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Eye on household debt [13-12-2011]  
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Fitch Ratings expects the authorities to employ more precautionary measures to tighten the monetary environment further from those which had been earlier introduced since last year to prevent households from over-extending themselves in an environment of continued ample liquidity, low interest rates and rising asset prices.

In a statement yesterday, Fitch said that Bank Negara would closely monitor household debt which stood at 76% of gross domestic product as at end-2010 and remained high which would leave the banking sector vulnerable to sharp increases in unemployment and interest rates.

“Global economic prospects are becoming increasingly weak, posing fresh downside risks to the Malaysian economy and banking system,” the statement said but added that the ongoing economic crisis in Europe was unlikely to materially impact local banks' credit profiles.

The rating agency said the impact of higher credit costs could be absorbed largely through banks' earnings, which would leave limited risk of capital erosion.

“Such resilience was also observed in the 2008-2009 global economic crisis and is broadly consistent with the conclusion of the agency's stress test,” it added.

It was on this premise that Fitch expected Malaysian banks to remain stable despite the threat of fresh economic slowdown that might emerge from mounting global uncertainties in the West.

Fitch, however, warned that “downward rating risks could arise should such a downturn, particularly if sharp and protracted, lead to significant capital impairment risks for local banks.”

Despite this warning, it said the likelihood of this happening was “fairly low” because of satisfactory loss-absorption qualities and risk management and a prudent regulatory environment among local banks.

Fitch expects domestic banks capitalisation to remain broadly intact with an average core Tier 1 capital adequacy ratio (excluding hybrids) of about 9% due to the low threat to capital and bank's management satisfactory record.

“The core capitalisation of major Malaysian banks while modest by regional comparison is satisfactory relative to their risk profiles and steady operating environment,” it said.

It added that deposits would continue to be the local banks' primary source of funding due to ample domestic liquidity but more intense competition for Malaysian banks overseas might hinder deposit-gathering efforts there where loan to deposit ratios was around 90%-100%.

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