The banking industry’s lending standards are mostly unchanged in the second quarter this year and expected to keep steady until September, based on the central bank’s latest survey on credit and loans released on Thursday, July 28.

The Second Quarter 2022 Senior Bank Loan Officers’ Survey (SLOS) was conducted June 16 until July 11 before the Bangko Sentral ng Pilipinas (BSP) announced an off-cycle 75 basis points (bps) increase to the key overnight borrowing rate, which lifted the key rate from 2.5 percent to 3.25 percent. The 40 surveyed banks have not yet accounted the surprise rate hike last July 14.

The SLOS which applies two approaches the modal and the diffision index (DI), noted a higher number of surveyed banks that kept their overall credit standards steady for loans to enterprises and consumers during the survey period.

Based on the DI results, the BSP said there are “diverse trends” since lending standards for businesses showed a net tightening while consumer loans have a net easing of credit standards.

About 76.1 percent of the 40 banks surveyed said they have unchanged overall lending standards for business loans as per the modal approach.

In the DI approach, there was a net tightening across all borrowers – from top corporations, large middle-market enterprises, small and medium enterprises, and micro enterprises.

Banks attributed the overall tightening of credit standards on the deterioration of borrowers’ profile and of the profitability of banks’ portfolio, and a more uncertain economic outlook. “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,” said the BSP. The decline in banks risk tolerance is also a factor in the net tightening in credit standards in the second quarter.

As for lending to households, 73 percent of banks surveyed said they did not change their lending standards based on the modal approach but again, for the DI results, there was net easing in credit standards for consumer loans.

This net easing was due to banks’ optimistic economic outlook, increased risk tolerance, and improvement in borrowers' profile when it comes to consumer loans. It translated to longer loan maturities, narrower margins for loans, and decreased use of interest rate floors. Meanwhile, the net tightening of credit standards was reflected in the decreased size of credit lines and stricter collateral requirements.

For the third quarter, the BSP said modal-based results indicate that more banks expect to maintain their overall credit standards. But based on the DI approach, banks see a net easing in 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.

The SLOS also include commercial real estate loans and residential property loans in the survey when predicting loan demand.

About 73.3 percent of banks reported broadly maintained overall credit standards for commercial real estate loans. The DI method still indicated a net tightening, however, due to decreased risk tolerance and deterioration of borrowers' profile, said the BSP.

For the next quarter or third quarter, based on the modal approach, banks expect to keep the same credit standards for commercial real estate loans.

But, demand for commercial real estate loans based on the DI model showed a “net rise” driven by the improvement in clients’ positive economic outlook as well as a higher need for managing inventory and accounts receivables. The next months also indicated that banks may have more attractive financing terms for borrowers.

On housing loans, the BSP said 71.9 percent of surveyed banks had unchanged lending standards while the DI approach showed a net easing for residential real estate loans because banks' more favorable economic outlook, improvement in borrowers’ profile, and increased tolerance for risk.

For the third quarter, the survey yielded the same results with DI-based method showing a net easing of housing loan standards.

Generally, the SLOS pointed to a steady loan demand in the second quarter. About 56.3 percent of the surveyed banks said loan demand was stable based on the modal results while 67.6 percent DI-based results said the same thing.

For the third quarter, the BSP said more than half of 40 surveyed banks said they expect stable loan demand for businesses and households.

The SLOS, introduced in 2009, helps the BSP to assess and understand banks’ lending behavior. The survey of banks’ lending standards is also an important credit activity indicator.

The second quarter SLOS originally included 64 banks, of which 42 are universal and commercial banks and 22 are thrift banks. Only 40 responded back to the BSP, about a 76.6 percent response rate.

The SLOS is similar to the surveys also 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.