This article first appeared in The Edge Financial Daily on June 19, 2018

KUALA LUMPUR: Moody’s Investors Service has maintained that the banking system in Malaysia will stay stable for the next 12 to 18 months, as Malaysians banks are expected to benefit from robust macroeconomic conditions in and outside of the country, although policy uncertainty poses a risk.

“A key supporting factor of the stable outlook is the robust macroeconomic conditions in and outside Malaysia, which will result in a favourable operating environment for Malaysian banks and help stabilise their asset quality and profitability,” said Moody’s vice-president and senior analyst Simon Chen in a statement.

“At the same time, while we will see faster loan growth, such growth will remain at a pace that is slower than the banks’ profit retention, which will lead to stronger capital buffers,” Chen said. Moody’s forecast loan growth to be at 6% to 7% this year as Malaysia’s gross domestic product expands by 5.4%.

Revenue improvements, driven by faster loan growth, will underpin the banks’ profitability profiles, and boost pre-provision income, it said, although stiffer deposit competition will limit improvements in net interest margins.

Credit costs will rise because of the new Malaysian Financial Reporting Standard 9 (MFRS 9), but only slightly, because of continuously benign credit conditions, the credit rating agency explained.

Meanwhile, capitalisation levels are set to 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 banks’ asset quality will remain stable on slowing growth in the household debt level, and easing stress among troubled corporates.

New non-performing loan formations will remain slow amid a moderate rise in interest rates, as corporate profitability improves and growth in risky household loans eases.

Funding and liquidity too will stay stable, as banks’ loan-to-deposit ratios will rise as loan growth accelerates, but remain below 100%.

On government policies, Moody’s said the removal of the goods and services tax could boost private consumption, and benefit domestic businesses in the near term.

While future policy changes by the new government will weigh on investor and business sentiment over the course of 2018, its support for banks in times of stress will continue to prove strong, it explained.

Moody’s conclusions are contained in a report on Malaysian banks entitled “Robust macro conditions and improving capitalisation support stable outlook”, which rates 11 banks in Malaysia: eight commercial banks, one investment bank, one Islamic bank, and one government-owned development financial institution. The rated commercial banks accounted for some 85% of total loans and deposits in the Malaysian banking system as at end-2017.