KUALA LUMPUR: Moody's Investors Service has revised Malaysia's banking system outlook to stable from negative to reflect an improving operating environment.

It expects banks' prudent underwriting, together with strong capital and liquidity, will shield banks from any incremental financial stress caused by the COVID-19 pandemic.

In a research note today, Moody's said operating conditions will improve as Malaysia's real gross domestic product will expand 6.2 per cent this year after contracting 5.6 per cent in 2020, supported by the government's fiscal spending and a recovery in global demand that will provide a boost to the country's net exports.

It said banks asset quality will remain stable despite the increase in nonperforming loans (NPLs) when forbearance and support measures for borrowers end, on the back of proactive increases in loan-loss provisioning in 2020 which will enable banks to absorb anticipated new loan losses.

"Malaysian banks capital will continue to be strong with stable profitability, conservative loan growth targets and prudent dividend policies that enable banks to maintain their capital ratios at current high levels.

"The banking system's Common Equity Tier 1 ratio stood at 14.8 at the end of 2020, a sufficient buffer against unexpected risks," it said.

On banks profitability, Moody's views that it will recover, but not to the pre-pandemic levels.

"Credit costs will decline because banks already sufficiently boosted provisions in 2020. Net interest margins will increase gradually as ample liquidity allows banks to reprice term deposits at lower rates while unwinding modification losses they incurred in 2020," it said.

In terms of funding and liquidity, it will remain sound, said Moody's.

"Banks are largely deposit-funded and not reliant on market-sensitive borrowings for funding. Deposit growth will keep pace with loan growth.

"Banks will continue to hold sufficient liquidity against any unexpected shock, with the liquidity coverage ratio for the banking system at 148 per cent as of the end of 2020, well above the regulatory minimum," it said.

On another note, it said the probability of government support remains high as the Malaysian government has a history of providing support to failing banks when needed while unlikely to adopt a bail-in regime in the next 12 to 18 months.

-- BERNAMA