Friday 29 Mar 2024
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Moody’s Investors Service said Malaysia’s slower household debt growth and lower household debt ratio are credit positive for the banking sector.

Bank Negara Malaysia’s Financial Stability and Payment Systems Report for 2014, released last week, showed moderating growth in loans to households and a decrease in the share of riskier consumer loans in newly originated loans.

The total growth of Malaysian household debt, including mortgages, grew 10% in 2014, down from an annual growth of 12% to 13% in the previous four years and closer to the nominal gross domestic product (GDP) growth rate, Moody’s noted.

“As a result, the total household debt-to-GDP ratio rose only 120 basis points in 2014 to 87.9%, a much slower rate of increase than in previous years,” Moody’s said in a report today (March 16).

The rating agency said these developments will lead to better asset quality on newly originated loans, which is credit positive for banks most exposed to household borrowers, including Public Bank Bhd (A3 positive, C/a3 stable) and Hong Leong Bank Bhd (A3 positive, C-/baa1 stable).

The growth of the riskiest categories of consumer loans, such as personal unsecured financing, credit card debt and motor vehicle loans, also slowed the most in 2014. New unsecured borrowings declined to 8.6% of total new household debt in 2014 from 16.5% in 2013.

“As a result of the slowing growth, these categories together comprised 33% of overall household debt in 2014, down from 36% in 2013 and 40% in 2010,” Moody’s said.

In addition, the proportion of loans to highly leveraged households, particularly lower-income households earning RM3,000 or less a month, fell to 26.7% of total household debt in 2014, from 27.3% in 2013 and 33% in 2012.

In 2014, only 8.2% of new loans to such borrowers had a debt service ratio (DSR) of more than 60%, compared with 14.1% as at July 2013. At end-2014, 80% of all new household loans had a DSR of less than 60%, while half had a DSR of less than 40%.

Moody’s noted that nearly 50% of the outstanding housing loans have a current loan-to-value (LTV) ratio of less than 70%, which is seen as credit positive for banks.

Lower LTVs provide banks some protection in their housing loan portfolios to withstand potential losses if property prices decline sharply.

Household debt currently constitutes more than 50% of the system-wide total loan portfolio, including unsecured financing. Hence, the continued moderating growth of household borrowings and prudent credit underwriting support the banks’ asset quality profiles, said Moody’s.

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