The outlook for China's banking system is stable and will remain in line with their rating levels in the next 12-18 months, Moody's Investors Service said on Monday.

“Our stable outlook is further underpinned by our view that China will stay on a path of steady expansion and pursue an agenda of orderly reform,” said Christine Kuo, a Moody's vice-president and senior credit officer.

In terms of challenges for the banks, the Moody's report notes several pressure points that will mostly likely be reflected in their asset quality and profitability.

These challenges will come from economic rebalancing, rising financial leverage, increasing interest rate liberalization, a greater shift toward higher-risk loan segments and continued large fluctuations in deposit flows.

Despite Moody's expectation of lingering asset quality pressure, the report notes that the banks have strong loss-absorbing cushions, in the form of provisions and earnings, as buffers against the potential rise in credit costs.

And despite a likely worsening in the banks' asset quality and profitability in 2014, Moody's does not expect their credit metrics to deteriorate to a level that will negatively affect their current ratings.

The report says that the banks will likely face a more challenging regulatory environment in the coming 12-18 months, with financial authorities increasingly focused on reforming the financial system, using particular tools, such as interest rate liberalization and possibly deposit insurance to set the stage for a more competitive banking environment.