PETALING JAYA: The Malaysian banking system remains stable, as strong loss-absorbing buffers should mitigate a potential rise in credit costs and moderating profitability over the next 12-18 months, according to Moody’s Investors Service.

“The banks are well positioned to manage the challenges associated with Malaysia’s weakening economy and the vulnerable oil and gas, real estate and construction sectors, supported in particular by strong loan-loss reserves and solid capital ratios,” Moody’s vice president and senior credit officer, Alka Anbarasu, said in a statement Wednesday.

A slowdown in trade, private investment and government spending will result in a moderation in gross domestic product growth to 4.4% in 2019 and 4.3% in 2020.

Nevertheless, Moody’s said domestic private demand would remain supported by stable employment conditions and wage growth.

While asset risk will rise, the overall loan performance should remain stable, with the system’s strong loan-loss buffers sufficient to absorb a potential rise in delinquencies. Loan-loss reserves for most rated banks increased in 2018, following the adoption of the Malaysian Financial Reporting Standard 9.

Moody’s said capitalisation would also remain stable.

“Despite weaker profits, banks can generate sufficient capital to support potential asset growth through risk-weighted asset optimisation and dividend reinvestment. Testifying to its resilience, the system-wide capital ratio still satisfies regulatory requirements even in a stress scenario,” it said.