Moody's Investors Service says that its outlook for the Malaysian banking system remains stable, as strong loss-absorbing buffers should mitigate a potential rise in credit costs and moderating profitability over the next 12 to 18 months. Despite weaker profit, banks can generate sufficient capital to support potential asset growth through risk-weighted assets optimisation and dividend reinvestment.

"The banks are well positioned to manage the challenges associated with Malaysia's weakening economy and the vulnerable oil and gas, real estate and construction sectors, supported in particular by strong loan-loss reserves and solid capital ratios," says Moody's vice president and senior credit officer Alka Anbarasu.

A slowdown in trade, private investment and government spending would result in a moderation in gross domestic product growth to 4.4% in 2019 and 4.3% in 2020.

Nevertheless, domestic private demand would remain supported by stable employment conditions and wage growth, said Moody's in a statement.

It said while asset risk would rise, overall loan performance should remain stable with the system's strong loan-loss buffers sufficient to absorb a potential rise in delinquencies.

Loan-loss reserves for most rated banks increased in 2018 following the adoption of Malaysian Financial Reporting Standard 9.

Capitalisation would also remain stable, it said.

"Despite weaker profit, banks can generate sufficient capital to support potential asset growth through risk-weighted assets optimisation and dividend reinvestment. Testifying to its resilience, the system-wide capital ratio still satisfies regulatory requirements even in a stress scenario," it said.

It said profitability, as indicated, would deteriorate as subdued asset growth and stiff competition for deposits would pressure net interest margins and pre-provision income.

"But funding and liquidity should remain robust, as deposit growth keeps pace with moderate loan growth," it added.