KUALA LUMPUR: Moody's Investors Service says the outlook for Malaysia’s banking system is stable (A3 stable) over the next 12-18 months, while supported by robust macroeconomic conditions, within and outside the country.
According to Moody's Vice President and Senior Analyst, Simon Chen, such an environment is favourable to Malaysian banks, while helping stabilise asset quality and profitability.
He said in a statement today that at the same time, faster loans growth would be seen, remaining at a pace that was slower than the profit retention of the banks, leading to stronger capital buffers.
Moody's conclusions are contained in its just-released report on Malaysian banks titled, "Robust Macro Conditions and Improving Capitalisation Support Stable Outlook," and authored by Chen.
The stable outlook is based on Moody's assessment of six drivers, namely operating environment (stable), asset quality (stable), capital (improving), funding and liquidity (stable), profitability and efficiency (stable) and government support (stable).
On the operating environment, Moody's says that while macroeconomic conditions will prove robust, policy uncertainty poses a risk and has forecast Malaysia's real Gross Domestic Product to expand by 5.4 per cent in 2018, and loans growing 6-7 per cent in the same period.
The removal of the Goods and Services Tax could boost private consumption and benefit domestic businesses in the near term.
However, uncertainty over future policy changes by the new government, will weigh on investor and business sentiment over the course of 2018.
On asset quality of banks, Moody's said it would stay stable, against the backdrop of easing stress among troubled corporates and slowing growth in household debt levels.
New non-performing loan formation will remain slow amid a moderate rise in interest rates, as corporate profitability improves and growth in risky household loans eases.
As for capitalisation, such levels will improve, as capital generation exceeds asset growth, and prove sufficient to cushion one-time adjustments to capital ratios to meet the MFRS 9 standard.
Moody's also said the funding and liquidity of banks would stay stable.
In particular, the banks' loan-to-deposit ratios will rise as loan growth accelerates, but such ratios would remain below 100 per cent.
In addition, the banks will remain well positioned to comfortably meet minimum requirements under Basel III liquidity and funding rules.
On profitability, Moody's said revenue improvements — driven by faster loan growth — would underpin the profitability profiles of the banks.
Faster loan growth will boost pre-provision income, although stiffer deposit competition will limit improvements in net interest margins.
Credit costs will rise because of the new MFRS 9 standard, but only slightly, because of continuously benign credit conditions.
Government support for banks in times of stress will continue to prove strong. Recent legislative reforms have not suggested any shift in the government's policy for the resolution of troubled banks outside liquidation, with a lack of legislation to force bank creditors to bear the cost of any bank bailouts.
Moody's rates 11 banks in Malaysia - eight conventional commercial, one investment, one Islamic and one government-owned development financial institution.
The rated commercial banks accounted for some 85 per cent of total loans and deposits in the Malaysian banking system at end-2017.
Moody's has also maintained a stable outlook on the Malaysian banking system since 2010. -- BERNAMA