KUALA LUMPUR, March 21 — RAM Ratings has reaffirmed its stable outlook for the Malaysian banking sector this year, in stating most banks with their sound credit metrics can withstand economic challenges.

In a statement, the credit rating agency said in line with the revised Gross Domestic Product growth forecast of 4.4 per cent this year, it expects the sector’s loan growth to ease to six per cent from 7.9 per cent in 2015.

Co-Head of Financial Institution Ratings Sophia Lee said the system’s gross impaired-loan (GIL) ratio is projected at 2.0 per cent at year-end and still healthy, although higher than the current historical low of 1.6 per cent.

"The projected uptick in GILs is also expected to be broad–based.

"The high level of household debt is still a concern, especially for the low-income group, and in an environment of rising job cuts and the escalating cost of living.

"While we expect some weakening in the credit quality of household financing, the deterioration should not be significant, given still-accommodative interest rates," she added.

As at end-January 2016, the household sector’s GIL ratio remained low at 1.1 per cent, with banks having generally maintained prudent underwriting standards for the sector.

According to Lee, corporate borrowers in segments like construction, oil and gas, wholesale and retail trade, automotive and non-residential property are expected to face greater earnings pressure if the weak market conditions persist.

"Based on stress tests, however, the credit deterioration in business loans is anticipated to be manageable, as the overall leverage and financial indicators of businesses have stayed fairly healthy.

"On the liquidity front, the position stayed healthy. However, the larger capital outflows in the second half 2015 have tightened funding conditions," she said.

Moving forward, RAM Rating's believes that competition for deposits will remain rife as banks emphasise stronger liquidity buffers, amid the uncertain economic environment.

It said, given the expectation of slower loan growth and a potential increase in credit costs, banks’ earnings are projected to soften this year.

Nonetheless, the Malaysian banking system is still well capitalised, with a common-equity tier-1 capital ratio of 13 per cent as at end-January 2016, it added.

At the same time, the tier-1 and total capital ratios of the system remained favourable at a respective 13.9 per cent and 16.6 per cent. — Bernama