KUALA LUMPUR, March 21 — Malaysian banks’ asset quality and profitability generally improved in 2017 and this trend is likely to continue into 2018 ,says international rating agency Moody’s Investors Service today.

The agency noted that this is due to stronger macroeconomic conditions, such as improving global trade and liquidity.

In a briefing today, the agency noted that Malaysian banks asset quality stabilised in 2017 as the percentage of impaired loans declined.

Moody’s vice president Eugene Tarzimanov said although the oil and gas sector was affected in 2016 by the plunge in oil prices, non performing loans in the sector were manageable and did not severely impact the banking sector

"Another trend that we notice among the Malaysian banks is with digitilisation, there has been a marked increase in operational efficiencies. This has resulted in a decline of the Cost -to -Income ratio’s of Malaysian banks,” said Tarzimanov.

He also said that profitability of Malaysian banks will likely improve on stronger loan growth and stable margins this year. Capital levels will ease slightly in 2018, due to implementation of the new accounting standard, MFRS 9.

Another trend that Tarzimanov observed was that competition for customer deposits is likely to rise and push up the banks’ funding costs, with the banks showing weaker deposit franchises.

While discussing Malaysian banks, he said one area that could not be ignored was Islamic banking.

Islamic financing and deposits have risen to 25-30 per cent of total system loans and deposits in the banking sector over the last 10 years

Both conventional and Islamic banks have significant lending to the household, wholesale and retail trade, real estate and manufacturing sectors.