Asian banks warned against rising household debt

Guess which countries will be badly hit?

Asia's increasing household leverage, mainly from rising mortgages, could be risky for Asian banks' creditworthiness.

That's according to a report, titled "Rising Household Debt Could Weigh Down Asia's Banks," that Standard & Poor's Ratings Services published today.

The report evaluates asset quality of banks in six Asian economies: Malaysia, Thailand, Singapore, Korea, Hong Kong, and China.

It notes that while banks in Asia have been operating under favorable credit conditions resulting from healthy economic growth for a few years now, a structural weakness appears to be emerging in some economies.

"Rising household debt fueled by rapid loan growth and easy monetary conditions could weaken the credit quality of banks in Asia," said Standard & Poor's credit analyst Ivan Tan.

"Potential asset bubbles and imbalances are building up in some countries, and could put the banks at risk."

Malaysia, Thailand, Singapore, and Korea have the highest household debt in Asia. In addition, high property prices in Hong Kong and China are leading to poor housing affordability there, which can undermine the credit quality of mortgages.

According to the report, banks in Malaysia and Thailand are the most vulnerable to a deterioration in the household segment. Banks in both countries have significant exposure to households. The rapid increase in household leverage has outpaced income growth and undermines household resilience.

"A sharp unwinding of household balance sheets during a recession is not our baseline expectation for any country in Asia," said Mr. Tan.

"However, a severe economic downturn leading to a rise in unemployment and a significant fall in property prices would hurt financial institutions. The resulting dip in market sentiment may also impair banks' ability to sell foreclosed properties. These events occurring in tandem would weaken banks' asset quality and increase credit costs."

In Standard & Poor's base case, economic growth in the selected systems will likely remain positive. The major banks have generally healthy financial positions by global standards, including capital and liquidity buffers, which would mitigate the potential risk from high household debt and property prices.

Government support also underpins the ratings on many banks, which can rely on the country's strong fiscal position, if needed.