Credit risks for banks exposed to oversupply property segments, says MARC

Residential mortgages comprised over 33% of banks’ total retail lending and 44% of household loan growth in 2018


MALAYSIAN banks need to monitor their exposure to the property overhang levels in the high-rise residential, office and shopping complex segments as these could weaken their asset quality in an economic downturn, said Malaysian Rating Corp Bhd (MARC).

“Overall, we believe there is no near-term recovery in sight for the property market given the affordability issues, unsold units and a challenging economic outlook. Moreover, the banking system has not been tested by a housing downturn since 1998,” MARC said in its Banking Sector Insights report released yesterday.

On the bright side, it said government-initiated cooling measures to curb market speculation have somewhat helped to contain the risk of a housing bubble.

Residential mortgages comprised over 33% of banks’ total retail lending and 44% of household loan growth in 2018.

Growth in applied and approved loans for residential properties came in at -0.1% and 1.2% in 2018, versus double- digit growth recorded the year prior.

Banks had an average gross impaired loan (GIL) ratio of 1.57% as of end-June 2019, up from 1.45% as of end-2018.

For now, expansion in residential property lending continues to be supported by employment trends, real wage growth and low-interest rates.

Malaysia’s high household debt level at 83% of GDP in 2018 (2017: 84.2%), however, makes households sensitive to increased unemployment and higher interest rates.

MARC highlighted higher incidents of impairment exhibited by banks’ personal and higher-valued residential property financing portfolios.

These exposures, coupled with the sensitivity of banks’ GIL ratio to economic growth, warrant a more cautious view of banking system asset quality, it said.

Meanwhile, earnings momentum continues to moderate on account of slowing loan growth and compressing net interest margins (NIMs).

Profits have also come under pressure from the rising cost of risk management and compliance, as the aftermath of the 2008 global financial crisis saw the introduction of new regulations and financial reporting requirements.

“Unlike past years in which profitability was boosted by high loan loss reserve releases and unusually low credit costs, there are now noticeably fewer earnings sources to sustain a strong earnings momentum,” MARC cautioned.

It believes revenue growth, rather than credit costs, poses the biggest risk to domestic lenders’ earnings in 2019.

“For 2019, we believe the banking sector’s ability to grow revenue will be challenged by lower credit growth, the competitive squeeze on NIM and increased credit risks across the board.

“Spread-related income growth is likely to become more of a challenge as the year wears on, if spreads remain compressed and growth in earning assets provides an insufficient offset. The impact will most likely be felt hardest by smaller banks with limited branch networks and undifferentiated branches,” MARC stated.

It said a focus on long-term value by banks’ boards and executive management will be important to avoid across-the-board cuts that might result in under-investment in their future.

The ratings agency also believes there is room for consolidation and restructuring in the sector, amid a rather quiet merger and acquisition scene this year.

“Given the increasingly competitive financial landscape, it is important for banks to proactively enhance their capacities and capabilities.

“Although consolidation is not an immediate necessity given the banks’ resilient performance last year and up to the first half of 2019, mergers would enhance the scale of a bank’s operations that may provide better synergies in operations and cost efficiencies,” it said.