Malaysian banks shrug off debt to buffer against market shocks

A decline in high-risk consumer loans prompted weaker household debt growth in 2017.

A slowdown in debt accumulation is strengthening the bid of Malaysian banks to withstand market shocks and absorb potential losses, according to a sector comment report from Moody’s Investors Service.

Household debt growth in Malaysia weakened from 5.4% in 2016 to 4.9% in 2017, a peak of 14.2% in 2010. This represents the slowest pace due to a marked decline in higher-risk consumer loans such as personal loans, auto loans and mortgages on non-residential properties.

This suggests that there is continued moderation amongst households and corporations in Malaysia, which bodes well for banks. This was confirmed in the central bank’s latest solvency stress test which affirmed the resilient capital and earnings buffers of Malaysian banks.

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Under adverse scenarios where total capital adequacy ratio would decline by about 50 basis points over a four year period whilst ratio would drop about 150 bp and 200 bp in a first and second scenario, the systemwide total capital ratio would remain above a regulatory minimum of 10.5% (including a capital conservation buffer of 2.5%) at the end of 2021.

This means that banks are on stable enough footing to withstand large market shocks.

Here's more from Moody's: 

According to BNM, more than 90% of capital losses under the stress test scenarios would result from credit losses. In the adverse scenarios, the systemwide gross impaired loan ratio would jump to 5% in the first scenario and 9% in the second scenario from 1.5% at the end of 2017, and loss-given defaults would rise as high as 80%. Losses from household loans would account for 34%-38% of total capital losses, while around 60% of the capital erosion caused by credit losses would derive from corporate loans.

Banks’ exposures to the highest-risk households, such as low-income households, fell to 17% of total household loans in 2017 from 19% a year earlier. Similarly, growth in aggregate non-financial corporate debt slowed to 3% in 2017 from 9% the prior year, with total corporate debt as a percentage of GDP declining to 103% from 110% over the same period.