Moody's: Slowdown in household loan growth is credit positive for Malaysian banks

Moody's Investors Service says that the further fall in household loan growth in Malaysia during 2016 from 2015 is credit positive for the asset quality of the country's banks because it points to a slower pace of debt accumulation among households.

"In addition, the data showed an improvement in the quality of new household lending. In 2016, the growth in household loans was driven by safer housing loans — specifically, loans supported by property collateral — and which exhibited low delinquency ratios, while the growth in riskier unsecured loans remained weak," says Simon Chen, a Moody's Vice President and Senior Analyst.

"Furthermore, the continued deceleration of household loan growth will help stabilize the high household leverage situation in Malaysia, which is among the highest in Asia, and we expect that household debt to GDP for 2016 will moderate from the 89% recorded at end-2015," says Chen.

"Among the Malaysian banks rated by Moody's, Public Bank Berhad (A3 stable, a3) and Hong Leong Bank Berhad (A3 stable, baa1) — the banks with the largest exposure to the household sector — will benefit the most from further improvements in the leverage profile of households," adds Chen.

Moody's conclusions were contained in a just-released report on banks in Malaysia, "Continued Slowing of Household Loan Growth Is Credit Positive for Malaysian Banks".

On 31 January 2017, Bank Negara Malaysia -- the country's central bank -- released banking system data that revealed the further decline in household loan growth in 2016 from a year ago. At end-2016, total outstanding household loans — making up 57% of total banking system loans — had grown 5%.

Meanwhile, a decline in auto loan growth also reflected households' increasing cautiousness towards discretionary spending. The overall household impaired loan ratio remained stable at 1.1% at end-2016, unchanged from the level at end-2015.

While asset quality for residential mortgages (55% of total household loans) and auto vehicle loans (19%) stayed unchanged from a year ago, the impaired loan ratio for unsecured loans — including personal and credit card loans — rose in 2016, indicating an increase in loan delinquencies and defaults among unsecured household borrowers.

At end-2016, the impaired loan ratio for unsecured loans was 1.9%, much higher than the ratios for other household loans, reflecting the higher risk nature of the unsecured household loans.

However, slow growth in unsecured personal loans and credit cards had reduced the banks' exposure to these risky loans to 12% of total household loans at end-2016 from a high of 15% at end-2011, which is positive for the banks' asset quality.

Similar to household loans, the asset quality of the banks' corporate loan portfolios remained stable at 2.3% at end-2016.

Impaired loan ratios have either improved or remained flat year-on-year across most industry sectors, except for commodity-linked mining and manufacturing sectors — which collectively made up 8% of total system loans at end-2016 — with impaired loan ratios at end-2016 higher than a year ago.