DR Yeah Kim Leng

by
Dr. Yeah Kim Leng

Group Chief Economist
RAM Holdsings Bhd
S&Ps Downgrading of Malaysian
Banks: How Serious is the Housing
Affordability and Household Debt
Situation?
20
th
February 2014
Economics Research
2
1
Are Malaysian banks at risk?
Outline
2
3
Is household debt at a critical level?
How serious is housing affordability?
4
Will the property market trot or totter?
Economics Research
3
1
Outline
2
3
4
Economics Research
0
2
4
6
8
10
12
14
% yoy chg
4
1. Are Malaysian banks at risk?

Headwinds facing the banking sector
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Income-to-
house price
ratio
Declining affordability
66.3
64.6
60.4
71.7
73.8
75.5
80.2
83.5
40
50
60
70
80
90
2006 2007 2008 2009 2010 2011 2012 2013e
Household
debt as a %
of GDP
Rising household debt
Macro-prudential measures yet to bite
Reining in fiscal deficit
Consumer sentiments dampened
Property price run-ups
Despite measures to curb speculative lending
0
10
20
30
40
50
60
-8
-6
-4
-2
0
2
4
G
o
v
t

d
e
b
t

a
s

a

%

o
f

G
D
P

Fiscal deficit
as a % of GDP
Government debt (rhs)
Fiscal deficit (lhs)
Declining housing affordability
Rising credit risk for banks
Source: BNM
Source: NAPIC
Source: Own calculation
Source: MOF
Economics Research
5
Bank sectors anchors
Favorable demographics
Rise in working age population
Source: Department of Statistics Malaysia
7.82
7.78 7.76
19.34 19.70
20.03
1.43
1.48
1.54
0
5
10
15
20
25
30
35
2010 2011 2012
M
i
l
l
i
o
n

p
e
o
p
l
e

65+
15-64
0-14
3.5%
4.7% yoy
1.9% 1.7% yoy
-0.5%
-0.4% yoy
Healthy job market
Low unemployment
Economic growth
Post-GFC (2010-13) approaching pre-GFC
0
5
10
15
20
25
30
35
40
45
%

o
f

G
N
I

S-I Gap (% GNI) Savings (% GNI) Investment (% GNI)
Savings surplus
Higher savings than investments
-10
-5
0
5
10
15
20
% pa
Real GDP growth Nominal GDP growth
8.0
3.4
0
2
4
6
8
10
A
n
n
u
a
l

c
h
a
n
g
e

%

Labour force growth (%) Unemployment rate (%)
Economics Research
6
Source: BNM Monthly Statistical Bulletin
However, still ample liquidity
0.0
0.2
0.4
0.6
0.8
1.0
1.2
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
LD ratio
RM billion
Deposit Loans LD ratio (rhs)
8.4
10.6
-10
-5
0
5
10
15
20
Annual
change %
Deposit growth (%) Loans growth (%)
Loans outstripped deposit growth
Loans outpaced deposit 2013
Economics Research
7
Exposure to household and property sectors
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2006 2007 2008 2009 2010 2011 2012 2013
Other sector
Household sector
Education, health & others
Financing, ins & bus svcs
Transport, storage & comm.
Real estate
Construction
W&R trade, rest. & hotels
Utilities
Manufacturing
Mining & quarrying
Agriculture
2013
1.5%
56.3%
3.4%
7.2%
2.4%
5.8%
4.1%
7.4%
0.8%
7.9%
0.7%
2.6%
Has concentration risks in bank lending jumped suddenly?
No
Economics Research
8
Exposure to households and property sector
0
5
10
15
20
25
30
35
Annual change
in banking
system loans (%)
Construction
Real estate
Household sector
Total Loans
Steady growth in lending to household sector since 2010
=> Lower risk compared
with other loan assets.
Economics Research
9
Loans for the purchase of residential
properties (mortgage loans)
Comprise 46.8% of total exposure by
purpose of financing (end-2012).
Largest component of household
expense.
Speculative buying poses a risk to the
financial system.
Monthly mortgage loan growth has
averaged 12-14% since July 2010 and
continues to hold up well at 12-13%
annually in 2013.

