KUALA LUMPUR: Kenanga Investment Bank Bhd (Kenanga Research) said household debt is in good shape, with June 2024's debt-to-gross domestic product (GDP) ratio coming in at 83.8 per cent, reflecting sustained appetite of loans which is supported by higher income.
As at December 2023, debt-to-GDP was 84.2 per cent.
Residential properties remain the lion's share of total debt (61.0 per cent) and would be largely collateralised, providing buffers to the financial system should there be a downturn.
"We gathered that there is a bigger proportion of debtors operating in the higher income group of >RM10,000 per month at 39.1 per cent of total financing (Dec 2023: 37.6 per cent) which further supports repayability," analyst Clement Chua said in his review of Bank Negara Malaysia's (BNM) Financial Stability Review (FSR) report for the first half of 2024.
"We opine the banks are applying better confidence in the household space, evident by the increase in housing loan approval rates to 76.9 per cent,"Chua said.
He found however, that there are still concerns on the businesses front.
"We view operating conditions to be fully back to normalcy, as we observed fewer firms-at-risk within the hospitality, mining and construction sectors. That said, there appears to be pain points experienced by wholesale and retail accounts, possibly due to higher import costs which we believe will taper down albeit more meaningfully into 2025," it said.
Chua said an increase in industry interest coverage ratio of 6.2 times versus December 2023's 5.8 times paints lower repayment risks for businesses, particularly with past hikes in interest costs behind us.
With regards to the implementation of Basel III's Standardised Approach, BNM believes its adoption could lead to a reduction in credit risk-weighted assets for the banks of up to 1.45 per cent. Through our qualitative assessments, the freed up capital could translate to higher dividends paid out in the tune of more than one per cent additional yield.
The banking sector has produced sequential improvements since the last BNM review on the back of supportive economic macro.
Chua said for now, BNM's stance to keep overnight policy rate (OPR) decisions isolated from regional monetary policies continues to bode well for markets.
He added that previous concerns on forex driven inflationary pressures look to subside following the recent spike in ringgit's strength, although he reckons hedges may delay its full impact into 2025 only.
Kenanga Research maintained its "overweight" call on banking sector in lieu of valuations to be further spurred by a return of foreign investors back into Malaysian banks.
The top picks in this sector include Public Bank with target price (TP) of RM5.10 followed by Hong Leong Bank (TP:RM27.40), and RHB Bank (TP: RM7.55).