What does 2H26 hold for banks?

AFTER benefiting from rising interest rates and resilient economic growth over the past several years, the global banking sector has had geopolitical tensions shave off some of its “defensiveness”, a positive trait that is often associated with banking stocks.

In Malaysia, earnings in the last quarter, although generally resilient, indicated weakness even as banks grappled with headwinds and international conflict which impacted profits to a certain extent.

Meanwhile, investors have reacted and showed their disapproval by selling off their holdings in banks.

Largest lender Malayan Banking Bhd, for instance, saw its stock fall to multi-month lows recently after it reported a weaker set of earnings in the latest quarter.

It’s the same for some of the other lenders.

But moving into the second half of the year (2H26), some industry players reckon that as geopolitical risks dip following the latest US-Iran de-escalation, a different scenario could emerge.

CIMB Research banking analyst Ei Leen Tan in a note to her clients this week says she believes a more hawkish US Federal Reserve (Fed) stance will reshape Malaysia’s 2H26 banking sector outlook, introducing tail risks associated with higher-for-longer rates.

OCBC Bank (M) Bhd managing director and head of consumer financial services Sammeer Sharma says that OCBC’s latest house view is that potentially, rates will hold.

“According to our latest house view, after the geopolitical stress owing to the Iran crisis...potentially the rates will hold.

“At this point in time, for United States and the other parts including Malaysia, the rates will hold. So, we don’t see any further deterioration in margins (of lenders),” he tells StarBiz 7.

Sammeer points out that Malaysia did not raise rates like the rest of the world did over the last few years, so the impact here has actually been “pretty minimal”.

“But if you look at Singapore, they have moved in tandem with global markets,” he adds.

All in all, the conflict in the Middle East has not really impacted OCBC Malaysia.

“For us, there has been negligible direct impact because we are in a very sweet spot due to the region we are operating in.”

Time lag

He does warn that there could be some time lag when it comes to the impact.

“Time will tell, there will be a ripple effect, because there are industries, geographies and supply chains that will be impacted.

“The inflation lag is yet to be seen.”

A banking analyst also tells StarBiz 7 that it is “still too early” to ascertain how 2H26 for banking will shape up globally, and domestically.

“We can’t be sure if the domestic economy will perform as well as how we expect it to.

“Following the Iran war and consequently, the energy shock that happened in the first quarter of this year, the impact that will filter down the economic layers will only be visible typically one to two quarters later,” he says.

When that happens, he also reckons it will lead to cost push inflation and for small and medium enterprises, this will be quite challenging.

“It will be challenging for them to run their businesses and sequentially their borrowing repayments may get affected.

“So, our outlook is still pending our assessment after the end of June quarter results,” he adds.

“We will see if the banks do signal any potential asset quality deterioration.”

Meanwhile, CIMB Research’s Tan says the combined effect of the US-Iran de-escalation roadmap and a more hawkish Fed marks an important reset for the Malaysian banking sector heading into 2H26.

“The easing of geopolitical tensions has significantly reduced the probability of a prolonged and severe oil shock-induced credit cycle, shifting investors’ focus away from asset quality downside risks and back to earnings fundamentals.”

In parallel, a higher-for-longer global rate environment introduces new challenges through increased bond yield volatility, foreign-exchange volatility, tighter liquidity conditions, and more uneven capital flows.

However, she points out that these risks are largely market-related rather than credit-related ones, and therefore, command a lower risk premium from investors.

“That said, our core thesis remains unchanged as Malaysian banks enter 2H26, capital and dividend optionality remain alongside improved earnings resilience, driven by incremental net interest margin upside and relatively contained credit costs, supported by solid capital and loan loss buffers.”

Tan notes the shift in the Fed’s narrative introduces additional tail risks associated with higher-for-longer rates, but these pressures are unlikely to result in a banking crisis.

According to her, current asset quality metrics are supportive of earnings and validate the view that Malaysian banks are entering this phase with thick buffers.

Nevertheless, she says banks are clearly more cautious, but the bias is towards maintaining or modestly increasing overlays – not releasing them, unless the macro backdrop “surprises positively”.

TA Research in its report on the impact of election cycles on the banking sector says a recurring pattern across the 13th General Election (GE13), GE14 and GE15 shows that foreign investors consistently reduced exposure after polling day, regardless of the election outcome.

“The key difference was not whether outflows occurred, but rather the speed and severity of the adjustment.

“GE13 reflected disappointment over limited political change, while GE14 triggered a reassessment of policy direction following the historic change in government,” it notes.

Moreover, GE15 saw a more gradual normalisation as strong banking fundamentals initially offset political concerns.

TA Research also says in each case, however, valuation multiples compressed as investors demanded a higher risk premium.

Looking ahead to GE16, it expects a similar dynamic, it notes, adding that the banking sector earnings should remain broadly resilient, but valuation risk is becoming increasingly important.

“As a result, we are tactically downgrading the Malaysian banking sector from ‘overweight’ to ‘neutral’, cutting our financial year 2026 (FY26) and FY27 price-to-book value forecasts to 1.17 times (from 1.25 times) and 1.12 times (from 1.20 times), respectively.”

It notes that importantly, this call is not driven by concerns over sector fundamentals, which remain sound, but by the heightened risk of election-related multiple compression in a less supportive macro backdrop.