By Doris Dumlao-Abadilla @Philbizwatcher
As banks brace for massive economic losses arising from the coronavirus pandemic this year, it has been a lot more challenging for the typical consumer to obtain bank financing to buy a new car.
Compared to other consumer accounts like housing loans, car loans are quite tricky because cars rapidly depreciate in value, unlike real estate which can be sold for a higher sum after banks foreclose on them.
Based on the latest data from the Bangko Sentral ng Pilipinas (BSP), lending by universal and commercial banks grew by a meager 2.8 percent year-on-year in September from 4.7 percent in August. Loans to households expanded at a lower rate of 10.2 percent in September from 12.9 percent in August, mainly due to the continued slowdown in credit card and motor vehicle loans during the month.
With the BSP aggressively easing monetary policy to help pump-prime the economy during this coronavirus (COVID-19) pandemic, interest rates have hit an all-time low. But even as the financial system is awash with liquidity, banks have deliberately curbed lending to households, fearful of a further spike in bad loans.
Explaining the cautious lending stance of the banking industry, Philippine National Bank president Wick Veloso said in a recent briefing: “It’s a case where liquidity is there but of course, you have to understand that we are responsible for our shareholders and our depositors. So we also have to be very careful in terms of lending.”
“When it’s foggy, you can’t drive fast. You slow down, you try to feel your way and if you’re able to see a better direction because the fog has eased, or you’re able to have better lights and technology to help you, then you can now proceed with caution,” Veloso explained.
For now, any banker would say that a lot of uncertainties remain, especially since the latest round of 60-day loan moratorium mandated by the Bayanihan 2 Act will expire only by end-December. Only after this will banks have a better visibility on the magnitude of loan defaults they have to address and the amount of additional loan loss provisioning they will require.
Based on the BSP’s third quarter 2020 senior bank officers’ loan survey – which covered 48 banking institutions, 47 percent of respondents indicated that they tightened their overall credit standards during the period. The share of banks that tightened their credit criteria declined from 61 percent of respondents in the second quarter, but it’s still pretty high and reflective of banks’ sluggish appetite on consumer loans.
A net tightening of credit standards for household loans was observed by the BSP across all types of consumer loans, namely, housing, credit card, auto, and personal/salary loans. As a result, banks reduced credit line sizes and imposed stricter collateral requirements and loan covenants as well as interest rate floors to mitigate risks.
“The banks cited less favorable economic outlook, a deterioration in borrowers’ profile, and a reduced tolerance for risk as the key factors,” the BSP said.
Consumer loans earn a higher margin for banks, but this is in exchange for taking on higher risks than lending to top-tier institutions.
Online stock brokerage COL Financial said in a research note that the weakness in overall loan growth was expected given the drop in economic activity. COL also noted that banks with high exposure to small and medium enterprises (SMEs), credit cards and auto loans would be “most at risk of credit quality deterioration amidst the pandemic.”
For the first time since 1998, the Philippines has entered an economic recession this year. For the full year, a year-on-year contraction of at least 10 percent is expected.
Meanwhile, Philippine banks’ bad loans have risen for the ninth straight month to hit a seven-year high of 3.4 percent as a ratio of total loans at end-September. The ratio is expected to further rise to 4.5 percent by yearend.
“We believe that banks are prioritizing asset quality over market share and thus remain cautious in lending amidst the uncertainty,” COL said.
But it’s not as if the typical household is very eager to borrow money to buy cars, houses and other consumer durables at this time. Many people have lost their jobs and for those who are still working, or doing business, work-from-home arrangements have minimized travel requirements, except for those in the business of logistics or moving goods. Based on a separate survey by the BSP, consumer outlook in the country has turned pessimistic for the third quarter as the overall confidence index (CI) fell to -54.5 percent. This was the lowest level seen by the BSP since it started going this nationwide survey in 2007.
A negative CI indicates that the number of pessimists outnumbered the number of optimists. As expected, respondents attributed their negative sentiment generally to the COVID-19 pandemic. Other reasons cited by the respondents were the following: (a) high unemployment rate and less working family members, (b) low and reduced income, and (c) faster increase in the prices of goods.
Specifically for motor vehicles and housing, the percentage of households in the country that considered the third quarter as a favorable time to buy big-ticket items declined to 12.8 percent, almost half of the 24.2 percent recorded in the first quarter of 2020.
The BSP attributed respondents’ waning buying sentiment to their: (a) shift on spending priority to food and other basic needs of the family (from big-ticket items), (b) ownership of big-ticket items at present, and (c) low/insufficient income.
One possible offshoot of this challenging environment is a boom in the secondary market for cars. It’s a welcome development for consumers who cannot afford to buy new cars but it will require a more tedious process for banks which need to foreclose and auction off these assets.