PETALING JAYA: Moody’s Ratings has kept its outlook for Malaysia’s banking system as “stable”, supported by steady economic growth and sound bank fundamentals.
However, it warned that banks’ plans to pay out higher dividends could pressure capital buffers although the sector’s internal capital generation is expected to remain stronger than balance-sheet expansion.
“We expect Malaysia’s real gross domestic product (GDP) to expand by 4% to 4.5% in 2026, on the back of resilient household consumption and fixed capital formation, amid risks from global trade and geopolitical uncertainties,” Moody’s said in a report.
It expected household consumption to hold up on the back of a strong labour market, with unemployment at 2.9% as of last November, rising real wages helped partly by income-related policy support and subdued inflation.
Moody’s expected inflation to average 1.8% in 2026.
At the same time, investment activity remained firm due to multi-year public and private projects, particularly in transportation, energy and civil engineering, alongside foreign investments in electrical and electronics manufacturing and data centres.
Tourism and electronics exports are also expected to remain supportive, although the agency flagged global growth risks from geopolitics and higher tariffs.
Against this backdrop, Moody’s expected system-wide credit growth of around 5%, supported by a neutral monetary policy stance.
It expected Bank Negara Malaysia to keep the policy rate around 2.75% in 2026, which should not materially restrict loan demand.
On asset quality, Moody’s anticipated risks as broadly stable with only modest deterioration from the unusually strong improvement achieved over the past four years.
The agency expected the banking system’s non-performing loan (NPL) ratio to hover around 1.4% to 1.6% in 2026, close to long-term averages, versus 1.4% as of end-June 2025.
“Overall business loan credit quality in Malaysia has improved over the years, with an NPL ratio of 2.2% as of the end of June 2025 compared with 2.8% at the end of June 2023.
“We expect a modest increase in credit cost for banks due to wholesale loan delinquencies and reduced loan loss coverage,” it said. Credit costs are expected to remain low at 15 basis points to 30 basis points, rising only slightly.
Moody’s said retail loan performance should stay healthy given low unemployment, rising real wages, a steady residential property market as well as a moderate median debt-service ratio of 33%.
Corporate credit quality is also expected to remain steady, helped by domestic demand and investments.
Moody’s said Malaysian banks are expected to remain well-capitalised, supported by sector return on equity of 10% to 11%, generating internal capital well above asset growth.
The system-wide common equity tier 1 ratio was 14.7% as of end-June 2025.
However, it cautioned that dividend payout ratios had risen at some banks over the last two years, and capital could come under strain if banks continued to “optimise” their capital structure by paying out more.
Profitability is expected to remain stable, with net interest margins likely bottoming out as deposit repricing lags rate cuts.
Non-interest income should remain a strong contributor, supported by wealth management, insurance, capital markets and fees.
Meanwhile, funding and liquidity conditions should remain stable, with loan growth broadly matching deposit growth and the loan-to-deposit ratio staying around 91%.
Meanwhile, an analyst told StarBiz that 2026 industry loans will grow 5% and was “positive” on the sector mainly due to its stable earnings visibility and resilient dividend yields.
