PETALING JAYA: Amid the tough operating environment, exacerbated by tariff uncertainties, global trade risk and geopolitical tensions, the banking sector is poised to remain on a strong footing heading towards 2026.
With the country’s relatively strong economic and macro fundamentals, banks’ firm balance sheets and prudent risk management, as well as improving business confidence, banking experts said this would allow banks to wade through the headwinds.
The economy is forecast to grow between 4% and 4.5% next year, from 4% to 4.8% this year. For the third quarter of 2025 (3Q25), growth as measured by real gross domestic product (GDP), expanded by 5.2%, while the economy grew by an average of 4.7% in the first nine months of 2025.
Most experts are of the view that the domestic economy would be able to surpass 4% by next year.
While recognising headwinds, which among others include tariff-related uncertainties and global trade risks which may dampen loan demand and elevate credit risk in exposed segments, RHB Banking Group managing director and group chief executive officer Datuk Mohd Rashid Mohamad as of now is optimistic of the banking sector moving into 2026.
In responding to queries from StarBiz, he said loan growth for the sector is projected to be in the region of 5% to 6% in 2026, slightly stronger than in 2025.
“This growth will be led primarily by the non-household (business) segment, as corporate borrowing picks up amid improving sentiment and a low interest rate environment.
“Consumer loans should remain stable, supported by resilient household spending, but the main momentum will come from businesses expanding capacity and investing in projects,” he said.
However, he said downside risks remain, including potential liquidity competition and external trade uncertainties, which could temper overall growth if global conditions weaken.
RHB group managing director and CEO Datuk Mohd Rashid Mohamad.
Based on statistics, outstanding loans grew 5.6% in October 2025, compared with 5.7% in September.
Business loan growth strengthened to 5.5% in October from 5.4% in September, driven mainly by higher working capital financing among non-small and medium enterprises.
Additionally, household loan growth remained stable at 5.7%, reflecting sustained demand across most loan purposes.
Mohd Rashid said RHB is maintaining an “overweight” stance on the sector, supported by strong fundamentals and a resilient domestic economy.
He said sector profit after tax and minority interest growth is expected to accelerate to about 5% year-on-year (y-o-y) in 2026 versus 2% y-o-y in 2025, driven by steady loan growth, easing pressure on net interest margin (NIM) and stable credit costs.
Mohd Rashid said additional growth drivers for the sector include continued infrastructure spending, healthy household consumption and improving business confidence, all of which will underpin banking activities.
RAM Rating Services Bhd senior vice-president of financial institution ratings Wong Yin Ching said while there is greater trade policy clarity, she expects export growth to soften as the impact of US reciprocal tariffs and payback from earlier front-loading activities start to filter through.
“Nevertheless, Malaysian banks are on a strong footing to navigate through domestic and external headwinds, thanks to their solid balance sheets and prudent risk management,” she noted.
She said on the whole, RAM is maintaining a stable outlook on the domestic banking system in 2026, even as the operating environment remains cautious.
For 2026, Wong said she expects overall loan growth to come in at 4.5% to 5%, supported by the rating agency’s forecast GDP growth of 4% to 5%. She added that household lending would likely be the main growth driver, overshadowing business loans.
According to Wong, asset quality continues to be a key strength of the banking system. “With loan portfolios predominantly skewed towards households, banks’ direct exposures to sectors affected by US tariffs are minimal.
“The labour market remains supportive, with unemployment at a historical low of 3% and labour force participation above 70% in the 3Q25.
“Nonetheless, we remain vigilant about downside risks, given shifting trade patterns, prevailing geopolitical tensions, and a slowing global economy.
“The system’s gross impaired loan (GIL) ratio is projected to stay below 1.5% in 2026, which is still healthy,” Wong noted.
The banking industry’s GIL ratio was marginally lower at 1.39% as of the end of October 2025, compared with 1.41% at end-September 2025.
On a brighter note, Wong said net interest margins (NIMs) are expected to widen in 2026, underpinned by the downward repricing of deposits and banks’ ongoing proactive liability management. At this juncture, she anticipates the overnight policy rate (OPR) to hold steady at 2.75% through 2026.
Mohd Rashid anticipates GILs to remain broadly stable at current comfortable levels, supported by prudent risk management and strong provisioning buffers. While isolated upticks may occur in certain sectors, overall asset quality should hold steady, given healthy repayment capacity and banks’ proactive credit monitoring, he said.
He expects NIM pressure to ease in 2026, which would support earnings growth. This improvement is expected to be driven by strategic deposit repricing, optimisation of liability mix, and a stronger current account savings account (CASA) ratio, as banks focus on reducing funding costs, he said.
Mohd Rashid added that the accommodative interest rate environment and stabilising deposit competition should also help margins recover from the compression seen in 2025.
Mohd Afzanizam Abdul Rashid, Bank Muamalat Malaysia Bhd chief economist
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said overall, he expects the banking sector to remain fairly stable with loan growth, possibly in the region of 5% to 5.5%.
On the same note, he said NIM is likely to remain flat as foresees the overnight policy rate (OPR) to be maintained at 2.75% while the impairment trend should be fairly stable as the country’s economy is expected to grow positively.
“We are projecting a GDP growth rate of 4.1% in 2026 from an estimated 4.7% growth in 2025.
“I expect competitive pressures from digitalisation of financial services where the barrier to entry into financial industries seems to have been lowered due to technology.
“Customers now have more choices when it comes to investment and financing products. All this will shape how banks should position itself in the face of competitive pressures.
“We could see “buy now, pay later” (BNPL) schemes have been well accepted by the public. Should the public become more savvy with BNPL, it will certainly pose a serious challenge to the incumbent such as the banks,” Mohd Afzanizam said.
Meanwhile, CIMB Securities banking analyst Tan Ei Leen said although sector core net profit growth is expected to remain subdued at 0.4% y-o-y in 2025, and 4.3% y-o-y in 2026, the investment thesis for Malaysian banks has shifted from cyclical earnings growth to a phase of “capital-efficient growth” driven by risk-weighted assets (RWA) optimisation.
She said this enhances capital headroom and supports more effective capital optimisation and reallocation.
“We believe higher dividend payouts and return on equity (ROE) improvements will be key catalysts to rerate the banking sector’s 2026 price-to-book multiples from 1.0 times to about 1.1–1.2 times.
“Banks that fit well into the capital optimisation theme are Public Bank Bhd
(which may register capital uplift of 50–100 basis points (bps) ) and Hong Leong Bank Bhd with a capital uplift of 50 bps, when the new framework takes effect on July 1, 2026,” Tan noted.
The research house has upgraded the banking sector to “overweight” from “neutral” as it sees room for structural ROE optimisation in 2026.
