PETALING JAYA: Banks’ asset quality remains resilient despite a slight deterioration amid uncertainties stemming from the Middle East conflict and ongoing US trade tensions, according to RAM Ratings.
The rating agency said the banking system’s gross impaired loan (GIL) ratio edged up to 1.43% as at end-June 2026 from 1.37% at end-December 2025.
Nevertheless, RAM Ratings expects the GIL ratio to remain broadly stable at around 1.4% by end-2026, supported by healthy loss-absorption buffers and proactive credit risk management by banks.
“While we are seeing higher delinquencies in certain loan segments, overall asset quality remains robust by historical standards,” RAM Ratings senior vice-president of financial institution ratings Wong Yin Ching said in a statement.
She said most banks had not reported any material increase in requests for repayment assistance, while favourable labour market conditions, including a low unemployment rate of 3%, should help limit further deterioration in asset quality.
RAM Ratings, however, remains watchful of small and medium enterprises and lower-income borrowers, given their greater vulnerability to an economic downturn.
The annualised average credit cost ratio of eight selected local banks remained largely stable at 18 basis points (bps) in the second quarter of 2026 (2Q26), compared with 19 bps in 1Q26.
The average GIL coverage ratio, including regulatory reserves, remained healthy at 139%, well above the pre-pandemic level of 107% as at end-2019.
Meanwhile, banking sector loan growth strengthened to 5.5% year-on-year in the first half of 2026, from 4.8% in 2025, driven mainly by a 6.1% expansion in business loans.
Household loan growth moderated to 5%, while residential mortgage growth eased to 5.4% from 5.9% in 2025.
RAM Ratings said net interest margins contracted three bps quarter-on-quarter to 2.01% amid intense competition for deposits and loans, and are expected to remain under pressure for the rest of the year.
However, stronger non-interest income and improved cost efficiency helped lift the average pre-tax return on assets of eight selected banks to 1.39% in 2Q26 from 1.33% in the preceding quarter.
The banking system’s common equity tier-one ratio declined to 13.9% at end-June from 14.7% a year earlier.
This was mainly due to stronger loan growth, lower securities valuations and higher dividend distributions.
RAM Ratings said capitalisation remained healthy and provided ample loss-absorption capacity.
