PETALING JAYA: Banks are poised to sustain growth even if there is a prolonged conflict situation in the Middle East.
This is likely to be so since domestic driven demand and export growth are still present in the local economy although RAM Ratings expected loan growth to moderate in 2026.
According to the ratings agency, this is in line with the slightly moderated gross domestic growth forecast for the country at 4% to 5% this year from 5.2% in 2025.
RAM Ratings projected industry loangrowth to moderate to 4% to 5% from 4.8% in 2025.
Household lending which accounted for 60% of system loans should remain the primary growth driver supported by ongoing residential mortgage demand, although auto financing is likely to slow due to lower new vehicle sales this year.
Meanwhile, business financing demand could be volatile as it is in tune with external trade conditions and supply-chain disruptions .
However, it should benefit from the execution of approved investments and continued policy-led initiatives under national master plans.
“Sustained corporate disintermediation towards the bond and sukuk market could temper business loan growth if market liquidity remains ample and credit spreads stay tight,” senior vice-president for financial institution ratings at RAM Wong Yin Ching told StarBiz.
“While heightened military tensions in the Middle East and US trade protectionist measures could elevate market volatility and pose downside risks to growth, we expect banks’ credit profiles to remain resilient, underpinned by strong fundamentals and prudent risk management,” Wong added.
RAM Ratings noted Islamic financing remained the primary engine of credit expansion in the banking landscape and had contributed an average of 69% of the system’s loan growth over the past five years.
It pointed out key downside risks to the present outlook which includes a sharper than anticipated economic growth slowdown, renewed commodity-price shocks that would fuel inflationary pressures and a protracted period of increased market volatility.
This could dampen investor confidence and constrain capital market issuance as well as investment activity, it noted.
On the gross impaired loans (GIL) ratio, which had receded to a multiyear low of 1.37% as of end-December 2025, it noted the improvement was due to higher write-offs and recoveries, the resolution of a large single name impairment and supportive labour market conditions.
But the outlook is “cautious” overall, as it anticipated credit costs could settle at higher levels if the external challenges prolong.
“While uncertainties could increase borrower stress in selected pockets, we expect credit pressures to remain manageable, with the GIL ratio and net credit costs hovering around 1.4% and 20 basis points (bps) in 2026 respectively,” said RAM senior vice-president for financial institution ratings Sophia Lee.
“Small and medium enterprises, restructured exposures and unsecured retail portfolios will remain key areas to watch,” Lee cautioned.
The data also showed stage two loans, which represented unimpaired loans that experienced significant increase in credit risk had fallen to a new low of 6.1%, indicating limited risk migration pressure.
As the banking system’s common equity tier-1 (CET-1) capital ratio declined to 14.2% of end-December 2025 from 15.1% previously, lenders have also gradually increased dividend payouts.
RAM Ratings said banks are returning excess capital accumulated during the pandemic to shareholders.
“We expect banks to continue prioritising capital efficiency to support shareholder returns while maintaining adequate buffers against downside risks,” Wong said.
Meanwhile, AmBank Research retained its “overweight” outlook on the banking sector noting that despite recent market weaknesses, the KL Finance Index remained relatively intact in the year-to-date period.
“A key concern from clients today is the escalation risk in the Middle East. Thus, our stock selection is designed precisely to mitigate this uncertainty.
“We favour Hong Leong Financial Group Bhd
, Hong Leong Bank Bhd and Public Bank Bhd for their defensive, consumer-centric loan books, which are relatively insulated,” it said.
“Concurrently, these names may preserve upside should tensions ease, with capital management acting as a clear re-rating lever, the final Basel three reforms are set to lift their CET-1 ratios by 40 bps to 100 bps, and dividend yields of 4% to 5% already exceed historical norms,” AmBank Research added.
Rating the banks mentioned above a “buy”, the research house expected the sector to stage a comeback later in the year after this period of geopolitical driven volatility.
