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Fitch: Rising Malaysian Household Debt Poses Growing Risks
March 24, 2014 / 3:31 AM / in 4 years

Fitch: Rising Malaysian Household Debt Poses Growing Risks

(The following statement was released by the rating agency) SINGAPORE/HONG KONG/LONDON, March 23 (Fitch) The continued rise in Malaysian household leverage is a risk, although the banks have built satisfactory earnings and loan-loss reserve buffers that could help protect them against the risk of deteriorating asset quality, says Fitch Ratings. 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. But higher leverage remains a downside risk for banks' financial profiles and ratings. Malaysian households are among the most highly leveraged in Asia: household debt reached 86.8% of GDP at end-2013, up from 80.5% a year ago, according to data published by the central bank on 19 March. Higher household debt has been accompanied by property price appreciation in certain segments, notably high-rise urban housing. The central bank has gradually introduced a range of regulatory measures aimed at tempering household borrowing and property lending since 2010. The pace of tightening gained steam in 2013, with further regulation from both the government and central bank targeting property market speculation and personal finance. These measures should help moderate consumer loan growth, particularly against a backdrop of ebbing liquidity flows and higher global interest rates. There are signs this is already starting, with growth in household debt slowing to 11.7% in 2013 from 13.5% in 2012. Mortgages, which account for a quarter of bank lending assets, continue to drive the growth in household debt. Meanwhile, personal loans slowed to a more sustainable pace after growing rapidly in the five years to 2012, particularly after stricter regulation was introduced in July 2013. These loans make up only around 8% of household borrowing and 4% of banking sector loans, but can act as an early indicator of household sector stress as they 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. However, the bulk of household debt, around 80%, is secured in nature. Pre-provision profitability is likely to remain healthy in the near term. Overall loan-impairment remains low, despite having started to creep up for personal loans and vehicle financing. The banks are 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 of end-December 2013. The macroeconomic backdrop could limit the severity of any deterioration in consumer asset quality in the near term. The brisk growth in household borrowing is backed by a robust economy, a steady job market and rising household incomes across a relatively young population base. We forecast GDP to grow by 5% and unemployment to remain stable at around 3% in 2014. Nevertheless, household leverage may continue to rise in the near term, which will increase risks on at least 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. The impact of this tightening cycle will remain manageable. But the longer household indebtedness goes on rising, the lower the tolerance to economic shocks (other things being equal). Second, rising household debt could in itself eventually become a drag on growth, if and when Malaysian households decide to rein in spending and start strengthening their balance sheets. Contact: Elaine Koh Director Financial Insitutions +65 6796 7239 Fitch Ratings Singapore Pte Ltd #35-05 Suntec Tower Four Singapore 038986 Andrew Colquhoun Senior Director Sovereigns +852 2263 9938 Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: 2014 Outlook: Asia-Pacific Banks here Asia-Pacific Sovereign Overview January 2014 here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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