PETALING JAYA: The banking sector enters the second half of financial year 2026 (2H26) on a strong footing and is undergoing a structural transition from consumption-led to investment-driven growth in system loans.
While the sector remains fundamentally sound with robust capital and liquidity buffers, analysts are adopting a more vigilant and selective stance for 2H26 in anticipation of slower growth prospects.
Industry-wide loan growth reached between 5.7% and 6% year-on-year (y-o-y) as of May, stronger than initially expected.
Growth was supported by business lending, which has become the primary engine of expansion, rising 6.4% to 7% y-o-y, fuelled by an “investment upcycle” in artificial intelligence-driven electronics, data centres and large-scale infrastructure projects.
However, household lending growth is moderating (5.2% to 5.5%) as consumers face rising living costs and inflation, alongside reports of layoffs by companies.
TA Research, in a banking sector report, noted a clear divergence in the performance of Bursa Malaysia-listed banks based on their geographic footprint.
Moreover, banks with a domestic focus, such as Affin Bank Bhd
(12.6% loan growth), Alliance Bank Malaysia Bhd (7.5%), and Hong Leong Bank Bhd (7.5% to 8.4%), have outperformed the industry average.
Banks with regional operations, such as Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd, reported muted group-level growth (0.9% and 1.1%, respectively) as strong operational performance in markets like Indonesia was offset by adverse foreign-exchange translation effects in 1H26.
TA Research noted Maybank had indicated that its 4% to 5% loan growth target could be subject to revision in the second quarter of financial year 2026 (2Q26), as 1Q26 loan growth was below expectations.
Additionally, growth was also weighed down by softer lending demand in Indonesia amid macroeconomic uncertainties.
Hence, CIMB Research and TA Research project a more challenging 2H26 for the banking sector.
TA Research has trimmed its 2026 loan growth forecast to 5.3%, while CIMB Research maintains a more conservative 4.8% target.
The latter said weak property and construction sectors will dampen loan growth in 2H26.
Higher construction costs (up around 5% to 15% since the onset of the Middle East conflict), elevated financing costs, and external uncertainties are expected to moderate activity across Malaysia’s property and construction sectors in 2H26.
“Property transactions in Malaysia softened in 1Q26, with transaction volume and value down 8% and 1% y-o-y, respectively.
“In 2H26, developers are likely to remain selective with new launches amid uncertain market conditions, which may limit growth in property loans,” CIMB Research said in its latest sector report.
The research house, however, remains “overweight” on the sector, citing its view that banks are highly defensive, with “rising capital optionality”.
Furthermore, its top picks are Public Bank Bhd (“buy”, target price or TP: RM5.50), RHB Bank Bhd (“buy”, TP: RM9.20), and Hong Leong Bank Bhd (“buy”, TP: RM26.40), which offer firm dividend visibility, defensive earnings, and stronger asset quality buffers.
Meanwhile, TA Research has a “neutral” recommendation on the sector. While it sees fundamentals as sound, it noted risks of election-related multiple compression amid speculation of an early general election.
Its top sector picks are Public Bank (“buy”, TP: RM5.36), Hong Leong Bank (“buy”, TP: RM24.41) and Alliance Bank (“buy”, TP: RM5.30).
