Malaysia, Thailand most exposed to increased asset-quality pressure in the household segment

This is when rates rise.

The long positive credit cycle that has benefitted banks in the Southeast Asian region may be on the verge of peaking, introducing new challenges for lenders as pockets of asset-quality risk emerge due to tighter global monetary conditions.

According to a release from Moody’s Investors Service, within the ASEAN region, the Malaysia and Thailand banking systems are the most exposed to increased asset-quality pressure in the household segment when rates rise.

This is primarily because the ability of households in these countries to service their debt in a rising interest-rate environment will be negatively affected by consumers' high leverage at a time when the housing market in Malaysia may be peaking and Thailand faces elevated political risks.

However, as Moody's report points out, ASEAN bank asset-quality risk from residential property price corrections is mitigated by legal frameworks that support bank creditors.

Here’s more from Moody’s Investors Service

Unlike in the US, banks in ASEAN have legal recourse to the borrowers on their debt obligations, beyond the underlying property assets mortgaged to the banks.

This feature provides greater creditor protection to banks, removes the incentive for borrowers to default on their mortgage obligations, and alleviates risks that housing NPLs will spike when property prices fall significantly.

Additionally, Moody's report notes that ASEAN banks have responded to regulatory measures aimed at curbing further increases in excessive household leverage.

Banks in Thailand, Malaysia, and Singapore have tightened their underwriting standards on household loans, which is positive for banks' asset quality over the longer term.

The banks also have strong buffers to withstand asset-quality shocks in the household segment.