Bubble, Bubble, Toil & Trouble

A report in the Star suggests that we may have an incipient retail credit bubble:

Mixed views on possible retail credit bubble

…“As current economic traction is positive and interest rates relatively low, (therefore making it accommodative for consumers to take up loans) – a key question to ask the local banking sector now is whether it is high time to re-balance loan portfolios away from retail loans, which dominate half of the industry’s lending,” RAM Ratings head of financial institution ratings Promod Dass said…

…UOB Kay Hian head of research Vincent Khoo concurs. He said: “In fact, I think there is already quite a bit of a bubble on the housing side.”

Based on Bank Negara’s latest data released yesterday, outstanding loans to households grew by 12.9% on an annual basis as at end-June, outstripping outstanding loans to businesses which expanded by 7.2%…

…“For the nation to achieve its desired gross domestic product growth over the next few years as well as the vision of a high income nation, more of the banking sector’s lending would need to be channelled to non-retail sectors with high multiplier effects,” Promod said.

Danny Wong, fund manager and chief executive officer at Areca Capital, downplays the credit bubble concern although he does admit that based on data, the trend is set towards that direction…

…As at last year, household debt in Malaysia stood at 77% of gross domestic product – the highest in Asia. This compares with 64% in 2008.

Is there a bubble? Or to be more precise, is there a potential for a household credit bubble to develop? There’s certainly some warning signs, such as the large jump in high-rise property prices in the last quarter of last year, and the acceleration in household lending (log annual and monthly changes):

…and especially since most of the increase is coming from the catch-all “personal uses” category (log annual and monthly changes):

That’s right – it’s not property, cars, or credit cards driving household borrowing, all of which are lagging overall loan growth. What type of loans fall in the personal use category, I have little idea, but it’s probably non-collateralised and consists of overdrafts and term loans. But that suggests that these loans might actually be loans to sole proprietors and small enterprises, as it’s hard to imagine overdrafts driving consumption spending. I’m speculating again, but there’s also the possibility these are loans for further education, which is a segment that is expanding very rapidly – loans to the education and health sector are up five-fold in just two years, which suggests a very rapid pace of expansion.

I disagree with the idea that banks should rebalance their portfolios away from the household sector. That completely ignores the structural shift that has occurred in Malaysia over the last decade, where capital markets (particularly PDS) have largely taken over funding for medium to large corporates. The proportionate increase in lending to the household sector is a consequence of the drying up of bank loan demand from the corporate sector.

Malaysia has developed the biggest and deepest bond market in ASEAN, and corporates are taking advantage of the cheaper funding that’s available. Banks are still “lending” to corporates in a different sense, as funds that used to be lent out in loans is now used to take up bond issues. You can see that clearly in the ratio of loans as a ratio to total commercial bank assets:

So there’s been a shift in business lending from the loan book to the trading desk. I suspect that if you take bank holdings of PDS into account, the ratio of banks’ financing of households against business probably hasn’t changed much since the 1990s.

One last note: the last line I quoted in the article linked to above is highly misleading. The household loans to GDP ratio definitely rose in 2009 from 2008 – but the rise was as much a result of a large drop in the denominator as an increase in the numerator. In other words, we just had a recession, where nominal GDP dropped 9.1% in log terms. Nobody should be surprised the ratio rose in 2009 – and nobody should be surprised if it fell this year either.