Fitch expects precautionary measures to check M’sian household debt

KUALA LUMPUR (Dec 11): Fitch Ratings expects precautionary measures
may be tightened further by Malaysian regulators to prevent households
from over-extending themselves, particularly in an environment of
continued ample liquidity, low interest rates and rising asset prices.

It a report issued late Sunday, it believed Bank Negara Malaysia
would closely monitor household debt, which - at 76% of end-2010 GDP -
remains high and leaves the banking sector vulnerable to sharp increases
in unemployment and interest rates.

The international ratings agency said in its report that it expected
the outlook of its rated Malaysian banks to remain stable, even if a
fresh economic slowdown were to emerge from the mounting global
uncertainty.

“Downward rating risks could arise should such a downturn,
particularly if sharp and protracted, lead to significant capital
impairment risks for the local banks. However, the agency views this
likelihood as fairly low, due to their satisfactory loss-absorption
qualities and risk management, as well as a prudent regulatory
environment,” it said.

Elaborating on household debt, it said precautionary measures might
be tightened further to those introduced in 2010 to the first half of
this year to avert too much household debt especially when there was
ample liquidity, low interest rates and rising asset prices.

“This, together with banks' satisfactory risk management, underpins
Fitch's view that domestic loans to individuals will remain of fairly
sound quality through credit cycles,” it said.

On the ongoing sovereign turmoil in Europe, the rating agency said it
was unlikely to materially impact on the local bank's credit profiles
though there were concerns that global economic prospects were becoming
increasingly weak, posing fresh downside risks to the Malaysian economy
and banking system.

Fitch said the impact of higher credit costs can be absorbed largely
through banks' earnings, leaving limited risk of capital erosion.

“Such resilience was also observed in the 2008-2009 global economic
crisis and is broadly consistent with the conclusion of the agency's
stress test,” it said.

Fitch said the low threat to capital, together with management's
satisfactory record, supported its expectations that the domestic banks'
capitalisation would remain broadly intact, with an average core Tier 1
capital adequacy ratio (excluding hybrids) of about 9%.

The ratings agency pointed out the core capitalisation of major
Malaysian banks, while modest by regional comparison, was satisfactory
relative to their risk profiles and steady operating environment.

Deposits would continue to be the banks' primary funding source due to ample domestic liquidity.

“ In contrast, competition may impede deposit-gathering efforts for
some Malaysian banks in their key overseas markets, where loan/deposit
ratios are around 90%-100%,” it said.