The outlook for Malaysia’s banking system will remain stable over the next 18 months, says Moody’s Investors Service.

This comes on the back of stability in operating conditions following the gradual recovery in global growth.

Simon Chen, who is a senior analyst and vice president, said the banks’ asset quality and profitability will see more stability.

“Their strong capital and stable funding levels, and our expectation of a continued high degree of government support, also underpin our stable outlook for Malaysian banks,” adds Chen.

Moody’s conclusions are contained in its just-released report titled, “Banking System Outlook — Malaysia: Stabilising Asset Risks and Profitability, Strong Capital Drive Stable Outlook,” authored by Chen.

It rates 11 banks in Malaysia accounting for 80 per cent of the banking system loans and deposits: eight conventional commercial banks, one investment bank, one Islamic bank and one government-owned development financial institution.

The stable outlook is based on Moody’s assessment of five drivers: operating environment (stable); asset quality and capital (stable); funding and liquidity (stable); profitability and efficiency (stable); and systemic support (stable).

With the economy’s projected growth of 4.3 per cent on average in 2017-18, up from 4.2 per centin 2016, domestic economic activity will remain robust.

But it warned that ringgit volatility will likely persist and will weigh on business and consumer sentiment.

On asset quality, Moody’s report says that asset risks are stabilising, on the back of improving macroeconomic conditions.

“But the high leverage among corporates and households remains a tail risk, with risks mitigated by Malaysia’s diversified economy and stable employment conditions.”

In terms of capital, there is stable capitalisation, and the level will remain sufficient to withstand asset quality shocks, even under various stress scenarios.

Profitability will stabilise — as credit costs normalise from elevated levels — owing to stabilising asset risks. However, margin pressure will persist, because of keen competition for deposits.

The government will also have the capacity to provide support to the banks in times of stress, given its commitment towards fiscal reforms and a narrower fiscal deficit.

Moody’s continues to view Malaysia as a high-support country, pointing out that there have been no bank failures since Bank Negara Malaysia was established in 1959.