S&P justifies its concerns on household debt

The credit cycle is at its best, with Malaysia’s economy enjoying full employment, but ratings agency Standard & Poor’s (S&P) believes that as household debt continues to rise, systemic imbalances will pose a risk to financial institutions.

S&P analyst Ivan Tan pointed out that imbalances had emerged, with property prices having risen 10% year-on-year since 2010 while household income had not kept pace.

“Household debt levels and housing price levels have very important implications on the ratings of the banks, as 55% of the household debt is on mortgages and 27% of the total loans (in the financial system) is on mortgages,” he told StarBiz.

He said the unemployment rate, at around 3%, was already near its lowest level, which meant that the country was already in full employment.

“What we are saying is that the credit cycle is at its best. Our outlook is for about one to two years and risk has built up in the financial sector, and we will continue to monitor the household debt levels in relation to the gross domestic product and look for consistent indications that the housing price escalation and consumer debt are moderating,” he said.

Tan believes that banks have sufficient financial buffer to withstand a 2% rate hike (in the overnight policy rate) in a hypothetical stress scenario despite the risks posed.

On Wednesday, S&P downgraded the outlook on four local financial institutions – CIMB Group Holdings Bhd, AmBank (M) Bhd, RHB Bank Bhd and RHB Investment Bank Bhd – to “negative” from “stable”.

CIMB Research analyst Winson Ng Gia Yann said the research house was negatively surprised by the downgrade, which was premised on the country’s high household debt. Nevertheless, it was still confident of the capabilities of Malaysian banks’ to keep their impaired loan ratios at bay.

“In fact, the industry’s gross impaired loan ratio has been falling from 3.4% in 2010 to 2.7% in 2011 and 2% in 2012. Also, banks had built up their loan-loss coverage to a strong 97.6% as at end-September 2013.

“For the industry, the household loan is mainly in the form of residential mortgages, which are mostly well-collateralised. Housing loans make up 27.9% of the industry’s loan base, compared with 4.8% for personal loans and 2.8% for credit-card receivables,” he said in a research note.

However, Ng said the downgrade could adversely affect sentiment on banking stocks in the near term.

“We are more concerned about top-line growth in the mature Malaysian market and pressures on margins. We do not see material risks for a significant uptick in impaired loan ratios, premised on a healthy economic climate, continuous improvemnt in bank loan approval and monitoring systems,” he said.

S&P also has lowered CIMB’s long-term Asean regional scale to axBBB+ from axA-.

AmResearch analyst Rachel Huang said the immediate impact from the outlook downgrade may be on funding costs.

“Based on industry checks, the banks have hinted that the change in outlook did not affect funding costs, as these were more reliant on ratings. For CIMB, the change in the Asean scale rating may affect funding costs, if these are raised in foreign currency, but we understand that there are no plans to do so.

“In addition, the company’s rating has been changed only at the holding company level, which thus does not affect its overseas subsidiary’s ratings,” she said.

In the report, Huang also said the latest downgrade implied a neutral impact on funding costs, as there was no change in ratings except for CIMB. - By Choong En Han (The Star)

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