rate of 76.6 percent. It should be noted that survey responses for the Q2 2022 SLOS were gathered between 16 June – 15 July 2022.

DETAILS OF THE SURVEY RESULTS

Lending to Enterprises

The Q2 2022 modal-based results indicated that most respondents (76.1 percent) indicated generally unchanged overall lending standards for business loans.

Meanwhile, the DI approach showed a net tightening of overall lending standards across all borrower firm sizes (specifically top corporations, large middle-market enterprises, small and medium enterprises, and micro enterprises).

Bank respondents reported that the overall tightening of credit standards was mainly due to the following factors: deterioration of borrowers’ profile and of the profitability of banks’ portfolio, and a more uncertain economic outlook.

In terms of specific credit standards, the net tightening of general lending standards was reflected in stricter collateral requirements and loan covenants, including increased use of interest rate floors.

On the other hand, net easing of credit standards was observed in terms of narrower loan margins, wider size of credit lines, and longer loan maturities.

While a bigger proportion of respondent banks expect generally unchanged lending standards for firms in Q3 2022, the DI approach continue to show anticipations of a net tightening in credit standards given the following reasons: less favorable economic prospects, decline in risk tolerance, and deterioration of borrowers’ profile as well as banks’ profitability and liquidity.

Lending to Households

The latest survey shows that a majority of the survey participants  (73.0 percent) maintained their lending standards for loans extended to households. Meanwhile, overall results from the DI method pointed to a net easing in credit standards for consumer loans which respondent banks attributed to optimistic economic outlook, increased risk tolerance, and improvement in borrowers’ profile.

Under the specific credit standards, the net easing in lending standards were reflected in longer loan maturities, narrower margins for loans, and decreased use of interest rate floors. Meanwhile, the net tightening of credit standards was shown in terms of decreased size of credit lines as well as stricter collateral requirements.

Over the next quarter, the modal-based results showed that a larger percentage of respondent banks expect to maintain their overall credit standards. Mirroring the survey results from the previous quarter, the DI-based approach indicated bank respondents’ expectations of net easing overall credit standards for consumers due to improvement in borrowers’ profile and profitability of banks’ portfolio, less uncertain economic outlook, and increased tolerance for risk.

Loan Demand

Results for Q2 2022 indicated that most respondent banks are seeing generally steady loan demand from both businesses (56.3 percent) and households (67.6 percent) based on the modal approach.

At the same time, DI-based results showed a net increase in overall credit demand from across all firm classifications and key categories of consumer loans (particularly housing loans, credit card loans, and auto loans) amid the improvement in business and consumer confidence. ^[5]

The reported net rise in demand for business loans was ascribed to increased customer inventory and accounts receivable financing needs, and improvement in customers’ economic outlook. Similarly, the net increase in demand for household credit was mainly linked to higher household consumption and banks’ more attractive financing terms.

For Q3 2022, more than half of the respondent banks expect unchanged loan demand from both firms and households.

Meanwhile, based on the DI method, survey participants anticipate a net increase in credit demand from businesses and consumers. Banks’ expectations of a net rise in overall demand for credit from firms is driven by customers’ more optimistic economic outlook as well as increased inventory and accounts receivable financing needs.

Similarly, banks’ expectations of a net increase in overall loan demand from households are due to the expected uptick in consumption and housing investment, lower interest rates, and banks’ more attractive financing terms.

Commercial Real Estate Loans

Results for Q2 2022 showed that a majority of respondent banks (73.3 percent) reported broadly maintained overall credit standards for commercial real estate loans (CRELs).

Meanwhile, the DI method indicated a net tightening of loan standards for CRELs in Q2 2022 for the 26^th consecutive quarter due largely to decreased risk tolerance and deterioration of borrowers’ profile. For Q3 2022, the modal approach pointed to most survey respondents anticipating unchanged standards for CRELs while the DI method continued to indicate respondents’ expectations of net tighter credit standards for CRELs.

In terms of loan demand for CRELs in Q2 2022, most respondent banks reported generally unchanged demand based on the modal approach. On one hand, the DI-based results pointed to a net rise in credit demand driven by the improvement in customers’ economic prospects as well as clients’ higher need for managing inventory and accounts receivables.

Modal-based results for Q3 2022 indicated respondents’ continued expectations of unchanged loan demand for CRELs. The DI values, meanwhile, showed an expected net rise in credit demand for CRELs in the next quarter due to customers’ positive economic outlook, bank’s more attractive financing terms, as well as an increase in customers’ inventory and accounts receivable financing requirements.

Residential Real Estate Loans

On housing loans extended to households In Q2 2022, a majority of survey participants (71.9 percent) indicated unchanged lending standards based on the modal approach.

Similar with the previous quarter, the DI approach showed a net easing for residential real estate loans due largely to banks’ more favorable economic outlook, improvement in borrowers’ profile, and increased tolerance for risk.

For the next quarter, a larger share of respondent banks anticipate credit standards for housing loans to be maintained, while DI-based results indicate a net easing of housing loan standards.

Most survey participants observed a broadly steady demand for housing loans in Q2 2022, and expect housing loan demand to be sustained in Q3 2022. Meanwhile, DI-based results reflected a net increase in residential real estate credit demand for both the current quarter and the next quarter driven by lower interest rates,^[6] and higher housing investment and household consumption.

^[1] In the modal approach, the results of the survey are analyzed by looking at the option with the highest share of responses.

^[2] In the DI approach, a positive DI for credit standards indicates that the proportion of respondent banks that have tightened their credit standards exceeds those that eased (“net tightening”), whereas a negative DI for credit standards indicates that more respondent banks have eased their credit standards compared to those that tightened (“net easing”).

^[3] During the Q1 2010 to Q4 2012 survey rounds, the BSP used the DI approach in the analysis of survey results. Beginning in Q1 2013, the BSP used both the modal DI approaches in assessing the results of the survey.

^[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, among others.

^[5]  Results of the BSP Q2 2022 Business Expectations Survey (BES) showed that the more buoyant outlook of the business sector was attributed to: (a) easing of COVID-19 restrictions; (b) reopening of the economy and return to normal business operations; (c) increase in sales/orders/demand (e.g., enrollment, loans, leasing, and utilities); and (d) uptick in economic activities due to election-related spending. Meanwhile, the BSP Q2 2022 Consumer Expectations Survey (CES) indicated  a less pessimistic outlook of households brought about by their expectations of: (a) availability of more jobs and permanent employment; (b) positive developments related to the COVID-19 situation, such as declining number of COVID-19 cases and the consequent easing of travel and social gathering restrictions; and (c) additional and high income.

^[6] Forty banks out of the final 49 respondent banks have submitted their answers to the survey between 16 June to 11 July 2022. This was prior to the 75-bps policy rate hike announced by the BSP on 14 July 2022. Hence, majority of the respondent banks may not have yet accounted for the off-cycle policy rate increase in their responses.