Monday, December 12, 2011

Fitch expects precautionary measures to check M'sian household debt

KUALA LUMPUR (Dec 11): Fitch Ratings expects precautionary measures may be tightened further by Malaysian regulators to prevent households from over-extending themselves, particularly in an environment of continued ample liquidity, low interest rates and rising asset prices.

It a report issued late Sunday, it believed Bank Negara Malaysia would closely monitor household debt, which - at 76% of end-2010 GDP - remains high and leaves the banking sector vulnerable to sharp increases in unemployment and interest rates.

The international ratings agency said in its report that it expected the outlook of its rated Malaysian banks to remain stable, even if a fresh economic slowdown were to emerge from the mounting global uncertainty.

'Downward rating risks could arise should such a downturn, particularly if sharp and protracted, lead to significant capital impairment risks for the local banks. However, the agency views this likelihood as fairly low, due to their satisfactory loss-absorption qualities and risk management, as well as a prudent regulatory environment,' it said.

Elaborating on household, it said precautionary measures might be tightened further to those introduced in 2010 to the first half of this year to avert too much household debt especially when there was ample liquidity, low interest rates and rising asset prices.

'This, together with banks' satisfactory risk management, underpins Fitch's view that domestic loans to individuals will remain of fairly sound quality through credit cycles,' it said.

On the ongoing sovereign turmoil in Europe, the rating agency said it was unlikely to materially impact on the local bank's credit profiles though there were concerns that global economic prospects were becoming increasingly weak, posing fresh downside risks to the Malaysian economy and banking system.

Fitch said the impact of higher credit costs can be absorbed largely through banks' earnings, leaving limited risk of capital erosion.

'Such resilience was also observed in the 2008-2009 global economic crisis and is broadly consistent with the conclusion of the agency's stress test,' it said.

Fitch said the low threat to capital, together with management's satisfactory record, supported its expectations that the domestic banks' capitalisation would remain broadly intact, with an average core Tier 1 capital adequacy ratio (excluding hybrids) of about 9%.

The ratings agency pointed out the core capitalisation of major Malaysian banks, while modest by regional comparison, was satisfactory relative to their risk profiles and steady operating environment.

Deposits would continue to be the banks' primary funding source due to ample domestic liquidity.

' In contrast, competition may impede deposit-gathering efforts for some Malaysian banks in their key overseas markets, where loan/deposit ratios are around 90%-100%,' it said.

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