Banks’ credit standards steady in 2022 – BSP

The banking sector’s credit or lending standards were generally unchanged for both business and household loans in 2022 and expected to continue this quarter, according to a Bangko Sentral ng Pilipinas (BSP) survey.

BSP’s latest Senior Bank Loan Officers’ Survey (SLOS), which uses two methods to assess lending standards and conducted between Dec. 14, 2022 to Jan. 13 this year, noted that under the modal approach, a higher number of banks that have maintained their overall credit standards.

In using the other method which is the diffusion index (DI), the survey results still indicate a net tightening of credit standards for business loans but unchanged for consumer loans.

As explained by the BSP, the modal approach analyzes results based on the highest share of responses which have three options -- tightening, easing, or unchanged lending standards. In the DI method, when it shows a positive result, it means banks that have tightened their credit standards exceed those that eased or “net tightening”. A “net easing” is the opposite, or shows negative DI for credit standards which means more banks have eased their credit standards than tightened it.

Bangko Sentral ng Pilipinas (BSP) logo as displayed at the BSP headquarter's "backdoor" entrance (Manila Bulletin photo).

Based on the fourth quarter SLOS on business loans, 80.9 percent of the 50 surveyed banks said they have “broadly unchanged” lending standards. This was true for the entire 2022 in general.

With the DI approach, the results showed a net tightening of credit standards for all borrower firm sizes. The BSP said the reasons for this are: deterioration of borrowers' profiles and banks' portfolios; reduced risk tolerance; and 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,” said the BSP.

The opinions for this quarter is the same, that banks still keep their current credit standards. The DI-based results, however, will likely continue to be a net tightening due to banks' lower tolerance for risk and deterioration in borrowers' profiles, said the BSP.

As for lending to households, 71.4 percent of surveyed banks said their standards were the same, and this was true for both the modal and DI methods. Based on the DI results, the unchanged overall standards were due to steady economic outlook; maintained risk tolerance; and 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,” said the BSP.

For the first quarter 2023, banks expect to maintain current lending standards for household loans as well using the modal method. The DI approach, meanwhile, is expected to be in a net easing overall credit standards with the improvement in borrowers' profiles and profitability of banks' portfolios, as well as higher risk tolerance.

The SLOS questionnaires have a portion on commercial and residential real estate loans and banks’ current credit standards for these types of loans.

The BSP said 82.4 percent of surveyed banks did not change their credit standards for commercial real estate loans. Using the DI method, it showed continued net tightening because of lower risk tolerance, deterioration of borrowers' profiles, and less favorable economic expectations.

For the next three months at least, the SLOS indicates steady loan standards for commercial real estate loans while the DI-based approach shows net tighter credit standards.

The BSP said demand for commercial real estate loans last year were generally unchanged because of customers' stable economic prospects and sustained inflow of internally-generated funds as well as steady access to alternative sources of funds. It could expect the same in the first quarter this year. The DI approach even expects a net rise in credit demand “amid banks’ more attractive financing terms and lower interest rates, and customers' lack of alternative sources of funds.”

About 65.6 percent of surveyed banks said they also have unchanged lending standards for residential real estate loans in the fourth quarter last year and in 2022 in general.

Based on the DI-based method, there was net easing due to the improvement in the profitability of banks' portfolios and borrowers' profiles, and higher risk tolerance along with less uncertain economic outlook.

For this quarter, the BSP said banks expect unchanged credit standards for housing loans, while DI-based indicate net easing.

The SLOS showed that overall loan demand in the last quarter of 2022 and for the rest of the year were broadly unchanged. There were 68.1 percent of surveyed banks that said so as far as business loans were concerned, while 62.9 percent said they did not change lending standards for household loans.

The DI-based results showed a net increase in overall loan demand from across all firm classifications and categories of household loans, said the BSP.

“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. Likewise, the overall net rise in household loan demand was mainly attributed to higher household consumption and banks' more attractive financing terms,” the BSP added.

For the first three months of 2023, the central bank said majority of surveyed banks anticipate a generally unchanged loan demand from businesses and households. Based on the DI method, there was expectation of a net increase in overall demand for loans from businesses on the back of a 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,” said the BSP.

The BSP first conducted the SLOS in 2009. The purpose is 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,” said the BSP.

The surveys are pattered after similar surveys conducted by the US Federal Reserve, the European Central Bank, the Bank of England, the Bank of Canada, and the Bank of Japan, among others.