RAM Ratings has reaffirmed the Malaysian banking sector's stable outlook as the sector wrapped up a difficult 2016 in good shape.

The rating agency said Malaysian banks remained resilient and expected the same performance this year.

Financial Institution Ratings Co-Head Wong Yin Ching said the economy was poised for a delicate recovery this year with RAM's Gross Domestic Product forecast at 4.5 per cent this year versus 4.2 per cent in 2016.

"We do not foresee a broad-based improvement in economic sentiment. Accordingly, the banking system's loan growth is likely to remain flat at 5-6 per cent this year," he said.

Wong said notably, the system's asset-quality indicators have held up well with its gross impaired loan (GIL) ratio remaining at a historical low of 1.6 per cent as at end-January 2017.

This was despite pressures on certain sectors such as those related to automotives, oil and gas, steel and property development especially smaller, cash-strapped players, he said.

However, the GIL ratio could increase to 1.8 per cent if such pressure persists whereby there is little evidence of widespread fragility, said Wong.

Based on its analysis of over 700 listed non-financial companies, RAM said the overall debt-servicing ability of Malaysian corporates had remained healthy despite declining profitability.

It added that the credit quality of household loans was expected to remain strong, supported by a benign economic environment and banks' generally prudent underwriting standards for this sector.

Residential property mortgages, the mainstay of household loans also continued to display solid asset-quality indicators, said RAM.

Meanwhile, RAM Co-Head of Financial Institution Ratings Sophia Lee said signs of weakness had surfaced for unsecured consumer loans, amid the elevated level of retrenchments and spiralling cost of living.

"But, we do not expect further deterioration to be significant, taking into consideration the current accommodative interest rates and contained unemployment conditions.

She said amid weaker corporate earnings, competition from non-bank deposit-taking institutions and capital outflows, the banking system's adjusted loans-to-deposits ratio had tightened to 87.2 per cent as at end-January this year.

"Competition for deposits is likely to stay keen as the funding environment remains highly sensitive to shifts in global sentiment.

Banks are emphasising stronger liquidity buffers in the uncertain economic landscape," she said, adding that banks' earnings were envisaged to remain pressured this year.

"Nonetheless, the Malaysian banking system is still well capitalised," Lee added. - BERNAMA