Saturday July 31, 2010

Mixed views on possible retail credit bubble

By YVONNE TAN
yvonne@thestar.com.my

PETALING JAYA: Amid the current healthy loan growth trend, there is concern that a retail credit bubble may just be in the making, according to some analysts.

“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.

If the industry keeps up this trend a retail credit bubble will be inevitable, Promod told StarBizWeek via email.

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.”

The growth in retail or household loans made up largely of housing and auto loans have been relatively encouraging in recent months amid signs that the economy is on a growth track.

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%.

From January to June, household loan applications totalled RM159.9bil with approvals at RM88.4bil while business loan applications were lower at RM131.6bil with approvals at RM72.3bil.

For the same period, small and medium enterprises (SMEs), a sub-sector of the business segment, registered loan applications of RM62.2bil with approvals at RM28.7bil.

“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.

“The concern is there but it is not alarming,” he said.

Wong pointed out that heavy consumer spending provided a boost to the economy for as long as consumers could make their payments.

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.

Nevertheless, Wong said the situation was still “manageable.”

“I believe that Bank Negara will be very swift in raising interest rates to curb any possible retail bubble,” he said.