Malaysian banks have the lowest bad loans in at least 17 years. They shouldn’t get used to it.

While the lenders’ non-performing ratios are at the lowest levels in data going back to 1998, they’ve begun ticking up and Standard & Poor’s reckons they’ll keep doing so.

“Loan quality is possibly at a cyclical peak,” said Ivan Tan, an S&P credit analyst in Singapore. “The non-performing loan ratio is probably as good as it can get.”

Borrowers have binged on a record 1.37 trillion ringgit ($361 billion) of loans, encouraged by a jobless rate which was close to a 1990s low last year. But that’s since risen as Asia’s only major oil exporter grapples with a crude price rout, the prospect of higher U.S. interest rates and troubles at a debt- laden state investment fund.

In April, non-performing dues as a portion of total loans fell to 1.17 per cent, before creeping back up to 1.2 percent the following month. The nation’s household debt had already totaled 87.9 per cent of the economy in December, the highest level in Southeast Asia, according to S&P.

While Tan says that low unemployment has allowed Malaysians to keep servicing their debts on time, the jobless rate has inched higher this year and was at 3 per cent in April. It had dropped to 2.7 percent last August, on par with a level in 2012 which was the lowest since 1998.

“We expect gross impaired loans to remain low despite the moderating economic outlook in 2015,” said Khairussaleh Ramli, group managing director of RHB Bank Bhd, citing continued low unemployment.

Oil-sensitive

Malaysia’s reliance on oil exports makes its economy the region’s most sensitive to the 46 per cent drop in the commodity’s price in the past year. The effect on the financial system has been tempered by its lower focus on corporate lending, with the nation’s banks the most exposed to personal loans in Southeast Asia, said Tan.

“Malaysia’s economic growth has performed quite well since the 2009 crisis,” said Elaine Koh, a director in Fitch Ratings’ financial institutions team in Singapore.

“Labor conditions and domestic investment have been strong and this has led to a very favourable credit environment over the past few years.”

Headwinds

But pressures are emerging in loans to companies. Overdue working capital facilities, a gauge of soured corporate lending, rose to 7.75 billion ringgit in May from 7.5 billion ringgit in April that was the lowest since at least 2008, according to Bank Negara Malaysia, the financial regulator.

Due to economic headwinds, Malayan Banking Bhd. may “see some increase in its NPL levels, but not to that of the global financial crisis years,” John Lee, Maybank’s group chief risk officer said in a June 24 e-mail. The nation’s biggest lender by assets cut its non-performing loans ratio to 1.52 per cent last year from as high as 3.4 percent in 2011, according to Bloomberg-compiled data.

Rising costs of living and borrowing are starting to dent Malaysians’ finances. Inflation inceased to 2.1 percent in May, more than double January’s rate, while prime lending rates rose near two-year highs in March. The Malaysia Department of Insolvency recorded 104,725 online requests related to bankruptcy in May, up 2 percent from a year earlier.

Sentiment may also take a hit from the unfolding crisis in Greece, and by a probe closer to home of a money trail that allegedly shows funds were improperly transferred to Prime Minister Datuk Seri Najib Tun Razak’s bank accounts.

Some US$700 million of funds may have moved through government agencies, banks and companies linked to state investment company 1Malaysia Development Bhd. before apparently appearing in Najib’s accounts, the Wall Street Journal reported Friday, citing documents from a government probe.

Najib said late Friday he had never taken funds for personal gain, and documents on which the report is based were doctored.

The ringgit is Asia’s worst-performing this year, having lost 23 per cent from a 2011 high as the political debacle surrounding 1MDB exacerbates oil-related losses.

While Kuala Lumpur resident Matthew Lim is ably servicing the money he borrowed two years ago for a shiny Volkswagen Coupe, he says it’s another story for others.

“I know a lot of people who are struggling,” said 49 year-old Lim. “They are taking money from one credit card to pay another.”