Con­cerns over prop­erty loans

Moody’s says they form the ‘great­est threat’ for lo­cal banks

The Star Malaysia - StarBiz - - Front Page - By GANESHWARAN KANA [email protected]­

PE­TAL­ING JAYA: The lat­est re­port by Moody’s In­vestors Ser­vice has set off alarm bells over the di­rec­tion of Malaysia’s fi­nan­cial sys­tem, af­ter the rat­ings agency called prop­erty loans the great­est threat for Malaysian banks.

The wor­ry­ing re­mark in Moody’s 2019 out­look re­port for Asia-Pa­cific banks came af­ter Bank Ne­gara’s con­stant as­sur­ance that the do­mes­tic prop­erty loans are sound, with the in­dus­try’s gross im­paired loans kept un­der con­trol.

Cit­ing the lat­est stress test find­ings, the cen­tral bank said in Septem­ber that the Malaysian fi­nan­cial sec­tor would likely re­main re­silient un­der se­vere macroe­co­nomic and fi­nan­cial strains.

Moody’s re­port has also brought the Hous­ing and Lo­cal Gov­ern­ment Min­istry’s plan to ease home fi­nanc­ing re­quire­ments un­der scru­tiny, rais­ing fur­ther ques­tions on the rel­e­vance of such a move.

In July, Minister Zu­raida Ka­marud­din said the gov­ern­ment and Bank Ne­gara were in talks to re­lax the hous­ing loan guide­lines for first-time house buy­ers, pri­mar­ily those in the low-in­come (B40) as well as mid­dle-in­come (M40) groups.

While the plan was in­tended to boost home own­er­ship and re­duce the num­ber of un­sold res­i­den­tial hous­ing units, prop­erty ex­perts who spoke to StarBiz have warned that the plan to loosen lend­ing re­quire­ments may back­fire.

Across the re­gion, Moody’s said prop­erty-re­lated loans form a large part of banks’ credit port­fo­lios. In the case of Malaysia, loans for the res­i­den­tial seg­ment ac­count for over 30% of the do­mes­tic bank­ing in­dus­try’s gross loans.

Apart from Malaysia, the rat­ings agency also named Aus­tralia, New Zealand and South Korea as the top coun­tries in the Asia-Pa­cific re­gion where prop­erty loans pose the great­est threat for do­mes­tic banks.

“Banks are ex­posed to prop­erty-re­lated risks, al­though real estate prices are de­creas- ing in such hot spots as Aus­tralia and Hong Kong, and post­ing slower growth in other mar­kets,” it said.

The re­port also high­lighted Malaysia as one of the Asia-Pacfic economies that saw the steep­est in­crease in res­i­den­tial prop­erty prices over the last eight years.

As at end-June, Malaysia came in fourth, just be­low Hong Kong, In­dia and the Philip­pines.

How­ever, un­like the three coun­tries, Malaysia has seen prop­erty prices cool­ing down in the first six months of the year.

In the Global Real Estate Bub­ble In­dex 2018, UBS Global Wealth Man­age­ment warned that Hong Kong – the world’s most over­val­ued hous­ing mar­ket – was at the great­est risk of a prop­erty bub­ble. Over the past 10 years, af­ford­abil­ity in Hong Kong has de­te­ri­o­rated more than in any other ma­jor city glob­ally.

Mean­while, in In­dia, house prices are ex­pected to con­tinue ris­ing, al­though it may take a hit due to dwin­dling credit sup­ply.

Ac­cord­ing to Reuters, house prices in the world’s sec­ond most pop­u­lated coun­try have risen at al­most dou­ble-digit rates for over a decade.

As for the Philip­pines, strong de­mand for prop­er­ties es­pe­cially in cer­tain lo­ca­tions such as Manila, have con­sis­tently pushed up prop­erty prices. The boom­ing gam­ing in­dus­try in Manila, fu­elled by Chi­nese monies, have seen an in­crease in Chi­nese work­ers mi­gra­tion and this has raised prop­erty de­mand in the cap­i­tal city.

Moody’s ex­pected the out­look for Asi­aPa­cific banks to be sta­ble over the next 12 months, al­though op­er­at­ing con­di­tions would prove to be more chal­leng­ing.

Ac­cord­ing to Moody’s vice-pres­i­dent and se­nior credit of­fi­cer Eu­gene Tarz­i­manov, the banks’ cred­it­wor­thi­ness will likely stay broadly sta­ble next year due to the still­healthy eco­nomic fun­da­men­tals and good credit buf­fers.

The cap­i­tal, pro­vi­sions and profit of banks in Asia-Pa­cific are an­tic­i­pated to of­fer suf­fi­cient loss-ab­sorb­ing buf­fers, with liq­uid­ity ex­pected to re­main sta­ble.

“In ad­di­tion, re­cent de­vel­op­ments on bank res­o­lu­tion in Asia-Pa­cific ce­ment our view that gov­ern­ment sup­port for the banks will stay strong, and that se­nior cred­i­tors will not be re­quired to pay for bank res­cues, al­though Hong Kong re­mains an ex­cep­tion,” said Tarz­i­manov.

On the po­ten­tial head­winds in 2019, the rat­ings agency stated that credit ex­pan­sion would con­tinue to slow down as eco­nomic growth in the Asia-Pa­cific re­gion has peaked and would mod­er­ate go­ing for­ward. Mean­while, the on­go­ing Sino-US trade war would also pose a risk for the banks.

Moody’s pointed out that pri­vate sec­tor lever­age re­mains high in many Asia-Pa­cific coun­tries, ex­pos­ing the banks to the risk of as­set qual­ity im­pair­ment as in­ter­est rates con­tinue to rise. Nev­er­the­less, growth in pri­vate sec­tor credit has slowed, with some mar­kets delever­ag­ing.

“More­over, cap­i­tal flows in and out of Asian fi­nan­cial mar­kets have been volatile, and fur­ther tight­en­ing in US dol­lar liq­uid­ity could have an ad­verse ef­fect on cor­po­rate debt re­pay­ment ca­pac­ity,” it said.

How­ever, the rat­ings agency re­mained pos­i­tive that the banks in the re­gion would have suf­fi­cient buf­fers against grow­ing risks.

Moody’s ex­pected tech­no­log­i­cal ad­vance­ments to re­shape the busi­ness mod­els of the banks in Asia-Pa­cific.

“Digi­ti­sa­tion will help banks scale down branch net­works and re­duce costs,” it said.

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