Global credit rating agency, Moody's Investors Service, expects the capitalisation of banks in Malaysia to remain robust and withstand the continuing challenges posed by the slowing operating conditions in the region.

The agency said this would continue the 2015 momentum which saw the capitalisation of rated domestically-owned Malaysian banks improve, supported by a combination of factors that includes slower loan growth, optimisation of risk-weighted assets (RWA) and capital raises.

"The improved capitalisation is credit positive as the higher capital buffers enhance the banks' resilience against rising credit risks, particularly in their foreign operations.

"This is at a time when economic growth and business sentiment is weakening in the region," it said in its report entitled, "Moody's Credit Outlook", published today.

It said banks that had an enhanced focus on foreign lending, such as CIMB and Maybank, posted greater increases in impaired loans and impairment charges in key overseas markets, including Indonesia, Thailand and Hong Kong.

By contrast, it said Public Bank and Hong Leong Bank, which have a stronger home market bias, had better asset quality metrics.

However, it said the banks' domestic asset quality is expected to deteriorate from the strong levels of the past three years, as the commodity and manufacturing sectors face increasing pressure from weak external demand and higher financing costs.

"Coupled with some banks' troubled exposures in regional markets, credit costs will likely remain elevated over the coming quarters," it added.

Moody's also expects the slower revenue growth this year to hurt the banks return on assets and internal capital generation, which is already under pressure from weak margins.

"Banks have also indicated slower and more cautious loan growth in overseas markets such as Indonesia and Thailand, and are increasingly focused on risk-adjusted capital allocation to negate the pressure on their capital," it said.