News

To avoid excessive household indebtedness and recent growing trend of offering products that are not in the longterm interest of consumers like extension of tenure), BNM announced new measures with immediate effect (except for applications made before last Friday: 1) maximum tenure of 10-yr for personal use (vs. current practice of up to 25-yr); 2) maximum tenure of 35-yr for residential and non-residential properties (vs. current practice of up to 45-yr); and 3) prohibition of pre-approved personal financing products.

The measures are applicable to all Financial Institutions (FIs) regulated by BNM, credit cooperatives regulated by Suruhanjaya Koperasi Malaysia, MBSB and AEON Credit.

Comment

We applause BNM preemptive but pragmatic measures to ensure healthy growth and limiting unhealthy practices that could jeopardize long-term sustainability of household loans.

Limiting the maximum tenure will result in higher repayment (or lower affordability) which could have an impact on loans growth. The impact is likely to be larger for personal use given the “higher reduction”. Actual assessment is close to impossible due to lack of information on average tenures.

However, we believe the impact is not likely to be significant. Firstly, actual tenures of these loans are shorter than the contract tenures given refinancing and prepayment. Secondly, distribution of tenures is likely to be spread out while longer tenures properties loans unlikely to be the bulk. Thirdly, although personal use could have a higher impact, it only constitutes 4.9% of total industry outstanding loans.

Hence, we are keeping our 9% loans growth projection for 2013 (or 2x HLIB’s GDP estimate of +4.5%) despite the latest measures and YTD loans growth of 9.3%. We expect resumption of activities post-election to sustain 2H growth.

Meanwhile, the impact on FIs would be milder vis-à-vis cooperatives, MBSB and AEON Credit given their relatively wider loans products and personal use only constitutes 2.4- 6.9% of total.

Within FIs, those with higher percentage of these loans (Figure 2) would experience higher impact (albeit marginal).

Risks

Risk of recession and its impact on asset quality, portfolio losses (MTM and realized), non-interest income growth as well as more macro prudential measures.

Rating

OVERWEIGHT

Positives – Best proxy to the impact of ETP (sector with third highest multiplier effect), domestic consumerism and economy, strong asset quality, robust capital ratios, capital management and M&As.

Negatives – Competitive pressure on margin, potential of global recession which would increase the possibility of rise in delinquencies, portfolio losses from foreign outflow.

Top Picks

RHB Cap and Maybank.

Source:Hong Leong Investment Bank Research - 8 Jul 2013