PETALING JAYA: Local banks face potential risks from weaker-than-expected economic growth and elevated deposit competition, which could weigh on loan growth, asset quality and net interest margins (NIM), according to CGS International (CGSI) Research.
The research house said weaker-than-expected economic growth in 2026 to 2027 could cause banks to register higher- than-expected loan loss provisions and softer growth in loans and fee income. Meanwhile, deposit competition among banks remains elevated.
“Any protracted or escalating deposit competition could lead to a further increase in banks’ cost of funds, exerting pressure on banks’ net interest margins, in our view,” CGSI Research said in a report yesterday.
The research house said the country’s 10-year government bond yield rose 21 basis points (bps) in the third quarter of 2026 (3Q26) to 4.03% on Sept 20, 2026.
This could be detrimental for the banking sector’s investment income in 3Q26, in CGSI Research’s view, as certain banks would have to record some losses from mark-to-market of their holdings of fixed-income securities.
“However, this would be positive for banks’ net interest margin in the longer term as banks’ new investments in fixed-income securities would fetch higher yields,” the research house said.
CGSI Research said banks’ total loan increased 3.7% in the eight-month period of 2026 (8M26) (from RM2.36 trillion at the end of December 2025 to RM2.45 trillion at the end of August 2026), translating to an annualised growth rate of 5.6% for 2026.
The research house noted this was slightly above the range of its projection for banks’ loan growth of between 4.5% and 5.5% in 2026.
“The upside in loan growth would help to offset any weakening in banks’ NIM in the second half of 2026, in our view, especially after the downward repricing of fixed deposits has mostly ended in July, following the cut in the overnight policy rate (OPR) on July 10, 2025, while the deposit competition remains keen in the banking industry,” CGSI Research said.
In terms of loan application for the banking industry, the research house said it was largely flattish (down 0.3% year-on-year or y-o-y) in August 2026, following double-digit growth in the preceding two months (up by 27% y-o-y in June 2026 and up by 17.1% y-o-y in July 2026).
“On a month-on-month basis, loan applications declined 15% in August, mainly due to the high base of end-July.
“For the major loan segments, the applications of residential mortgages dwindled by 6% y-o-y in August (versus a 1.8% increase y-o-y in July) while the applications of auto loans fell 10.1% y-o-y in August (wider than the 1.2% y-o-y drop in July).
“The applications of working capital loans still grew at a double-digit rate of 11.5% y-o-y in August, but this was slower than the expansion of 82.3% y-o-y in June and 59.8% y-o-y in July,” CGSI Research said.
That said, although growth in the banking industry’s loan approvals moderated in August (from an expansion of 22% to 25% y-o-y in June to July), the research house said they still grew at a double-digit rate of 11% y-o-y in August.
CGSI Research said the key driver was the 50.9% y-o-y jump in the approvals of working capital loans in August, albeit slower than the 71.6% y-o-y surge in July.
Meanwhile, banks’ gross impaired loan (GIL) had risen RM1.53bil or 4.5% (from the end of February to the end of August) since the outbreak of the war in the Middle East.
CGSI Research expects banks’ GIL ratio to continue to increase towards 1.5% at the end of 2026, due to credit risks arising from elevated oil prices.
“In our view, the increase in banks’ GIL ratio was partly limited by banks’ proactive move to engage with their borrowers and offer repayment assistance to borrowers who are suffering material negative impact from the elevated oil prices (on their cash flows),” the research house said.
CGSI Research retained its “overweight” stance on banks, premised on robust fee income in 2026 and its expectations for rising dividend payout ratio over 2026 to 2028.
