High household leverage in Thailand and Malaysia remains a source of risk for both economies, while their asset quality outlook, underpinned by the macroeconomic environments, is being challenged by headwinds from China's cooling economy, says Fitch Ratings.
However, larger commercial banks in both countries appear better placed to weather any asset quality stress because of their high-quality customer bases and reasonable capital and asset quality buffers, said Fitch in its "Asia-Pacific Banks Chart of the Month" reports.
Household debt to GDP in Thailand and Malaysia remained among the highest in Southeast Asia at 86% and 88% at the end of 2014. This is despite slower household credit growth over the past two years.
Thai household debt accelerated rapidly from 2010-13, partly because of tax breaks on vehicle and housing purchases. Malaysia's household debt has been driven by favourable credit conditions and strong consumer demand.
Growth in household lending has slowed more recently, to 6.5% for Thailand and 9.9% for Malaysia in 2014 from 18% and 13.9%, respectively, in 2012.
In Malaysia, this has partly been due to successive regulatory measures to curb excessive household borrowing, particularly in personal unsecured loans and lower-income households.
Fitch views the slowdown in household debt growth as positive for macroeconomic stability as it helps to contain an excessive build-up of debt. However, household leverage is likely to remain high in the short to medium term as consumer loan demand is unlikely to be materially below GDP growth for both economies.
Increased leverage makes households more sensitive to macroeconomic weakness, and this has already had an effect on delinquencies for some banks, especially in Thailand. Further asset quality deterioration is likely and will depend on the outlook for economic growth and unemployment, with lower-income households being more vulnerable in both Malaysia and Thailand.
For Thailand, weaker economic growth, escalating delinquencies and the exposure of some entities to vulnerable lower-income segments already contribute to a continued negative outlook for the sector, which could be exacerbated if the economy is very weak for a prolonged period.