Thais’ household debt jolts S&P

Thais’ household debt jolts S&P

THE NATION October 31, 2013 1:00 am

AS THE LEVEL of household debt increased to 77 per cent of gross domestic product in 2012 from 55 per cent in 2008, Thais are now more vulnerable to rising interest rates, unemployment, and economic slowdowns, said a rating agency. In Standard & Poor’s Ratings Services’ analysis “Rising Household Debt Could Weigh Down Asia’s Banks”, Thailand’s household-debt-to-GDP ratio is second only to Malaysia’s, which in 2012 was 80.5 per cent against 60.4 per cent in 2008.

The analysis covered 14 economies in Asia. It said the credit profiles of banks in Malaysia and Thailand were the most vulnerable to a deterioration in the health of their respective household segments. Banks in both countries have significant levels of loans to households.

In addition, the rapid increase in household leverage has significantly outpaced income growth in both countries.
While the growth in consumer loans in Thailand has been aggressive in recent years, wage increases are partially mitigating that risk. Still, debt accumulation has been much faster than the rise in wages. Accordingly, the ratio of household debt to average annual income increased to 1.22 times in 2012, from 0.97 time in 2008.
Thanks partly to the end of a government stimulus policy of tax rebates for first-time car buyers, which led to a sharp rise in auto loans last year, the growth in the personal consumption segment is expected to moderate in the second half of 2013 and in 2014.
Consumer loans grew by about 19.5 per cent year on year in the first half of 2013.
While mortgages account for 14 per cent of total banking-system loans in Thailand, the proportion is as high as 31 per cent in Singapore, 30 per cent in South Korea and 27 per cent in Malaysia. The proportion of auto loans to total bank loans is 13 per cent in Malaysia, compared with 8.5 per cent in Thailand and 2.5 per cent in Singapore.
Though expecting that Thai financial institutions’ asset quality will cushion negative impacts, unlike the severe plunge experienced by US and European banks as a result of high household debts, the rating agency expressed particular concern on the rising rate of non-performing loans (NPLs) in the auto and condominium segments.
Delinquent car loans rose 80 basis points to 6.8 per cent in the first half of this year, compared with a stable delinquency ratio of 2.2 per cent for the entire loan book. Similarly, the NPL ratio increased by 30 basis points to 1.7 per cent for car loans, while the ratio for the overall loan book declined by 10 basis points. Banks’ exposure to the condominium segment, although rising, is currently limited. The NPLs and credit costs in this segment are expected to increase gradually in the next 12-24 months as the economy slows, but the level will be manageable.
“Auto, personal, and unsecured loans accounted for a larger proportion of bank loans in Malaysia and Thailand than within our selected peer group,” the report said. “Under stable operating conditions, these are appealing asset classes because they offer higher yields than residential mortgages, often at only incrementally higher credit costs. Thus these asset classes enable banks to offset margin pressure in a low-interest-rate environment.
“However, when the credit cycle turns, delinquencies tend to be worse in these categories, with losses highly correlated with the financial health of household borrowers.”
In Thailand, commercial banks account for about 42 per cent of household loans, followed by specialised financial institutions (30 per cent), saving cooperatives (15 per cent), and credit-card, leasing, and personal companies (10 per cent).
“Overall, credit growth has been high and we believe this is leading to a build-up of economic imbalances in Thailand.