Moody’s Investors Service expects an uptick in non-performing loans (NPLs), particularly in the household segment, in the South-East Asian banking system.
Moody’s assistant vice president and analyst Simon Chen said on Thursday that in Asean, the Malaysian and Thai banking systems were the most exposed to increased asset-quality pressure in the household segment when rates rise.
“This is primarily because the ability of households in these countries to service their debt in a rising interest-rate environment will be negatively affected by consumers’ high leverage at a time when the housing market in Malaysia may be peaking and Thailand faces elevated political risk,” he said in reference to Moody’s just-released report “Rising household leverage poses risks to Asean banks as the economic cycle shifts”.
Moody’s said the long positive credit cycle that has benefited banks in Asean might be on the verge of peaking. These would pose challenges for the lenders as pockets of asset-quality risk emerge due to tighter global monetary conditions.
“Our central scenario is that banking systems in Asean will be broadly resilient to the financial impact of a shift in interest rates, but we expect an uptick in NPLs, particularly in the household segment,” said Chen.
Moody’s report showed household debt has risen significantly in Asean in the past several years, with growth in bank loans to households outpacing loan growth to other borrowers.
Household leverage as a percentage of GDP was at historically high levels in Malaysia (A3 positive) (87% at end-2013) and Thailand (Baa1 stable) (82% at end-2013), and close to its five-year high in Singapore (Aaa stable) (75% at end-2013).
Although household debt has also risen significantly in Indonesia (Baa3 stable) and the Philippines (Baa3 positive), the growth in these countries was from a low base.
However, the report pointed out Asean bank asset-quality risk from residential property price corrections was mitigated by legal frameworks that support bank creditors.
Unlike in the US, banks in Asean have legal recourse to the borrowers on their debt obligations, beyond the underlying property assets mortgaged to the banks.
This feature provides greater creditor protection to banks, removes the incentive for borrowers to default on their mortgage obligations, and alleviates risks that housing NPLs will spike when property prices fall significantly.
Additionally, Moody’s report notes that Asean banks have responded to regulatory measures aimed at curbing further increases in excessive household leverage.
Banks in Thailand, Malaysia, and Singapore had tightened their underwriting standards on household loans, which was positive for banks’ asset quality over the longer term.
The banks also have strong buffers to withstand asset-quality shocks in the household segment, Moody’s said.
