HLIB research noted that the banking sector delivered largely in-line first-quarter 2026 results, demonstrating resilience despite a challenging operating environment marked by geopolitical tensions and rising energy costs.
The research house said aggregate sector earnings were broadly within expectations, although results from Malayan Banking Berhad and Bank Islam Malaysia Berhad fell short of forecasts due to weaker-than-expected non-interest income and higher provisioning charges.
Sector-wide core earnings declined 5.2% quarter-on-quarter and slipped 0.5% year-on-year in the first quarter, weighed down by softer treasury gains and fee income, particularly at Maybank and BIMB, alongside a normalisation in credit provisions.
HLIB noted that only Alliance Bank Malaysia Berhad and Maybank set aside additional loan loss provisions during the quarter as a precaution against potential stress among small and medium enterprises (SMEs) arising from energy price shocks linked to the ongoing Iran conflict. Most other banks maintained their existing provisioning levels, opting to reassess conditions during the second quarter.
Despite the earnings moderation, underlying banking fundamentals remained healthy.
Industry loans expanded 3.4% year-on-year in the first quarter, improving slightly from 3.2% growth recorded in the preceding quarter, while deposits rose 1.9%, reflecting continued customer confidence and stable liquidity conditions.
Net interest margins (NIMs) also showed signs of recovery, improving by two basis points quarter-on-quarter as banks continued to benefit from declining funding costs.
Asset quality remained strong, with the sector’s gross impaired loan (GIL) ratio edging down to 1.39%, one basis point lower than the previous quarter and eight basis points below a year earlier. Analysts attributed the improvement to healthy loan book expansion and prudent credit management practices.
Energy Prices and Geopolitics Under Close Watch
Looking ahead, HLIB believes the second and third quarters of 2026 will be crucial in determining how rising energy prices and geopolitical uncertainties affect the broader economy and banking sector.
The research house said loan growth remained surprisingly resilient in the first quarter, partly due to corporates accelerating financing activities to build inventory buffers, secure raw material supplies and support working capital requirements amid cost inflation and supply chain disruptions.
Businesses are also increasingly drawing on banking facilities to manage longer payment cycles and preserve liquidity as operating conditions become more uncertain.
While this should support near-term loan demand, HLIB cautioned that growth momentum could moderate if macroeconomic conditions weaken further.
The research house expects any adverse effects from external shocks to emerge gradually, particularly among borrowers facing margin compression from rising operating costs and softer consumer spending.
“Current asset quality indicators remain benign, but the true impact is likely to surface with a lag,” the report said.
Analysts said banks should closely monitor repayment trends over the coming quarters, as any deterioration could result in higher credit costs and a gradual increase in impaired loans.
Strong Buffers Support Sector Outlook
Despite these risks, HLIB believes the banking sector remains well positioned to withstand a moderate increase in economic stress.
The sector continues to benefit from strong capitalisation levels, prudent underwriting standards and sizeable overlay provisions estimated at approximately RM4.1 billion, which provide a meaningful buffer against potential credit losses.
HLIB maintained its Overweight rating on the sector, citing resilient earnings visibility and attractive dividend yields amid ongoing market volatility.
Given the uncertain macroeconomic backdrop, the research house continues to favour a selective stock-picking approach and identified CIMB Group Holdings Berhad and AMMB Holdings Berhad as its preferred banking picks, supported by what it views as undemanding valuations and attractive risk-reward profiles.
