According to Moody’s vice-president and senior analyst Simon Chen, such an environment favoured Malaysian banks while helping stabilise asset quality and profitability.

In a statement today, he said faster loans growth would also be seen, albeit at a pace that was slower than the profit retention of banks, which would lead to stronger capital buffers.

Moody’s conclusions were part of its newly released report on Malaysian banks titled “Robust Macro Conditions and Improving Capitalisation Support Stable Outlook”, authored by Chen.

The stable outlook was 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 said while macroeconomic conditions would prove robust, policy uncertainty posed a risk. It forecast Malaysia’s real gross domestic product to expand by 5.4% in 2018, adding that loans were expected to grow 6-7% in the same period.

It said 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 would weigh on investor and business sentiment over the course of 2018, it added.

On asset quality of banks, Moody’s said this would stay stable against the backdrop of easing stress among troubled corporates and slowing growth in household debt levels.

It said new non-performing loan formation would remain slow amid a moderate rise in interest rates, as corporate profitability improved and growth in risky household loans eased.

As for capitalisation, such levels were also expected 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 the funding and liquidity of banks would stay stable.

In particular, it said, the banks’ loan-to-deposit ratios would rise as loan growth accelerates, but would remain below 100%.

It also expected banks to 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 banks.

Faster loan growth is also expected to 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, it said.

It added that government support for banks in times of stress would continue to prove strong. It said recent legislative reforms had 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 rated 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% of total loans and deposits in the Malaysian banking system as of end-2017. Moody’s has also maintained a stable outlook on the Malaysian banking system since 2010.