High household leverage in both Thailand and Malaysia remains a source of risk for both economies, according to Fitch Ratings in its Asia-Pacific Banks Chart of the Month report.
Asset quality outlook is underpinned by the macroeconomic environments in the two countries, which are challenged by headwinds from China as the economy there slows and weighs on growth prospects across Asia, the respected firm said.
However, larger commercial banks (as opposed to state policy banks or non-bank institutions) in both jurisdictions appear better-placed to weather any asset quality stress. This is due to their better-quality customer bases and reasonable capital and asset quality buffers.
Household debt/GDP in Thailand and Malaysia remain among the highest in Southeast Asia at 86 percent and 88 percent respectively at the end of 2014, according to the ratings agents, and this is despite slower household credit growth in both countries over the past two years.
Thai household debt accelerated rapidly between 2010 and 2013 in particular, partly due to tax breaks on vehicle and housing purchases, while growth in Malaysia household debt has been driven by favourable credit conditions and strong consumer demand.
Growth in household lending has slowed more recently, to 6.5 percent for Thailand and 9.9 percent for Malaysia in 2014, from 18.0 percent and 13.9 percent respectively in 2012. In Malaysia, this has partly been due to successive regulatory measures to curb excessive household borrowing, particularly in personal unsecured loans and lower-income households.
Fitch said it viewed the slowdown in household debt growth as positive from a macroeconomic stability perspective, as it helps to contain an excessive build-up of debt. However, household leverage is likely to remain high in the short- to medium-term as consumer loan demand is unlikely to be materially below GDP growth for both economies.
Increased leverage makes households more sensitive to macroeconomic weakness, and this has already had an effect on delinquencies for some banks, especially in Thailand. Further asset quality deterioration is likely and will depend on the outlook for economic growth and unemployment, with lower-income households being more vulnerable in both Malaysia and Thailand.
However, Fitch sees the commercial banks, particularly the larger and more diversified institutions, as having satisfactory buffers to cope with the risks associated with high household debt.
In Malaysia’s case, moderate economic growth and broadly steady employment conditions are likely to continue to support asset quality in the near term, but high household debt could have potential negative implications over the medium term if macroeconomic conditions were to worsen significantly.
For Thailand, weaker economic growth, escalating delinquencies, and the exposure of some entities to vulnerable lower-income segments already contribute to a continued negative outlook for the sector, which could be exacerbated if the economy is very weak for a prolonged period.
Andrew Batt, International Group Editor of PropertyGuru Group, wrote this story. To contact him about this or other stories email andrew@propertyguru.com.sg
