January 10, 2017 10:00 am JST
FT Confidential Research

Malaysian consumer borrowing growth to recover weakly in 2017

Data suggest fragile recovery for household loan growth

  • We believe the current slowdown in household loan growth in Malaysia will bottom out in the next two quarters but the subsequent recovery will be weak. Our Future Consumer Borrowing Index for the country - which gauges expected changes in borrowing over the coming two quarters - rose 1.5 points quarter-on-quarter to 67 in the fourth quarter.
  • Sluggish income growth will discourage consumers from spending on big-ticket items, which generally require finance.
  • We expect weak growth in 2017 for banks, with total lending to consumers rising 5.3-5.6 per cent in 2017, up from an estimated 5.1-5.3 per cent this year.

Household loan growth has been decelerating in Malaysia since 2013 but FT Confidential Research analysis of recent proprietary survey data suggests the slowdown will bottom out in the next two quarters.

The picture for the fourth quarter is nevertheless very weak. Our 1,000 survey respondents complained of sluggish income growth, which is dragging on purchases of big-ticket items that often require bank financing. The growth outlook for Malaysian banks remains weak in 2017.

FTCR indicators suggest a bottoming out

While the majority of FT Confidential Research's suite of coincident indicators fell, our leading borrowing indicator suggests Malaysia's loan growth slowdown may be coming to an end.

Our Future Consumer Borrowing Index rose 1.5 points quarter-on-quarter to 67 in the fourth quarter (see chart). The leading indicator gauges the expecting change in borrowing levels in the coming two quarters, with any reading above 50 suggesting expansion.

The slowdown in loan growth was initially caused by tighter lending requirements imposed by the central bank in 2012, prompted by concerns over high levels of household debt, which rose to 89.1 per cent of GDP by the end of 2015. It was later exacerbated by the implementation of a new consumption tax in April 2015, job losses caused by a sharp fall in oil and gas prices, as well as political uncertainty arising from the 1Malaysia Development Berhad corruption scandal.

Central bank data show household loan growth has been decelerating since 2013, falling to 5.4 per cent year-on-year in October from 5.6 per cent in September.

Income growth weakens

While respondents showed greater intent to borrow, they reported weaker income growth in the fourth quarter. Our Household Income Index for Malaysia fell 9.2 points quarter-on-quarter to 63.3, indicating a slowdown in annual household earnings growth (see chart). This weighed on spending on non-essential items, with our Discretionary Spending Index falling to 72.8, a 6.6-point drop from the third quarter.

Weak income growth will discourage Malaysians from buying big-ticket items, such as property, which usually demand bank finance (see chart).

Our Property Purchase Index - gauging property buying intentions for the coming two quarters - fell 10.5 points from the third quarter to 35.1. Our indicator tracking respondents' views on whether this is a good time to buy property - our Property Buying Sentiment Index - also slid, down 9.4 points to 29.3.

While our Auto Purchase Index rose 0.4 points quarter-on-quarter to 24.9, we doubt the improvement is sustainable. Most carmakers plan to raise prices, which will put off many prospective buyers. The weakening of the ringgit against most major currencies, especially the US dollar, is raising the cost of imported car parts. The currency has depreciated 2.5 per cent against the US dollar so far this year, after falling 23 per cent in 2015 due to collapsing energy prices. Perodua, Malaysia's largest carmaker, warned in early December it could raise its prices if the ringgit continues to depreciate. Bermaz Auto, the exclusive distributor of Mazda vehicles in Malaysia, has already raised prices for 2017.

Tepid 2017 growth for Malaysian banks

Based on our analysis, we believe Malaysian household lending could rise 5.3-5.6 per cent in 2017, from an estimated 5.1-5.3 per cent this year. About 57 per cent of total loans in the banking system went to the household sector as of the end of October.

While this is positive for banks, the improvement will probably be small. They have already taken a hit from disappointing economic growth this year, with revenue growth among the four largest Malaysian lenders weak in the first three quarters of 2016. Improvements in net profit at CIMB and RHB (see chart) were only achieved through severe cost-cutting measures.

This article was first published on Dec. 16 by FT Confidential Research.

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast Asia. A team of researchers in these key markets combine findings from proprietary surveys with on-the-ground research to provide predictive analysis for investors.

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