KUALA LUMPUR,Mar 25: Moody’s Investors Service has revised Malaysia’s banking system outlook to stable from negative to reflect an improving operating environment.

It expects the banks’ prudent underwriting, coupled with strong capital and liquidity, to shield them 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% this year after contracting 5.6% in 2020.

It said this is supported by the government’s fiscal spending and a recovery in global demand that will provide a boost to the country’s net exports.

Moody’s said the banks’ asset quality will remain stable despite the increase in non-performing loans (NPLs) on the back of proactive increases in loan-loss provisioning in 2020 which will enable them to absorb anticipated new loan losses.

“The Malaysian banks’ capital will continue to be strong with stable profitability, conservative loan growth targets and prudent dividend policies that enable them to maintain their capital ratios at current high levels,” it said.

“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 profitability will recover, but not to the pre-pandemic levels, and funding and liquidity will remain sound.

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

“They will continue to hold sufficient liquidity against any unexpected shock, with the liquidity coverage ratio for the banking system at 148% as of the end of 2020, well above the regulatory minimum,” it said.

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