Exposure to households and property sector
Economics Research
10
NPL ratio improved further in 2013
Household NPLs edged lower as asset quality remains strong
1.2
2.8
5.8
0.7
2.2
1.6
5.5
2.1
0.4
1.5
3.9
2.0
1.0
1.9
6.5
0.6
2.0
1.3
5.8
1.4
0.4
1.3
2.1
1.9
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Percent
2012 2013
Slight overall
improvement
to 1.9% at end
2013
Economics Research
11
Loans portfolio performance by sector
7.9
56.3
27.8
39.2
1.0
1.9
6.5
0.6
2.0
1.3
5.8
1.4
0.4
1.3
2.1
1.9
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
0
10
20
30
40
50
60
NPL ratio (%)
% share of total
loans/NPLs
Share of total loans (lhs) Share of total NPLs (lhs) NPL ratio (rhs)
Household
sector NPL ratio
lower than share
of total loans
Economics Research
12
Banks capital adequacy fortified further
Post-crisis strengthening of risk-weighted capital adequacy ratios.
Asian
Financial
Crisis
Global
Financial
Crisis
15.7
13.9
0
2
4
6
8
10
12
14
16
18
Percent
Core capital ratio
Risk weighted capital ratio
Economics Research
13
Banking sector profitability
Source: CEIC database
ROE & ROA slightly below long term trend; slight uptick in 4Q2013
1.0
1.5
23.4
11.2
18.9
14.9
15.6
0
5
10
15
20
25
%

p
e
r

a
n
n
u
m

Return on equity (ROE)
Return on assets (ROA)
Still healthy
returns during
the 2008/09
GFC
Economics Research

Impact of S&Ps downgrading of banks on bonds
14
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Index
AA1 Bonds AA2 Bonds AAA Bonds
Correction in bond prices but they have since recovered.
S&Ps
announcement
on 27 Nov 2013
Economics Research

Impact of S&Ps downgrading on equity prices
15
3 banks stock prices before & after S&Ps announcements
RHB Capital Bhd
CIMB Group Holdings Bhd
AMMB Holdings Bhd
S&Ps
announcement
on 27 Nov 2013
S&Ps
announcement
on 27 Nov 2013
S&Ps
announcement
on 27 Nov 2013

No major stock price
corrections that
suggest that banks
have hidden
problems.
Economics Research
16
1
Outline
2
3
4
Economics Research
17
2. Is household debt at a critical level?
Household debt in emerging Asia (% of GDP)

Selected country comparisons
Source: Bank Negara Malaysia
High but not too different from several other economies.
US
Japan
Economics Research

Whither the HH debt trend?
18
0
10
20
30
40
50
60
70
80
90
0
100
200
300
400
500
600
700
800
900
2006 2007 2008 2009 2010 2011 2012 2013e
% of GDP RM bn
Total household debt (RM bn) HH debt to GDP (%)
0
10
20
30
40
50
60
70
80
90
100
% of GDP
Forecast trend
HH debt 2008-13: Est. 12%
CAGR
Source: Bank Negara Malaysia; 2013 -20 own forecasts
Projected to level off from 2015
Current trend
Higher than income
growth; not sustainable
Macro-prudential measures
to bite slowly
Economics Research
19
Overall assessment of household debt situation
Household debt level sustainable at present
rate of household income and asset growth.
Borrowers with RM3000 monthly income
constitutes 16% of bank lending to
household.
Vulnerable to job layoffs, interest hikes and
economic slowdown.
Downturn scenario still not on the radar.
Economics Research
20
1
Outline
2
3
4
Economics Research

Residential property price trends
Average price increases pre- and post-GFC
Source: NAPIC, CEIC
21
3.2
4.3
2.3
-0.3
4.3
3.0
4.4
3.2
4.6
6.1
5.8
3.4
6.0
8.2
4.3
9.5
11.9
11.4
8.4
9.3
7.0
8.2
5.9
6.1
8.3
10.4
8.3
6.7
9.8
8.5
-2
0
2
4
6
8
10
12
14
A
n
n
u
a
l

c
h
a
n
g
e

(
%
)

