Here's why Maybank, Public Bank, CIMB will benefit from stricter lending criteria

They have scale advantages to price loans competitively.

According to Moody's, on 5 July, Bank Negara Malaysia, the central bank of Malaysia, announced a set of measures to tighten lending criteria, curb excessive household debt and reinforce responsible lending practices by credit providers.

The measures, which went into effect immediately, apply across the financial sector and are credit positive for Malaysian commercial banks.

The new measures, which apply to new loan applications, are stricter in the following ways:

» Reducing to 10 years from 25 years the maximum tenure for personal loans
» Reducing to 35 years from 45 years the maximum tenure for residential and non-residential property loans
» Prohibiting credit providers from offering pre-approved personal loans

Here's more from Moody's:

We expect the measures will be credit positive for Malaysia’s three largest Malaysian banks by total assets: Malayan Banking Berhad, Public Bank Berhad and CIMB Bank Berhad.

With their dominant branch networks, these banks will continue to have scale advantages that will help them price their loans more competitively than smaller banks. Of the three, Maybank and Public Bank have recorded above-industry growth in their household loan portfolio over the past three years.

The shorter loan tenures will improve the quality of bank borrowers. Given that our rated Malaysian banks generally apply debt service ratios of 50%-70%, the higher periodic payments associated with a shorter loan tenure will directly reduce the amount that banks will lend to highly leveraged borrowers.

The tighter credit requirements now increase the qualifying criteria for borrowers to secure new financing, particularly those with outstanding debt obligations and little cushion in their debt-servicing capacities, as well as new borrowers with weak credit profiles.

Although we consider Malaysian banks’ systemwide exposure to highly leveraged households and associated risks to be manageable, the new measures mark another step to slow excessive debt accumulation by households and reduce the household sector’s vulnerability to higher interest rates.

Household debt has increased at an average annual rate of 13% over the past five years. Household debt/GDP in Malaysia increased to 80.5% in December 2012 from 60.4% in 2008, among the highest levels for developing countries in Asia.

Importantly, the new measures will harmonize lending discipline among Malaysia’s credit providers. This development is critical to limiting credit access to financially weak borrowers, particularly in the current context of low interest rates and intensecompetition among credit providers in the consumer segment.

Prior measures to tighten household credit growth that applied mainly to banks, such as the central bank’s Guidelines for Responsible Financing implemented in January 2012, allowed non-bank financial institutions, including developmental financial institutions and cooperatives, to continue to fuel the consumer credit boom, particularly in unsecured personal loans. At the same time, many commercial banks have also recorded strong growth in their mortgage portfolios.