BANKS’ LENDING STANDARDS BROADLY UNCHANGED IN Q1 2023

Results of the Q1 2023 Senior Bank Loan Officers’ Survey (SLOS)^[1] showed that a larger percentage of bank respondents maintained their overall credit standards for business and household loans based on the modal approach.^[2] Meanwhile, the diffusion index (DI) method^[3],[4]  showed a net tightening of lending standards to firms and a net easing of lending standards for households.

Lending Standards for Loans to Enterprises

Modal-based results for Q1 2023 showed that a higher number of respondent banks (73.3 percent) have unchanged credit standards for enterprises. On the other hand, the DI approach showed a net tightening of overall credit standards^[5] across all borrower firm sizes with the following reasons cited by the surveyed banks: (1) deterioration in the profitability and liquidity of banks’ portfolios, (2) less desirable borrowers’ profiles, (3) uncertain economic outlook, and (4) a lower risk tolerance.

Over the next quarter, both modal and DI approaches indicated that banks anticipate generally steady loan standards for firms due to the following factors: (1) stable economic outlook, (2) broadly steady risk tolerance, and (3) stable profile of borrowers.

Commercial Real Estate Loans. Results of the Q1 2023 SLOS showed that a majority of bank participants (76.7 percent) reported generally unchanged credit standards for commercial real estate loans (CRELs). Meanwhile, DI-based results showed a net tightening of loan standards for CRELs in Q1 2023 for the 29th consecutive quarter, with banks citing reduced tolerance for risk and deterioration of borrowers’ profiles. For Q2 2023, most banks expect to maintain their credit standards for CRELS, while the DI-based method show a net tightening of lending standards for CRELS in the next quarter.

Lending Standards for Loans to Households

Most respondent banks (51.5 percent) maintained their credit standards for loans extended to households in Q1 2023. Meanwhile, the DI approach reflected a net easing of lending standards for consumer loans,  particularly for credit card loans and auto loans.^[6] Bank respondents attributed the easing of lending standards for consumer loans to the following factors: (1) improvement in profitability of banks’ portfolios, (2) optimistic economic expectations, (3) increased risk tolerance, and (4) improvement in borrowers’ profiles.

Over the next quarter, the modal approach showed a higher percentage of respondents anticipating unchanged loan standards for consumer loans. Meanwhile, the DI method reflected bank respondents’ continued expectations of a net easing in household loan standards largely driven by improvements in the profitability of banks’ portfolios and banks’ higher tolerance for risk.

Housing Loans. In Q1 2023, most surveyed banks (58.1 percent) reported generally unchanged credit standards for housing loans. On the other hand, the DI-based method indicated a net tightening of loan standards for residential real estate loans which was attributed to the following: (1) deterioration in the profitability and liquidity of banks’ portfolios; (2) weakening profile of borrowers; and (3) banks’ reduced tolerance for risk. In the next quarter, a larger proportion of respondents anticipate generally steady lending standards for housing loans, while DI-based results reflect expectations of net easing of housing loan standards.

Loan Demand from Enterprises

Q1 2023 results revealed broadly unchanged loan demand from firms (66.7 percent) based on the modal approach. However, the DI method reflected a lower net increase in overall credit demand from across all firm classifications, driven largely by increased customer inventory and accounts receivable financing along with improvement in customers’ economic prospects. ^[7]

In the succeeding quarter, most participant banks responded with anticipation of broadly unchanged loan demand from firms. Based on the DI method, however, banks indicated expectations of a net increase in overall demand for loans from businesses in Q2 2023 driven by firms’ increasing financing requirements along with an improved economic outlook.

Commercial Real Estate Loans. Loan demand for CRELs in Q1 2023 was unchanged based on both the modal and DI approaches due to stable economic prospects and steady inflow of customers’ internally-generated funds. A large majority of banks expect demand for CRELs to be maintained in the next quarter based on the modal approach. Meanwhile, the DI-based approach showed surveyed banks’ outlook of higher loan demand for CRELs in Q2 2023.

Loan Demand from Households

Q1 2023 results pointed to broadly unchanged loan demand from households (60.6 percent) based on the modal approach. Meanwhile, DI-based results showed a slower increase in overall household loan demand across all consumer loan categories during Q1 2023 compared to Q4 2022. Respondents attributed the general rise in consumer loan demand to higher household consumption and housing investment along with banks’ more attractive financing terms.

Over the following quarter, most respondent banks anticipate generally unchanged loan demand from households. The DI method, however, indicated that banks foresee a net increase in overall consumer loan demand in the next quarter mainly due to  expectations of a rise in household spending.

Housing Loans. Participating banks indicated broadly unchanged loan demand for housing loans in Q1 2023 and expected a similar outcome in Q2 2023. On the other hand, the DI approach pointed to a net rise in residential real estate loan demand for both the current quarter and the following quarter driven mainly by an increase in housing investment and household consumption.

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^[1] The SLOS 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. The responses for the Q1 2023 SLOS were gathered between 2 March and 12 April 2023 from 47 banks out of the total 63 bank participants. The response rate of 75.0 percent in the Q1 2023 SLOS is slightly lower compared to the 79.4 percent response rate in the Q4 2022 survey round.

^[2] 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.

^[3] 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”). Meanwhile, unchanged credit standards in the DI approach indicates that the proportion of the respondent banks that have tightened their credit standards is equal to those that eased their credit standards.

^[4] 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.

^[5] The net tightening of credit standards for business loans In Q1 2023 is reflected in the stricter collateral requirements and loan covenants, and more use of interest rate floors.

^[6] The net easing of credit standards for household loans in Q1 2023 is reflected in the lengthened loan maturity and easing of collateral requirements for credit card loans, as well as lengthened loan maturity and narrower loan margins for auto loans.

^[7] Likewise, results of the  latest BSP Business Expectations Survey (BES) Business showed that  firms expressed stronger confidence on the economy for Q1 2023 which was attributed to: (a) higher consumer demand for products and services (e.g., motor vehicles, loan products, construction materials, electronics, and computers/laptops), (b) full reopening of the economy and return to pre-pandemic normalcy as more COVID-19 restrictions are lifted, (c) increased business activities and sustained economic recovery, and (d) expansion and new business opportunities in healthcare, manufacturing, and construction sub-sectors. The BSP Consumer Expectations Survey (CES) also indicated consumers’ improved economic sentiment for Q1 2023 due to their optimism about: (a) more available jobs and permanent employment, (b) higher income from wages/salaries, remittances, and other sources, and (c) positive developments in the country’s COVID-19 situation such as the relaxation of vaccination, testing, and masking requirements, fewer COVID-19 cases, and post-pandemic recovery of businesses as workers return to their offices.