PETALING JAYA: Despite a tough economic environment, Malaysian banks are expected to weather the headwinds and show resiliency next year, thanks to the sector’s healthy asset quality, strong provisions, and robust capitalisation.
Banking experts said although the business environment would be tough next year with looming headwinds, nonetheless the banking sector’s strong metrics would cushion the headwinds.
These headwinds, among others, include global trade uncertainties, uneven growth trajectories, shifts in global monetary policy and persistent geopolitical tensions.
RHB group managing director and CEO Datuk Mohd Rashid Mohamad
RHB Banking Group managing director and group chief executive officer Datuk Mohd Rashid Mohamad said he expects the Malaysian banking sector to remain resilient next year, supported by a stable domestic economy and prudent financial system.
Sector profitability in terms of profit after tax and minority interest is projected to expand around 4% to 5% year-on-year, improving from the banking group’s estimate of 2% to 3% y-o-y, this year he said in response to queries from StarBiz.
“Growth will be driven by steady loan expansion, particularly in business lending, easing margin pressures as deposit costs reprice, albeit with a time lag, following the overnight policy rate (OPR) adjustment in July, and stable credit cost environment reflecting healthy asset quality.
“Malaysia’s banking system is entering 2026 from a position of strength, steady domestic demand, disciplined risk management, and the capacity to support growth across all customer segments,” Mohd Rashid noted.
He said while external uncertainties persist, the fundamentals of the domestic banking system remain intact, well-capitalised, well-managed, and resilient.
He said the banking system is also proactive in risk-management, allowing banks to withstand shocks while supporting economic recovery.
Commenting on strategies RHB is employing to ensure it remains on a strong footing for 2026, Mohd Rashid said: “Our focus isn’t just on growing faster, it’s on growing better. A stronger, more balanced portfolio and sharper execution will sustain RHB’s performance through 2026 and beyond.
“RHB is entering the second year of its PROGRESS27 strategy, which focuses on driving best in service, high profitability, and responsible and purposeful banking.
“These pillars have positioned us well to navigate a more competitive and margin-compressed environment, including the OPR cut.”
He noted that RHB is staying agile across four key areas: loan growth, deposit franchise, fee income, and cost-efficiency.
“Together, these strategies enhance RHB’s resilience and ability to deliver sustainable returns, especially in a moderating growth environment.”
RAM Ratings co-head of financial institution ratings Wong Yin Ching
RAM Rating Services Bhd senior vice-president of financial institution ratings Wong Yin Ching said while uncertainty surrounding global tariffs has somewhat subsided, shifting trade patterns, persistent geopolitical tensions, and a slowing global economy continue to pose headwinds.
Despite this challenging backdrop, she said RAM maintains a stable outlook on the domestic banking system in 2026.
“Malaysian banks have demonstrated resilience through economic cycles, supported by strong asset quality, robust capitalisation, and healthy provisioning buffers, which collectively underpin their capacity to withstand external and domestic pressures,” she said.
Banking system loans expanded by an annualised 4.3% in the first eight months of this year, broadly in line with RAM’s full-year projection of 4% to 4.5%.
Household credit demand (5.2% annualised) outpaced business loan growth (3% annualised), largely driven by home and vehicle financing.
“For 2026, RAM expects overall loan growth to improve slightly to 4.5% to 5%, supported by easing trade uncertainties and a projected GDP growth of 4% to 5%. Household lending will likely remain the main growth driver, overshadowing business loans,” added Wong.
In terms of asset quality, she expects the banking system’s gross impaired loan (GIL) ratio to stay below 1.5%, with an average credit cost ratio of around 25 basis points (bps) in 2026.
The industry’s GIL ratio stood at a commendably low 1.43% at end-August 2025 as against 1.44% at end-December 2024.
RHB’s Mohd Rashid projects a marginal improvement in the sector’s GIL ratio in 2026, underpinned by continued corporate resilience. “RHB is maintaining a prudent stance, keeping credit cost assumptions flat at 20 bps, and providing sufficient provision where needed,” he said.
On net interest margin (NIM) of banks, Wong said following the 25 bps OPR cut in July 2025, bank margins are expected to come under pressure in the second half of 2025.
However, she said the impact should be partly cushioned by the lower statutory reserve requirement introduced in May this year and banks’ active liability management, including reducing high-cost deposits and diversifying funding sources.
“With most deposits expected to have repriced lower by early 2026, bank margins should stabilise with a slight positive bias next year, “Wong noted.
Bank Muamalat Malaysia chief economist Mohd Afzanizam Abdul Rashid
Taking an optimistic but cautionary stance, Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said the banking sector would continue to remain resilient with strong capitalisation, ample liquidity and robust risk management framework allowing financial intermediation activities to remain uninterrupted.
Nonetheless, he said the intense competition, higher operating cost and possible moderation in economic growth next year would mean banks credit underwriting would remain tight going into 2026.
Mohd Afzanizam said risks for OPR cuts are something that banks cannot ignore.
“This would mean further compression on NIM is quite likely in 2026. Assuming that the economic growth hovers around the official forecast of 4% to 4.5% and inflation rate of 1.3% to 2%, we see no compelling reason for Bank Negara to reduce the OPR.
“Sectors such as construction, renewable energy, automotive, properties, plantation and manufacturing will continue to be the key sectors for banks to extend their credit facility.
“The anticipation for US interest rate cuts in 2026 could drive the local bond yields lower. This would mean gains from marketable securities would be earnings accretive for the banks in 2026,” he said.