2001-2009 2010-2013(1H)
Common macro-factors across markets such as low
interest rate, strong liquidity and cheap financing.
3. How serious is housing affordability?
Strong price increases during the post-GFC period
Economics Research

Income growth trends
22
GNI growth (% pa) GNI per capita growth (% pa)
GNI
deflator
(% pa)
Real
(constant 2005
prices)
Nominal
(current
prices)
Real
(constant
2005 prices)
Nominal
(current prices)
1970s (1971-80) 8.4 16.0 5.8 13.3 7.0
1980s (1981-90) 6.1 8.9 3.2 5.9 2.6
1990s (1991-00) 7.0 11.2 4.3 8.4 4.0
2000s (2001-10) 4.9 9.2 2.9 7.0 4.0
Pre-GFC 2002-2008 6.0 12.5 3.9 10.3 6.2
Post-GFC 2010-2012 4.5 9.1 3.0 7.5 4.4
Constant-price and inflation-adjusted national income growth
Source: Department of Statistics Malaysia; computations by RAM Economics Research
Lower but still strong income increases during the post-GFC period
Economics Research

Has income kept pace with house prices?
Income and house price indexes
Source: NAPIC, CEIC
23
0
50
100
150
200
250
Index 2000=100
Income (GNI) per capita (2000=100) HPI (2000=100)
KL: 1-1 1/2 Storey Terraced KL: Condominium
House price increases have caught up with income increases
Economics Research

Affordability index
Affordability indexes
Source: NAPIC, CEIC
24
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Income-to-HPI
ratio
Income-to-KL
terrace house
price ratio
Income-to-KL
condo price
ratio
Rise
Fall
Steady decline in national-level affordability
Economics Research

Affordability by income groups
Source: Household Income Survey 2012, DOSM; calculations by author
25
342
1,203
1,087
1,142
759
533
410
308
390
663
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
0
200
400
600
800
1,000
1,200
1,400
Affordable house
price (RM)
'000 households
Income group (monthly income in RM)
Estimated number of households ('000) Affordable price based on 3x annual income (RM)
Affordable price based on 5x annual income (RM) Affordable price based on 6x income (RM)
Max house price based on loan eligibility (RM)
Economics Research
26
1
Outline
2
3
4
Economics Research

House-ownership rate
Proportion of total (%)
27
28.7 42.7 20.2
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
J
o
h
o
r
K
e
d
a
h
K
e
l
a
n
t
a
n
M
e
l
a
k
a
N
.

S
e
m
b
i
l
a
n
P
a
h
a
n
g
P
u
l
a
u

P
i
n
a
n
g
P
e
r
a
k
P
e
r
l
i
s
S
e
l
a
n
g
o
r
T
e
r
e
n
g
g
a
n
u
S
a
b
a
h
S
a
r
a
w
a
k
W
.
P
.

K
L
W
.
P
.

L
a
b
u
a
n
W
.
P
.

P
u
t
r
a
j
a
y
a
M
A
L
A
Y
S
I
A
Owned Rented Quarters
216
385
182
28
0
200
400
600
800
1,000
1,200
1,400
1,600
J
o
h
o
r
K
e
d
a
h
K
e
l
a
n
t
a
n
M
e
l
a
k
a
N
.

S
e
m
b
i
l
a
n
P
a
h
a
n
g
P
u
l
a
u

P
i
n
a
n
g
P
e
r
a
k
P
e
r
l
i
s
S
e
l
a
n
g
o
r
T
e
r
e
n
g
g
a
n
u
S
a
b
a
h
S
a
r
a
w
a
k
W
.
P
.

K
L
W
.
P
.

L
a
b
u
a
n
W
.
P
.

