Banks kept credit standards steady in Q4 2022

Results of the Q4 2022 Senior Bank Loan Officers’ Survey (SLOS)^[1],[2] showed that a higher number of bank respondents maintained their overall credit standards for lending to enterprises and households based on the modal approach.^[3] Meanwhile, the diffusion index (DI) method^[4],[5]  indicated a net tightening of credit standards for business loans and unchanged credit standards for consumer loans.

Lending to Enterprises

Modal-based results for Q4 2022 showed that a larger proportion of the surveyed banks (80.9 percent) have broadly unchanged lending standards for business loans. Meanwhile, the DI approach reflected a net tightening of overall credit standards across all borrower firm sizes. Bank participants indicated that the overall tightening of credit standards was largely due to the following factors: 1) deterioration of borrowers’ profiles and banks’ portfolios, 2) reduced risk tolerance, and 3) a more uncertain economic outlook. Specific lending standards which reflected the net tightening of overall credit standards include the increased use of interest rate floors, tighter collateral requirements and loan covenants,  and reduced size of credit lines.

For Q1 2023, majority of the respondents expect generally steady credit standards for enterprises. On the other hand, DI-based results reflected an anticipation of net tightening credit standards mainly due to banks’ lower tolerance for risk and deterioration in borrowers’ profiles.

Lending to Households

A large proportion of respondents  (71.4 percent) kept their credit standards for loans extended to households unchanged in Q4 2022. The DI approach also indicated unchanged overall lending standards for household loans, which was due to the following responses of banks: 1) a steady economic outlook, 2) maintained risk tolerance, and 3) unchanged borrowers’ profiles and profitability of banks’ asset portfolios. In terms of specific credit standards, the net tightening of credit standards for household loans was apparent through wider loan margins, stricter collateral requirements and loan covenants, decreased size of credit lines, and increased use of interest rate floors. However, these were counterbalanced by some form of easing in specific lending standards particularly for credit card loans (i.e.,  increased size of credit lines, less stringent collateral requirements and loan covenants, lengthened loan maturity, and less use of interest rate floors) as well as in the longer loan maturities across all types of household loans.

Over the next quarter, the modal approach showed a larger proportion of respondents expecting generally steady lending standards. Meanwhile, the DI method indicated bank respondents’ continued expectations of net easing in overall credit standards driven by improvement in borrowers’ profiles and profitability of banks’ portfolios, as well as higher risk tolerance.

Loan Demand

Survey results for Q4 2022 pointed to broadly unchanged loan demand from both businesses (68.1 percent) and households (62.9 percent) based on the modal approach. Meanwhile, DI-based results showed a net increase in overall loan demand from across all firm classifications and categories of household loans. The overall net rise in demand for loans  from businesses was driven by an improvement in customers’ economic outlook and increase in customer inventory and accounts receivable financing needs. ^[6] Likewise, the overall net rise in household loan demand was mainly attributed to higher household consumption and banks’ more attractive financing terms.

Over the following quarter, a majority of surveyed banks responded with anticipations of generally unchanged loan demand from businesses and households. Based on the DI method, banks indicated expectations of a net increase in overall demand for loans from businesses in Q1 2023 driven by customers’ more optimistic economic outlook as well as increased customer inventory and accounts receivable financing needs. Likewise, bank respondents also expect a net increase in overall consumer loan demand in the next quarter mainly due to higher household consumption and housing investment.

Commercial Real Estate Loans

Results of the Q4 2022 SLOS showed that  a majority of bank participants (82.4 percent) reported unchanged overall credit standards for commercial real estate loans (CRELs). Meanwhile, DI-based results pointed to a net tightening of lending standards for CRELs in Q4 2022 for the 28^th consecutive quarter largely due to lower risk tolerance, deterioration of borrowers’ profiles, and less favorable economic expectations.^[7] Over the following quarter, the modal approach pointed to most of respondent banks anticipating steady loan standards for CRELs while the DI-based approach pointed to respondents’ expectations of net tighter credit standards for CRELs.

In terms of credit demand for CRELs in Q4 2022, respondents indicated generally unchanged demand based on both modal and  DI approaches, which was attributed to customers’ stable economic prospects, customers’ sustained inflow of internally-generated funds as well as steady access to alternative sources of funds. For Q1 2023, modal-based results showed respondents’ outlook of sustained loan demand for CRELs while the DI-based approach pointed to anticipations of net rise in credit demand amid banks’ more attractive financing terms and lower interest rates, and customers’ lack of alternative sources of funds.

Residential Real Estate Loans

A majority of  the participant banks (65.6 percent) responded with generally unchanged credit standards for housing loans in Q4 2022. Meanwhile, the DI-based method pointed to net easing of credit standards for residential real estate loans which was associated with the improvement in the profitability of banks’ portfolios and borrowers’ profiles, and higher risk tolerance along with less uncertain economic outlook. For Q1 2023, a higher number of respondents expect unchanged credit standards for housing loans, while DI-based values continue to show prospects of net easing of housing loan standards.

 

In Q4 2022, most respondent banks reported broadly steady credit demand for housing loans while anticipating a similar scenario for Q1 2023. Meanwhile, the DI method indicated a net increase in residential real estate loan demand for both the current quarter and the next quarter driven mainly by higher household consumption and housing investment.

^[1] 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. 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. 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, among others.

^[2] The analysis of the results of the SLOS focuses on the quarter-on-quarter changes in the perception of respondent banks. The responses for the Q4 2022 SLOS were gathered between 14 December 2022 and 13 January 2023 from 50 banks out of the total 63 bank participants. The response rate of 79.4 percent in the Q4 2022 SLOS  was slightly lower compared to the 79.7 percent response rate in the Q3 2022 survey round. Note that with the exclusion of UCPB in the list of universal and commercial banks as of 5 October 2022 following its merger with Landbank, the total number of SLOS participants starting in Q4 2022 is 63 banks (from previously 64 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.

^[3] In the modal approach, the results of the survey are analyzed by looking at the option with the highest share of responses. The three options for the modal approach are either 1) tightening,  2) easing, or 3) unchanged credit standards for loans to enterprises and for loans to households.

^[4] 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”).

^[5] 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.

^[6]  Compared to Q3 2022,  DI indicators showed a slower increase in loan demand from firms in Q4 2022 due to the influence of dampened business and consumer sentiments. Results of the  latest BSP Business Expectations Survey (BES) reported that business sentiment turned less optimistic in Q4 2022 which was attributed to: (a) higher inflation, (b) peso depreciation, (c) decline in sales and demand, (d) rising costs of production inputs, e.g., raw materials and fuel, and (e) higher interest rates. Likewise, the BSP Q4 2022 Consumer Expectations Survey (CES) showed more pessimistic consumer sentiment largely due to concerns over the: (a) faster increase in the prices of goods and higher household expenses, (b) low income, and (c) fewer available jobs and working family members.

^[7] It is important to note that banks’ aggregate responses on the change in credit standards may vary depending on the loan classification (i.e. banks credit standards to consumer loans and residential real estate loans may differ from business loans and commercial real estate loans