PETALING JAYA: Local banks should be able to weather the slower economic growth expected this year amid lingering uncertainties over US tariffs on a combination of low levels of impaired loans, sound underwriting practices and healthy capital and provisioning buffers.
RHB Banking Group managing director and group CEO Datuk Mohd Rashid Mohamad believes the domestic banking sector enters the second half of 2025 in a position of strength.
“Despite external uncertainties including tariff developments and global trade moderation, the sector remains well-capitalised with strong liquidity buffers,” he said.
Domestic fundamentals, particularly resilient household consumption, steady private investment and ongoing infrastructure projects provide an important cushion for the sector.
“On the whole, we forecast sector net profit growth to moderate in 2025 to 3% year-on-year (y-o-y), down from 8% y-o-y in 2024.
This is on the back of a 4% y-o-y rise in operating income, partly offset by higher credit cost as banks adopt a more conservative approach to loan provisioning and provision buffers.
“While some businesses may take a wait-and-see stance in light of global trade dynamics, the overall banking system is expected to remain resilient and continue to support economic activity throughout the remainder of the year,” Mohd Rashid said.
He said domestic demand would continue to be the main growth driver for the sector, underpinned by a firm labour market and supportive government measures.
On the investment side, infrastructure spending and strategic national frameworks such as the National Energy Transition Roadmap and the New Industrial Master Plan 2030 would open opportunities for financing capital markets.
For banks, he said this translates into steady demand across retail lending, small and medium enterprise (SME) financing and corporate banking, with the electrical and electronics (E&E) sector and consumer-related services remaining active.
“That said, challenges remain. Global trade uncertainties and tariffs pose risks to export-reliant industries such as E&E, raw materials and machinery.
“Export growth has already begun to moderate, the mining sector continues to contract due to lower oil and gas production, and manufacturing is seeing some slowdown from disruptions in refined petroleum output.
“The narrowing of the current account surplus also signals softer external demand. “Malaysia’s diversified economy and deep integration into global supply chains provide an important buffer.
“We therefore maintain a cautiously optimistic outlook, with the banking sector well-positioned to navigate these headwinds while continuing to support sustainable growth,” he said.
He said the bank has revised its system loan growth projection slightly to 4.5% to 5% for 2025, reflecting the moderation in gross domestic product (GDP) growth.
For RHB, he now expects loan growth in the range of 5% to 6%, compared to the earlier 6% to 7% guidance.
Households loans would continue to provide an anchor for growth, he said, noting that it would be supported by stable demand in housing and auto financing.
“On the business side, opportunities exist in SMEs and corporates, particularly those involved in infrastructure and E&E. “Should business confidence improve, we could see stronger disbursements in this segment,” Mohd Rashid said.
CIMB Securities head of research Ivy Ng Lee Fang said domestic banks have sufficient buffers and ample room to support credit growth but they may need to exercise caution in light of the challenging operating environment.
“Banks have sufficient buffers and ample room to support credit growth, however they may exercise more caution in light of a more challenging operating environment,” she said.
“In terms of funding and liquidity conditions, banks are still able to support intermediation activities, as implied by a healthy industry loan-to-fund ratio of 83.3% as at June 2025, banks are not constrained by a lack of liquidity.
“The industry liquidity coverage ratio (LCR) stood at 160.6% as at June this year implies that the overall banking system has excess cash reserves to meet short-term liquidity needs, and a common equity Tier-1 (CET1) capital ratio of 14.3% (June 2025) could still support healthy loan growth, while some of the bigger banks have even higher CET1 ratios,” Ng noted.
CET1 is a key measure of a bank’s financial strength.
It represents the highest quality capital a bank can hold, and money that fully available to absorb losses and keep the bank stable during tough times.
Ng has maintained banking sector loans growth forecast at 4.5% y-o-y, a revision from 5.3% in April to reflect the overall softer momentum in 2025 amid trade tensions and macro uncertainties.
She said banking sector loans continued to show signs of moderation, expanding by 2.1% in the first six months of 2025 ( and a growth of 5.1% y-o-y) as compared to an overall growth rate of 5.5% y-o-y in 2024.
Loan growth was anchored by the household segment (grew 2% in the first six months of this year, and 5.8% y-o-y), supported by steady demand in mortgages, auto and personal financing.
Business loans remained muted as corporates adopted a cautious stance while seeing higher repayments.
“Looking ahead, we expect loan growth to be sustained by households, underpinned by the mortgage pipeline and continued passenger vehicle sales, although demand has peaked in 2024, it remains driven by vehicle replacement cycle.
“Business lending should gradually recover with greater policy clarity and economic visibility, led by SMEs,” Ng said.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid has pencilled in total loans to grow at 5% for 2025.
He said banks remained robust and well capitalised, with high liquidity and a closely monitored risk management framework by Bank Negara Malaysia.
Gross impaired loans (GIL) ratio remains low at 1.42% in June compared to 1.44% in December 2024.
He said the GIL ratio could range between 1.40% and 1.45% for 2025.
He said the total capital ratio was at 17.8% as of June and similarly, the LCR of 160.6% was well above minimum level.
“So the banks have the capacity to lend. It’s a question of their risks appetite and meeting the regulatory requirement when extending the financing,” he said.
RAM Rating Services Bhd senior vice-president of financial institution ratings Wong Yin Ching projects overall loan growth to taper to 4% to 4.5% for full-year 2025, broadly in line with RAM’s slower GDP growth expectation of 3.5%-4.5% versus 5.1% in 2024. Credit growth is anticipated to be primarily driven by household lending, as a cautious business outlook and rising operating costs dampen business loan growth.
She said while domestic banks’ direct loan exposures to US tariffs continues to be limited, the secondary impact of global trade disruptions on the economy remains uncertain.
Overall, she said the rating agency projects the system’s GIL and credit cost ratios to trend higher to 1.5% and 25 basis points (bps), respectively, for 2025. However, Wong considers these levels to be manageable levels. Banks’ loan loss coverage and capital ratios also remain robust, providing an ample loss absorption buffer, she said.
She said bank margins would likely see a mild contraction this year, weighed down by the 25-bps overnight policy rate (OPR) cut in early July but partly offset by the lower statutory reserve requirement introduced in May.
“With more moderate loan growth, higher loan provisions and some margin compression anticipated, banks’ profitability will likely be under pressure in 2025,” Wong said.
Mohd Rashid anticipates some margin pressure this year due to lower OPR and dilution in loan yields from new disbursements. That said, he said the compression would be modest.
He said banks continue to actively manage their balance sheets including deposit repricing and diversifying income sources through fee-based businesses such as wealth management, treasury and transaction banking. These measures would help cushion the impact and sustain overall profitability, he said.
On another note, he said RHB’s GIL ratio remains below industry average, reflecting disciplined underwriting and active recovery efforts.
“We are confident of sustaining asset quality healthy levels. We are guiding the group’s GIL ratio for 2025 to land between 1.40% and 1.50%,” Mohd Rashid added.
