The banking system in Malaysia remains competitive and its profitability likely to continue into 2013, said Standard & Poor's (S&P) in its latest banking outlook.
With eight core banking groups fighting for market share in a matured financial system, price competition is particularly acute in residential mortgage, it said.
It expects banks to have higher pricing discipline this year after more than three years of net interest margin (NIM) decline.
Maybank and CIMB and banks with foreign operations in higher yielding markets will be better positioned to offset the domestic competition.
It described the banking system as fundamentally strong, well capitalised and having strong retail liquidity and is also resilient to mild external slowdowns.
NPL (non performing loan) ratios may increase slightly in 2013 as the loan book seasons but it will be manageable.
The debit-servicing ability of the lower-income households are more vulnerable to economic downturns, unemployment trends and rising interest rates on loans.
"We believe this to be the main risk to the system as household lending accounts for 55 per cent of the system exposure."
With household debt to the gross domestic product of over 70 per cent, it marks one of the highest in the region. Prudential measures by Bank Negara Malaysia to rein in household loans growth and impose more stringent underwriting standards will mitigate downside risk.
In a report last week, the rating company said the performance for banks in most Southeast Asian countries will depend significantly on economic growth, both domestic and external.
In its outlook for Malaysia, it expects weaker loan activity, which could strengthen fundamentals.
Meanwhile, S&P said the Asean debt markets need greater regional investor participation.
As the third pillar of Asia after China and India, Asean is among the top growth regions in the world and its capital markets are among the fastest-growing around the world.
S&P has forecast the region to grow by four to six per cent in 2013 and 2014.
Opportunities await if Asean countries can further develop local currency bond markets and tap their high savings rates.
Intra-regional financing flows and reforms by Asean will be critical for the region's economic development and growth ambitions.
Despite worries over sovereign creditworthiness elsewhere, local investor currently prefer to invest in their respective markets or further overseas in the United States or Europe rather than in neighbouring countries.
S&P's recent expansion of the Asean regional credit rating scale to more than 120 issuers provides independent opinions about the credit risk of issuers active in the region
"Our Asean regional rating scale provides a benchmark within an Asean context while our global scale helps investors such as those in the Middle East keen to invest in Malaysia's Islamic Finance bond market, compare creditworthiness within a global context," said S&P's managing director for Asean Surinder Kathpalia.
S&P can rate ringgit bond issue of an issuer on a global or Asean scale provided the issuer has and existing global scale rating from it and has offshore bond issues outstanding, which have a global scale S&P rating.