Here's what to expect from Malaysian banks' asset quality over the next 12-18 months

New NPL formation is seen to stabilise.

Moody's expect the banks' asset quality to remain broadly stable over the next 12-18 months. Given the gradual recovery in macro conditions, new nonperforming loan (NPL) formation is expected to stabilise, with issues arising mainly from highly leveraged corporates and households.

Here's more from Moody's:

The pace of asset quality improvement appears to have slowed, with system impaired loan ratios remaining at 1.6% of total banking system loans at end-February 2017. In 2016, impaired loan ratios remained stable in most of the industry sectors amid uncertain external conditions, with the exception of the mining and quarrying sector, which includes oil and gas related companies that were impacted by a significant decline in global oil prices.

Based on data compiled from over 800 listed non-bank companies in Malaysia, we noted further weakening of debt metrics of the corporate sector in 2016, largely driven by poorer revenue and profitability. The share of debt held by weak companies with interest coverage ratios (ICR) of less than two times remained fairly flat at 14% in 2016, after rising to 13% in 2015, from 7% in 2014.

Sectors that have experienced more stress in debt-servicing include transportation, and oil and gas related services sectors. These sectors were primarily impacted by a sharp decline in the prices for their products and demand for their services. The stress was similarly reflected in the increase in the impaired loan ratio for the mining sector.