Highlight Malaysian banks can weather high household debts and property prices, says S&P

by **Cals** Wed 12 Feb 2014, 03:07

Highlight Malaysian banks can weather high household debts and property prices, says S&P
Business & Markets 2014
Written by Jonathan Gan at theedgemalaysia.com
Tuesday, 11 February 2014 19:00

KUALA LUMPUR (Feb 11): Malaysian banks’ generally healthy financial positions should mitigate the effects of high household debt and property prices, said S&P in its banking outlook report on Malaysia.

The Malaysian update was one of several by the rating agency on Southeast Asia’s banking sector.

The rating agency said it expected government and regulatory actions to curb the recent rapid rise in property prices and growth in household debt, which was a major concern.

“The still healthy economic climate and low unemployment will ease the pressure on households stemming from increased leverage in the face of modest income, higher living expenses from subsidy reductions and possibly higher interest rates in our opinion,” said the report.

Nonetheless, it cautioned: "However, in our base case, we expect the government's policy intervention to curb the rise in property prices and household debt. Downgrades would be likely if our base-case expectations fail to materialize.”

S&P noted that household indebtedness in Singapore, Thailand, and Malaysia had been increasing since 2008, leaving these banking systems vulnerable to rising interest rates.

“The U.S. Federal Reserve's tapering of its bond-purchase program could lead to higher interest rates and asset quality pressure.

“Malaysia's households, in particular, could land in a tight spot due to high leverage relative to modest income,” it said.

The rating agency pointed out Malaysian banks were particularly vulnerable to deterioration in household health, given that the household sector accounted for about 57% of total loans of the banking system.

“Credit risks are also high, given Malaysia's fairly large private-sector debt burden relative to the country's modest income levels.

The rating agency also noted that as Malaysia’s headline consumer price index (CPI) rose, it would impact low income borrowers.

“Leverage of borrowers with a monthly income of RM3,000 or less is considerably greater than for those in higher income groups. These borrowers constitute about 16% of the banking system's loans, and are particularly vulnerable to inflation, which has negative credit implications for the banks that lend to them,” said the international rating agency.

The report also expected the central bank to raise its overnight policy rate (OPR) to 3.5% from 3% to combat inflation.

“We expect that government measures to cool price growth… which should result in inflation-adjusted growth in property prices of 4% or less in 2014,” the report added.

The report anticipated loan growth to moderate to 9%-9.5% in 2014 in view of the central bank’s ongoing tightening measures, higher inflation and government steps to cool the property sector.

“Loan growth trends will likely reverse in 2014 with business loans growing faster than consumer loans,” it said.

For the region, S&P said banks in most Southeast Asian countries would face tougher operating conditions in 2014 because of lower economic growth prospects and tighter credit conditions.

“Our view of the banking systems of Singapore, Indonesia, Thailand, and the Philippines is one of stability,” it said.