Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid
PETALING JAYA: The Malaysian banking system is not out of the woods yet, as it continues to face headwinds despite the injection of around RM19bil from the recent “aggressive” cut in the statutory reserve requirement (SRR) ratio.
On May 8, Bank Negara announced that the SRR would be reduced from 2% to 1%, effective May 16. This would release about RM19bil into the banking system amid heightened volatility and uncertainty in global financial markets.
However, the central bank left the overnight policy rate (OPR) unchanged at 3%.
Economists and analysts noted that while the banking system remains well-capitalised, it still faces risks from US tariffs and geopolitical tensions, despite temporary relief from a 90-day agreement between the United States and China to reduce steep tariffs
Most agree that the outcome after the 90 days will be crucial in determining the broader economic impact, which, in turn, will have some effect on the banking sector.
The anticipated slowdown in economic growth this year – driven by tariffs and escalating geopolitical risks – could potentially trigger a trade war, dampening global growth and leading to lower interest rates.
Lower interest rates are expected to compress banks’ net interest margins (NIMs), a key measure of profitability.
Currently, the benchmark lending rate, or OPR, stands at 3%, with some economists forecasting at least one rate cut this year.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid noted that a lower interest rate environment could make a comeback amid heightened global uncertainty from tariff shocks.
“If that happens, it would have an impact on banks’ NIM, especially those banks that have a bigger share in variable-rate financing (loan) contracts.”
He said weaker gross domestic product (GDP) growth prospects means banks may need to have higher financing loan loss provisions that could affect their earnings in the current year.
Tighter credit underwriting standards would also impact loan growth, which could affect NIMs and profitability.
“Intense competition is here to stay. It’s a challenging outlook for banks on the whole this year,” he noted.
Mohd Afzanizam expects loan growth to reach around 5% for the year.
That said, he believes banks’ financial positions are still robust and should be able to withstand tariff-related shocks.
“I think the foreign investors are fully aware of this and they would be more than happy to have greater exposure to banking stocks as they are proxy to Malaysia’s economic health,” Mohd Afzanizam said.
UCSI University Malaysia associate professor of finance and Centre for Market Educationresearch fellow Liew Chee Yoong
UCSI University Malaysia associate professor of finance and Centre for Market Education research fellow Liew Chee Yoong also expects NIM to face continued compression pressures in 2025.
He noted that the confluence of rising deposit competition, stagnant interest rates, and limited room for further loan repricing may weigh on NIM levels across the banking sector.
Banks experienced mild margin erosion in 2024, and this trend is expected to persist unless the lending mix shifts decisively toward higher-yield segments such as unsecured personal financing or small and medium enterprise loans, he said.
As banks continue to digitalise and adopt new financial technologies, he said their ability to grow non-interest income may offer partial insulation against NIM pressures.
“While margin performance may not dramatically deteriorate, banks will have to work harder to preserve profitability, particularly in an environment where monetary conditions are largely neutral and market yields are plateauing.
“Hence, the NIM outlook for 2025 leans toward a marginal decline or, at best, flat performance compared to 2024,” he said.
“Should inflation remain sticky or unemployment rise, banks may experience a deterioration in asset quality, particularly in unsecured consumer loans.
“Hence, while resilient, the sector must remain vigilant and agile in managing credit risks and regulatory burdens,” he said.
RAM Rating Services Bhd senior vice president of financial institution ratings Wong Yin Ching
Meanwhile, RAM Rating Services Bhd senior vice-president of financial institution ratings Wong Yin Ching said banks’ profits may face pressure in 2025 in line with more moderate loan growth and increased provisions.
NIMs are envisaged to stay largely unchanged, with the lower SRR having a mild positive impact.
“NIMs will be predominantly influenced by the direction of the OPR. At this juncture, RAM expects the OPR to remain stable for the rest of the year unless economic growth slows significantly, which is not our base case,” she said.
RAM expects slower GDP growth of 3.5% to 4.5% in 2025, down from 5.1% last year.
Despite the SRR reduction, she said the rating agency is maintaining its loan growth projection of 4% to 4.5% for the banking sector, citing ongoing trade negotiations as a key uncertainty.
“Consumer loans, particularly home loans, will drive domestic loan expansion, given weaker sentiment and increased caution by businesses.
“Calls for potential deferment of the targeted petrol subsidy rationalisation and revision of the sales and service tax rates and scope, may further support consumer spending,” Wong said.
OCBC Bank managing director and head of strategy and transformation Saw Poh Hoon
OCBC Bank managing director and head of strategy and transformation Saw Poh Hoon, however, said the reduction of the SRR would enhance liquidity in the banking system, enabling banks to expand their balance sheets and support credit growth.
“The release of these funds will certainly help to improve margins by enabling banks to manage their funding costs more efficiently. We do not expect any further SRR cuts in the near term,” she said.
Saw is projecting a modest loan growth rate in the low to mid-single digits across credit segments. The recent tariff policies have impacted business sentiment, potentially leading to delays in investment and expansion plans among companies, she said. Naturally, she said banks are taking a more cautious stance in their assessments, which may somewhat temper the growth trajectory.
On the OPR, Saw said the bank’s house view is that there is likely to be a cumulative reduction of 50 basis points by the first half of 2026.
“That said, it should be noted that during its May Monetary Policy Committee meeting, Bank Negara emphasised its commitment to a data-driven approach. So, should fresh data indicate weakness, there is always the potential for rate cuts even as early as the second half of this year,” she said.
