KUALA LUMPUR: The Malaysian banking system is expected to be stable over the next year and a half, despite an expected deterioration in operating environment as well as profi tability and effi  ciency, a re-port by Moody’s Investors Service Inc revealed yesterday.

In a statement, the credit rating agency said it has maintained a stable outlook on the Malaysian banking system since May 2013.

Moody's vice-president and senior analyst Simon Chen said the key drivers of this outlook are the banks' strong capital and stable funding levels, as well as Moody’s expectation of a continued high degree of government support.

"These positive factors offset a moderate deterioration in the banks' operating environment and profi tability profi les," he said on the release of Moody's report ti-tled "Banking System Outlook Malaysia".

Th e report underlined Moody's expectation of how bank credit-worthiness will evolve in Malay-sia's banking system over the next 12 to 18 months, and looks at the system in terms of fi ve factors: op-erating environment (classifi ed as deteriorating), asset quality and capital (stable), funding and li-quidity (stable), profi tability and effi  ciency (deteriorating) and sys-temic support (stable).

Moody's report said sys-tem-wide credit growth should register 8% to 9% in 2015, down from 10% in 2014, on the back of slower gross domestic product (GDP) growth in Malaysia (A3 pos-itive) of 4.8% from 6% in the cor-responding periods.

High household debt levels, however, pose risks to 57% of to-tal bank loans that are extended to households, particularly if un-employment rises, property prices fall, or interest rates rise, it said.

Still, it expects stability in Ma-laysia's low unemployment rates to partially off set the risk of higher household loan delinquency rates.

It also noted that bank capital levels are strong and can absorb the losses in its stress test sce-narios, though profi tability will deteriorate over the next 12 to 8 months, given that credit costs will normalise from historically low levels.

This article first appeared in The Edge Financial Daily, on May 27, 2015.