Will swelling private sector debt threaten Malaysian banks?

Private sector debt as a share of GDP is tipped to hit 153% by end-2019.

Despite their significant exposure to the private sector, Malaysian banks remain in a strong position to weather the economic downturn due to the resilient debt-servicing capacity of corporates, according to a report from S&P.

The private sector’s indebtedness is projected to remain high by end-2019, at 153% of the GDP. However, the country’s monetary policy and full employment will lend support to the ability of corporates to pay back their debt.  Corporates in Malaysia have generally healthy balance sheets with the median debt-to-equity ratio of Malaysian corporations stood at 49.3% in 2018, whereas the median interest coverage ratio was 7.2x. Businesses in Malaysia also have sound liquidity positions, with the median ratio of cash to short-term debt at 1.6x.

Malaysian banks have generally prudent underwriting policies and sound risk management systems, noted S&P Global Research. Around 72% of the total mortgages of banks have a loan-to-value ratio of less than 80%; and banks typically give up to 90% mortgage financing for customers with good credit scores. 

Impaired loans in the business sector dropped have also declined gradually over the years to 2.3% as of end-2018 from 5.2% in 2010.

Exposure to typically high-risk sectors such as construction and real estate is limited to around 12%; whilst direct exposure to Malaysia’s troubled energy sector is also minimal, with energy loans representing about 1.3% of total loans as of 31 December 2018. 

“The overall credit assessment in Malaysia is supported by a well-established credit bureau system featuring comprehensive databases with both positive and negative information on borrowers. There is generally no undue concentration in corporate lending by sector or single name,” the credit rating agency added.