P
u
t
r
a
j
a
y
a
'000 units
Owned Rented Quarters
Number of units (000)
Source: Household Income and Basic Amenities Report 2012, Department of Statistics Malaysia
4. Will the property market trot or totter?
20% of total residential units nation-wide rented, higher in urban
Economics Research

Supply-demand gap
Housing stock by type as at 2Q2013 (units)
Source: NAPIC, 2Q2013
28
Malaysia KL Selangor Johor P Pinang
Single storey terraced 884,919 21,550 156,688 182,846 42,414
2-3 storey terraced 1,003,028 65,431 413,066 157,459 58,519
Single storey semi-detached 164,809 490 10,181 26,879 8,918
2-3 storey semi-detached 152,063 5,984 31,894 16,737 15,960
Detached 426,385 6,884 46,057 85,317 6,884
Townhouse 29,345 4,676 16,466 1,261 2,738
Cluster 29,336 4,248 7,285 0 7,999
Low cost house 589,432 3,786 88,563 124,907 15,170
Low cost flat 469,044 95,647 195,641 45,026 56,005
Flat 373,086 50,156 153,298 21,796 111,195
Service apartment 49,832 17,436 18,550 3,726 513
Condominium or service 498,962 148,673 205,155 28,292 40,843
Total 4,670,241 424,961 1,342,844 694,246 367,158
Malaysia KL Selangor Johor P Pinang
18.9 5.1 11.7 26.3 11.6
21.5 15.4 30.8 22.7 15.9
3.5 0.1 0.8 3.9 2.4
3.3 1.4 2.4 2.4 4.3
9.1 1.6 3.4 12.3 1.9
0.6 1.1 1.2 0.2 0.7
0.6 1.0 0.5 0.0 2.2
12.6 0.9 6.6 18.0 4.1
10.0 22.5 14.6 6.5 15.3
8.0 11.8 11.4 3.1 30.3
1.1 4.1 1.4 0.5 0.1
10.7 35.0 15.3 4.1 11.1
100.0 100.0 100.0 100.0 100.0
Proportion (% of total)
Low cost houses and flats make 30% of total housing stock
Economics Research

Incoming supply
29
Source: NAPIC
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
No. of units
Sabah
Perlis
Kel
Treng
Pahang
Kedah
Melaka
Perak
NS
PP
Johor
Putrajaya
Selangor
KL
Rising incoming supply since 2010
Economics Research

House price trend
Malaysias HPI and KL average price trends
Source: BIS; BNM
30
93.4
185.9
RM319,529
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
0
20
40
60
80
100
120
140
160
180
200
RM/dwelling
HPI
2000=100
HPI (national, 2000=100) KL (RM per unit)
National-level House Price Index (HPI) rose 85.9% between 2000
and 2H2013, or a compound annual growth rate of 8.7% pa
Economics Research

Strength of recent house price increases
Source: BIS, BNM
31
0
2
4
6
8
10
12
14
Quaterly yoy %
Malaysia's House Price Index
Price increases decelerating as tightening measures bite
Economics Research

Concluding remarks
32
S&P downgrade of banks: Are banks at risk?
Banks underlying
fundamentals especially
capital adequacy and
liquidity continues to
strengthen
Well positioned to
withstand a rise in
household and housing
NPLs.
Household debt level: How critical?
High household debt
level
Debt level forecast to
level off with slower
loans growth amidst an
assumed nominal GDP
growth of 6-8%.
Economics Research

Concluding remarks
33
Housing affordability: How serious?
(contd)
Overall affordability
index has declined to
around 1
Cooling measures and
affordable housing
programmes warranted
House price inflation
easing whilst incoming
supply rises
Property market soft-
landing
3.8 mn or 55% of 6.8
million households have
monthly income of below
RM4,000
This segment can only
afford houses that are
priced around
RM360,000 and below
Thank you

Contact:
yeah@ram.com.my

RAM Holdings Berhad
(RAM Economics Research Department)
Level 19, The Gardens South Tower , Mid Valley City, Lingkaran Syed Putra
59200 Kuala Lumpur
Tel: (603) 7628 1101 / Fax: (603) 7620 8255
www.ram.com.my
34

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