Banking Sector (Maintain Neutral) - Managing Household Indebtedness

We attended Bank Negara briefing on its 2011 Annual, and Financial Stability and Payment Systems reports.  The session focused on:  (i)  rising  household indebtedness, and  (ii)  the  contagion from external  developments. However, an assessment  revealed that the  domestic financial  system was relatively sound, given the relatively small direct and indirect exposure to  the  above-mentioned risks. This is reflected  in the continued improvement  of system impaired loans and still ample liquidity, with the domestic banking sector  depending heavily on Ringgit-based funding, despite  some  effects  from  the  deleveraging  of  European banks. However, we maintain our NEUTRAL call on the sector at this juncture in light of the moderation in consumer loans growth, which contributes a hefty 55% of overall system loans, and continued pressure on net interest margins. Our top picks are CIMB (BUY, FV: RM8.05), Maybank (BUY, FV: RM9.60) and RHB Capital (BUY, FV: RM9.90).

Rising household indebtedness under control.  The rise in  household debt-to-GDP from 62.7% in 2008 to 76.6% in 2011, spiraling property prices in  certain locations and the  double-digit spurt in unsecured personal lending and credit card debts  have given rise to concerns of rising household indebtedness, with total system household debts now comprising 54% of the system’s gross loans base. Despite the increasing concerns, closer scrutiny  reveals that  the  pressure  on  income and inflationary shocks are more prevalent in the lower income segment (individuals with monthly income below RM3,000) living in urban locations, with this segment of borrowers making up a relatively small 13% of the banking system’s total loans and 26% of household loans.

Large portion of personal loans with non-bank financial institutions. The risk from this segment is further mitigated by the fact that the personal loans taken fall under two broad categories: (i) personal loans from development financial institutions and building societies under automated salary deduction schemes, and  (ii) purchase of securities linked to capital guaranteed Amanah Saham Nasional investment unit trusts, which certainly provides a  buffer in  times of economic stress. Roughly 60% of the reported personal loans are from non-financial institutions.

Composition of higher risk loans segment still manageable. The higher risk household lending segments like personal loans, purchase of securities and credit cards expanded by a relatively robust 18.8%, 20.2% and 8.4% respectively.  Despite this, the combined share of lending from this segment has only inched up a marginal 1ppt to 13% of the system’s entire loans base. In terms of pure unsecured lending, total loans in the personal loans and credit cards segments combined inched up by 1ppts to 8%. As such, even if we assumed a spike in impaired loans  in these two  segments,  their relatively small composition relative to the total loans base suggests that they should not pose any potential systemic risk to the banking system. 

Source: OSK188