Will property stress threaten to undo Malaysia's banking resilience?

Unsold housing stock may pressure asset quality.

Although the central bank has reiterated that the country remains in a strong position to shield itself against financial shocks, stress in the property segment continues to pose a threat to financial stability, according to UOB Kay Hian.

Also read: Looming loan slowdown threatens Malaysian banks' 2019 earnings

Supply imbalance continues to characterise the residential property sector with unsold housing stock rising to 177,200 in the first half of 2019 from 168,261 in the previous year. Excess supply in office spaces and shop complexes also continue to exert pressure on rental rates and asset quality although exposure to the segment remains manageable at 3.4% of total outstanding loans.

There were also cases of higher residential property loan defaults for properties priced below $119,400 (RM500,000).

Despite rising concerns around asset quality deterioration, Malaysia’s banking sector still has a robust capital buffer with a CET1 ratio of 13.4% from 13.1% in 2018 and relatively high LLC inclusive of regulatory reserve of 126.9% in addition to ample liquidity. Overall business sector interest coverage ratio stands at 4.5x, above the prudent 2.9x assessed threshold.

"BNM has also simulated a financial stress scenario on the potential losses suffered by banks in the consumer lending portfolio and concluded that total potential losses would amount to $15.55b (RM65.1b), which is still lower than the sector’s excess capital buffers of $24.67b (RM103.3b)," Keith Wee Teck Keong, analyst at UOBKH said in a report.