PETALING JAYA: Malaysia’s banking sector is expected to regain momentum in the second quarter of financial year 2026 (2Q26), as stabilising market conditions, easing funding costs and resilient credit demand support earnings, despite a subdued 1Q26 weighed down by weaker trading income and higher provisions.
Analysts remain broadly constructive, citing solid loan growth, stable net interest margins (NIMs), strong capital buffers and attractive dividend yields, although expectations for earnings growth have been trimmed amid persistent geopolitical and macroeconomic uncertainty.
Another noteworthy angle to take into account is that observers believe the Federal Reserve’s June meeting, which is taking place overnight on later yesterday and today, will have minimal bearing on Bank Negara Malaysia’s overnight policy rate (OPR) for this year.
“It is likely that our central bank will maintain the OPR at the current 2.75% level moving into the second half of the year (2H26), providing more stability for the banking sector and the overall capital markets,” Vincent Lau, head of equity sales at Rakuten Trade, told StarBiz.
On that tone, CIMB Research is maintaining its “overweight” call on the banking sector, pointing out last week in a note that Malaysian banks are now entering 2Q26 with improved earnings resilience driven by incremental net interest margins (NIM) upside.
It said sector-wide non-interest income (NOII) could also stage a sequential recovery in 2Q26 on stabilised market conditions and continued growth in recurring fee-based income.
Similarly, RHB Research noted: “The 2Q26 appears to be a better quarter sequentially as marked-to-market losses suffered in 1Q26 stabilise, while some banks saw improved investor sentiment and wealth traction.”
The first quarter, however, reflected a softer start to the year.
According to BIMB Research, Malaysian banks largely met earnings expectations in 1Q26 with Malayan Banking Bhd
(Maybank), Public Bank Bhd, RHB Bank Bhd, Hong Leong Bank Bhd, CIMB Group Holdings Bhd, AMMB Holdings Bhd and Alliance Bank Malaysia Bhd reporting results broadly in line with expectations, while MBSB Bhd lagged due to weaker fund-based income and higher credit loss charges.
The research house reported that sector core earnings slipped 5.4% quarter-on-quarter, largely due to weaker net interest income and NOII. On a year-on-year basis, however, earnings were essentially flat.
CIMB Research described the latest reporting season as a sign that the industry is entering a more mature phase, saying: “The first quarter results season broadly confirms that Malaysian banks are entering a phase of normalisation, supported by structural improvements and a solid earnings base.”
Among individual lenders, Public Bank and RHB Bank stood out for their execution, with the research outfit observing: “Public Bank delivered the strongest results, posting the highest return on equity (ROE) of 12% while keeping net profit flat year-on-year (y-o-y), despite the absence of significant overlay write-backs and higher operating expenditure.”
Meanwhile, credit demand remained a key earnings pillar during 1Q26, supported by lending to corporates, small and medium enterprises (SMEs) and selected retail segments.
BIMB Research noted that loan growth accelerated to 5.4% y-o-y in the first quarter from 4.5% in the preceding quarter, with most banks recording stronger lending momentum.
Nevertheless, analysts said lenders have understandably turned more cautious on the external environment, with CIMB Research noting that banks are now flagging macro uncertainty and geopolitical risks as key constraints.
The conflict in the Middle East remains one of the key concerns, although banks do not expect a significant direct impact, especially since the war currently appears to be on its last legs as per latest updates, barring any unforeseen re-escalations.
RHB Research said Malaysian banks believe the first order impact from the Middle East conflict is limited as direct exposures are not significant, although lenders will continue to monitor potential second and third-order effects and watchful over sectors such as transport, logistics, agriculture, construction and infrastructure, as well as SME segments.
Rakuten’s Lau echoed the cautiously optimistic sentiment, pointing out that businesses may look forward to oil prices receding more markedly in the final two quarters of 2026, and therefore allocating their resources elsewhere for better productivity.
“As such, this could provide room for loan growth, especially since there is no uptake in gross impaired loans so far this year.
“That said, supply chain recovery and the overall uplifting of sentiments may take time as we may need effects from positive external factors such as the listing of SpaceX (Space Exploration Technologies Corp) on Nasdaq and the sustained run of the S&P500 to fully pan out and spill over to the Malaysian market,” he said.
Meanwhile, the banking sector’s NIMs have also begun to stabilise after prolonged funding cost pressures, with BIMB Securities reporting that sector NIM stood at 1.99% in 1Q26, with most banks recording quarter-on-quarter improvements.
CIMB Research said: “Maybank’s guidance appears to be the most positive; it believes that a NIM of 2.10% could be the new sustainable baseline, as higher deposit rates are expected to creep into its NIM from 2Q26 onwards.”
Even so, analysts say deposit competition remains an area of focus, with BIMB Securities observing that deposit competition is expected to remain stable through 3Q26, before picking up towards year-end due to seasonal factors.
The research house added: “However, irrational pricing is unlikely given the broader backdrop of slower economic growth.”
At the same time, CIMB Research observed a notable increase in financial market volatility in 1Q26, which had a direct and uneven impact on trading and foreign exchange-related income across the sector.
It added that banks with larger treasury operations faced greater earnings swings, while others benefited from stronger fee-based businesses such as wealth management and bancassurance.
The brokerage noted: “Banks such as RHB Bank, Hong Leong Bank, Public Bank, AMMB, Alliance Bank, and Affin Bank continue to focus on building more stable, recurring income streams to reduce reliance on inherently volatile market-driven earnings.”
CIMB Research also noted that cost discipline remained another bright spot during 1Q26 despite continued spending on technology and digitalisation, although the brokerage also warned that operating cost pressures are gradually building across the sector, driven by sustained investment in technology, higher personnel costs, branding initiatives, and ongoing regulatory requirements.
Asset quality remained broadly stable, and while lenders have become more conservative in provisioning, RHB Research believes that existing provisions appear adequate under current assumptions.
“Assuming the base case scenario that the elevated energy prices do not persist, banks think existing overlays and provision buffers should be sufficient to help cushion the potential emerging risks ahead,” said the research house.
Research houses nevertheless expect earnings growth to remain moderate this year, with BIMB Securities forecasting sector earnings to expand by 4.5% in 2026 (compared to 3.4% in 2025), resulting in a ROE of 10.1%.
RHB Research adopted a more conservative view, saying: “We now project FY26 profit after tax and minority interest growth of 2.5% y-o-y (from 4.3% y-o-y) on the back of 3% y-o-y operating income growth, partly offset by negative jaws and higher credit cost.”
In business and corporate finance, a negative jaws (or jaws ratio) occurs when an organisation’s operating expenses are growing faster than its income or revenue.
Despite softer growth expectations, BIMB Securities is of the view that sector valuations are still attractive, trading at around one time price over book value of 2027, supported by dividend yields of 6% to 7%, particularly among large-cap banks such as Maybank, CIMB, Public Bank, as well as RHB Bank and MBSB.
Capital management is also emerging as an increasingly important investment theme, with CIMB Research pointing out that dividend optionality is increasingly becoming a key differentiator across Malaysian banks, underpinned by strong capital buffers and incremental Basel 3.1 uplift.
With earnings resilience intact and shareholder returns remaining attractive, analysts are confident that Malaysia’s banking sector appears well positioned to navigate an uncertain global environment, while delivering steady growth in the quarters ahead.
