Banks may tighten loan standards on economic jitters

Banks expect to tighten their credit standards toward corporate borrowers in the first quarter of 2020 due to a decline in risk appetite and less favorable economic outlook, the latest survey of the Bangko Sentral ng Pilipinas revealed on Friday.In a statement, the central bank said that based on the diffusion index approach, its latest senior loan officers survey showed expectations of net tightening of overall credit standards early this year.

“Respondent banks attributed their anticipation of tighter overall credit standards largely to expectations of a deterioration in the profitability of banks’ portfolios, stricter financial system regulations and reduced tolerance for risk, as well as banks’ less favorable economic outlook,” the BSP said.

The same survey showed, however, a steady application of credit standards toward household loans in the first quarter of 2020.

“In terms of respondent banks’ outlook for the next quarter, results based on both the modal and diffusion index approaches indicated expectations of unchanged overall credit standards for household loans,” the central bank said, adding this was “largely on account of respondent banks’ unchanged tolerance for risk and steady economic outlook, as well as expectations of unchanged profile of banks’ borrowers.”

Over the next quarter, most of respondent banks expect steady overall loan demand from firms and households. However, diffusion index-based results suggested expectations of a net increase in overall loan demand for business and household loans.

For business loans, the expected net increase in demand was associated largely with corporate clients’ higher working capital requirements. Meanwhile, the expected net increase in loan demand from households was attributed largely to expectations of higher household consumption and more attractive financing terms offered by banks, the central bank said.

Over the next quarter, although most of the respondent banks anticipated generally steady loan demand, more banks expected demand for commercial real estate loans to increase compared to those expecting the opposite.

Over the next quarter, results based on the modal approach showed that respondent banks expect overall credit standards for housing loans to remain unchanged, but the diffusion index-based results suggested expectations of a net tightening of credit standards for housing loans in the first quarter of 2020.

The BSP has been conducting the survey 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.

In the latest survey round, survey questions were sent to a total of 65 banks (42 universal and commercial banks and 23 thrift banks), 48 of whom sent in their responses, representing a response rate of 73.8 percent. INQ