The credit cycle is at its best, with Malaysia's economy enjoying full employment, but ratings agency Standard & Poor's (S&P) believes that as household debt continues to rise, systemic imbalances will pose a risk to financial institutions.
S&P analyst Ivan Tan pointed out that imbalances had emerged, with property prices having risen 10 per cent year-on-year since 2010 while household income had not kept pace.
"Household debt levels and housing price levels have very important implications on the ratings of the banks, as 55 per cent of the household debt is on mortgages and 27 per cent of the total loans (in the financial system) is on mortgages," he told StarBiz.
He said the unemployment rate, at around 3 per cent, was already near its lowest level, which meant that the country was already in full employment.
"What we are saying is that the credit cycle is at its best. Our outlook is for about one to two years and risk has built up in the financial sector, and we will continue to monitor the household debt levels in relation to the gross domestic product and look for consistent indications that the housing price escalation and consumer debt are moderating," he said.
Tan believes that banks have sufficient financial buffer to withstand a 2 per cent rate hike (in the overnight policy rate) in a hypothetical stress scenario despite the risks posed.
On Wednesday, S&P downgraded the outlook on four local financial institutions - CIMB Group Holdings Bhd, AmBank (M) Bhd, RHB Bank Bhd and RHB Investment Bank Bhd - to "negative" from "stable".
CIMB Research analyst Winson Ng Gia Yann said the research house was negatively surprised by the downgrade, which was premised on the country's high household debt. Nevertheless, it was still confident of the capabilities of Malaysian banks' to keep their impaired loan ratios at bay.