PETALING JAYA - Malaysian banks are particularly vulnerable to deterioration in household health, given that the household sector accounts for about 57 per cent of the banking system's total loans, a report by Standard & Poor's Rating Services (S&P) shows.
S&P analysts Ivan Tan and Deepali V Seth Chhabria said a prolonged run-up in housing prices and household debt in Malaysia had contributed to growing economic imbalances in the country.
They pointed out that credit risks were also high, given Malaysia's fairly large private-sector debt burden relative to the country's modest income levels.
"S&P anticipates that major Malaysian banks' generally healthy financial positions, including sufficient capital and liquidity buffers, will mitigate the potential credit risk from high household debt and escalating property prices," they said.
They added that government support also underpinned the ratings on many banks.
"In our base-case scenario, we expect the Government and the regulator to put the brakes on the rapid rise in property prices and growth in household debt. The effect of the Government's recent stringent cooling measures will become more apparent as we move further into 2014," they said.
They expect the banks to have adequate capital and liquidity buffers to maintain their financial positions despite risks from weakening household health.
Malaysia's households face challenges on several fronts. Household leverage has been increasing over several years even as income levels remain modest. The country's per capita gross domestic product of US$10,849 (S$13,752)) is one of the lowest among "A-"rated sovereigns.
"Subsidy reductions for sugar and fuel will push up living expenses, while the threat of rising interest rates from monetary policy normalisation looms. Economic imbalances from high property prices will strain household debt servicing when the credit cycle turns," they said.