Effective this Jan 1, those looking to borrow from banks to buy houses and cars will be subject to Bank Negara Malaysia’s (BNM) new guidelines aimed at promoting prudent, responsible and transparent retail financing practices.
While much has been documented about the high borrowings of Malaysian households, little has been said about the 33% of households’ financial assets that are in the form of equities and unit trusts, which makes them also vulnerable to market volatility.
Malaysia’s high proportion of household debt to GDP of 76% is already a well-known fact. Having targeted the credit card segment earlier by imposing fees and stricter credit limits, the central bank is now tightening the income criteria for mortgages, requiring eligibility to be based on net income rather than gross income as it was previously.
Not only that, effective last Friday the tenure for car loans is now capped at nine years.
Although much has been said about the high level of household borrowings, what do their balance sheets look like?
Earlier this year, BNM published its 2010 Financial Stability and Payment Systems report, highlighting that some 33% of households’ financial assets are in the form of equities and unit trusts, and are susceptible to the performance of the stock market.
Equity holdings and unit trust funds accounted for 17% and 16% respectively of household assets at the end of 2010, with endowment policies accounting for 6%.
Bank deposits form the biggest chunk of household financial assets at 31%, followed by retirement savings with the Employees Provident Fund (EPF) with 30%, and equities 17%.
In fact, equity holdings were at their highest levels since the financial crisis in 2008, recording a 20% change on an annual basis according to the report. This was partly due to the stock market recovery that saw the FBM KLCI gaining 19.34% in 2010. It also contributed to the bulk of the 14.9% expansion in household financial assets last year.
If the high volatility in equity markets persists, it may impinge on a household’s ability to service its debt and mortgages, and inadvertently slow economic growth.
Equity markets around the world have been on a downhill slide since August, hit by the European debt crisis and a slew of other external concerns. Starting with Standard & Poor’s downgrade of US sovereign debt, worries spread to a possible default by Greece and several other European countries, as well as slowing growth in China and a sluggish recovery in the US.
In August itself, 7.9% or RM97.4 billion was wiped off the KLCI’s market capitalisation, with a further RM69.6 billion erased in September.
Year-to-date, the KLCI has declined 5.15% to 1,454.4 last Friday, and is off an intra-day high of 1,597.08. From the year’s high to the year’s low of 1,310.53 on Sept 26, the index fell 17.9%. The market has since rebounded from the low rising 10.9% to last week’s close.
BNM shared its concern over the stock market’s impact in the report.
“With one-third of household financial assets in the form of equity, households are susceptible to volatile swings in equity prices as observed in 2008, when a 39.3% fall in the KLCI precipitated a decline in household financial assets. This in turn, may subject the household financial position to the vagaries of the equity market.”
In 2008, the value of equity holdings and endowment policies held by households fell by over 35% when the stock market slumped. The value of unit trusts fell over 15% while bank and EPF deposits chalked up modest growth.
However, BNM also said this risk is mitigated by “a substantial and almost equal proportion of household financial assets represented by deposits with financial institutions, which continue to provide a comfortable buffer to support households’ debt servicing ability”.
The central bank added that at the end of 2010, the ratio of financial assets-to-debt remained relatively unchanged at 238.4%, with more than 60% of the financial assets held in the form of highly liquid assets.
Economists contacted by The Edge Financial Daily were not too worried about the impact of the stock market volatility on household assets.
“Investors would have already taken that into consideration when investing,” said Dr Yeah Kim Leng, group chief economist at RAM Holdings.
The current market decline would produce negative wealth effects, but this would be offset by rising income and the rally in commodities prices this year, he said.
“The question now is what is the threshold that would trigger bankruptcy and defaults,” he elaborated. Yeah said the current correction in the markets is not sizable enough to trigger such a situation.
There are other indicators to observe, including employment levels, wage rates and bank credit flows, he said.
“If credit lending for retail and households were impinged, then spending would definitely be cut,” he warned.
Those who invested in the stock market would be the ones with excess savings, he said, adding that households can still depend on fixed income sources such as unit trusts like Amanah Saham Bumiputera and savings deposits which can provide stable returns.
Yeah estimated that the KLCI would have to drop between 30% and 50% from its peak this year to cause any real effects to households.
“This time around, the market is more dominated by institutional investors than retail compared with the 1997 Asian financial crisis. So investors won’t be directly burned by this correction,” said Suhaimi Ilias, an economist at Maybank IB Research.
Suhaimi said: “Unlike back in the 1990s, leveraged equity investments via share margin financing (SMF) were a big thing so individuals were far more vulnerable to market swings due to margin calls and forced selling. As mentioned, this time around household assets related to equity investments are mainly placed under professional fund managers who are better equipped to monitor the investment portfolio and manage risks. Banks are also far more careful in extending SMF these days.
“For that matter, banks are also exercising a great deal of prudence in lending as part of credit risk management, under the close watchful eyes of Bank Negara, which has also been implementing macro prudential measures since late 2010 on mortgages and credit card loan.
“To me, 33% of households invested in equities and unit trusts is not that high a ratio. Moreover, the household financial assets to household debt ratio obviously excludes real assets [such as property holdings] but includes mortgages on the debt side ... so the household assets to debt cover could be higher,” he said.
Nontheless, Suhaimi said a weakening sentiment can affect the real economy as households and consumers turn more cautious in their spending as they react to market news and movements.
“The household assets to debt cover figure is an aggregate statistic, with no breakdown by household income groups, that is high income, middle income, low income,” he added.
“Chances are the lower income households and those working in export-based industries, for example, may be vulnerable due to a lower household assets to debt cover, and from the impact of the global downturn, as what we saw in 2008/09 when many people in the manufacturing sector were retrenched outright or had reduced income due to redundancies or working on shorter shifts,” he said.
“This can lead to difficulties in repaying loans and rising non-performing loans. Back in 2008/09, Bank Negara stepped in to provide temporary relief for the retrenched workers by allowing banks to grant a six-month moratorium on housing loan repayments,” he said.
With high debts and a rising propensity to invest in riskier assets, maintaining near full employment and raising income levels are keys to maintaining households’ financial sustainability.