Household debt still a concern, may continue to rise in the short term

PETALING JAYA: High household debt continue to overshadow Malaysian banks’ outlook as debt may continue to rise in the short term, say Fitch Ratings analysts.

They said in a report that the higher leverage remained a downside risk for banks despite having built satisfactory earnings and loan-loss reserve buffers that could help protect them against the risk of deteriorating asset quality.

However, they said tighter lending regulations and receding liquidity conditions should lead to a moderation in credit growth and temper the build-up of risks in the banking system.

They noted that higher leverage remains a downside risk for banks’ financial profiles and ratings, with the risks coming from two fronts.

“First, a sharp increase in macroeconomic volatility would affect households’ debt-servicing capacity. We expect the central bank to begin raising rates in 2014 in response to inflationary pressure stemming partly from rationalisation of government subsidy schemes,” they said.

Secondly, rising household debt could in itself become a drag on growth, if and when Malaysian households decide to rein in spending and start strengthening their balance sheets.

Malaysian households are among the most highly leveraged in Asia with household debt reaching 86.8% of gross domestic product at end-2013, up from 80.5% a year ago, according to data published by Bank Negara last week.

The analysts said measures introduced since 2010 to temper household borrowing and property lending gained steam last year.

“There are signs this is already starting, with growth in household debt slowing to 11.7% in 2013 from 13.5% in 2012,” they said.

They added that an early indicator of household sector stress would come from personal loans as these loans tend to be accessed more by lower-income households.

“A rise in personal loan delinquencies is likely to be accompanied by higher impairments in vehicle finance, which comprises a more significant 15% of banking system assets,” they said.

But they pointed out that around 80% of household debt was secured and that pre-provision profitability would likely remain healthy in the near term.

“Overall loan-impairment remains low, despite having started to creep up for personal loans and vehicle financing,” they said.

The analysts said the banks were also protected by satisfactory loan-loss reserves of between 85% and 119% of gross impaired loans, and core Tier-1 capital buffers of between 8.7% and 11.3% for the top three domestic banks as at end-December 2013.

They said a robust economy, steady job market and rising household incomes backed the brisk growth in household borrowing across a relatively young population base.

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