Malaysian banks are expected to maintain resilient asset quality through the remainder of 2026 despite a slight increase in impaired loans and heightened uncertainties from the Middle East conflict and ongoing US trade tensions, according to RAM Ratings.
The banking system’s gross impaired loan (GIL) ratio edged up to 1.43% at end-June 2026, from 1.37% at end-December 2025.
Nevertheless, RAM said overall credit fundamentals remained sound, supported by healthy loss-absorption buffers and proactive credit risk management by banks.
The rating agency expects the banking system’s GIL ratio to remain broadly stable at around 1.4% by end-2026.
“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.
“Encouragingly, most banks have not reported any material increase in requests for repayment assistance. Favourable labour market conditions, as reflected in the low unemployment rate of 3%, will help mitigate further deterioration in asset quality.”
RAM, however, remains watchful of small and medium enterprises (SMEs) and lower-income borrowers, which it considers more vulnerable to an economic downturn.
The annualised average credit cost ratio of eight selected domestic banks remained relatively stable at 18 basis points (bps) in the second quarter of 2026, compared with 19 bps in the preceding quarter.
Most banks continued to maintain management overlays, while several increased provisions during the quarter in response to macroeconomic uncertainties.
Banks also retained substantial buffers against potential deterioration in loan quality.
The average GIL coverage ratio, including regulatory reserves, stood at a healthy 139%, substantially above the pre-pandemic level of 107% at end-2019.
Banking system loan growth strengthened to 5.5% year-on-year in the first half of 2026, accelerating from 4.8% for 2025.
Business lending was the main driver, expanding 6.1%, while household loan growth moderated to 5.0%.
RAM said the increase in business financing was largely driven by corporate borrowers rather than SMEs.
Meanwhile, growth in residential mortgages — the largest component of household lending — continued to slow after moderating over the past two to three years.
Mortgage growth eased to 5.4% in 1H26, compared with 5.9% in 2025 and 6.9% in 2024.
Banks continued to face pressure on profitability from tighter net interest margins (NIMs), amid intense competition for both deposits and loans.
Average NIM contracted three bps quarter-on-quarter to 2.01% and RAM expects margins to remain under pressure for the rest of 2026.
However, stronger non-interest income and improved cost efficiency more than compensated for the margin compression during the second quarter.
As a result, the average pre-tax return on assets of the eight banks covered by RAM improved to 1.39% in 2Q26 from 1.33% in 1Q26.
The Malaysian banking system’s common equity tier-1 (CET1) ratio declined to 13.9% at end-June 2026, from 14.7% a year earlier.
RAM attributed the decline mainly to stronger loan growth, lower securities valuations and higher dividend distributions.
Despite the reduction, the rating agency said banks remained well capitalised, with sufficient capacity to absorb potential losses.
Banks adopting the Standardised Approach for credit risk are also expected to benefit from capital savings following the implementation of Basel reforms on July 1, 2026.
Overall, RAM’s assessment suggests that while Malaysian banks are navigating increased external uncertainties, margin pressures and pockets of higher borrower delinquency, strong provisioning, healthy capital buffers and supportive labour market conditions should help contain deterioration in asset quality.
The eight banks covered in RAM’s roundup are Affin Bank Bhd, Alliance Bank Malaysia Bhd, AMMB Holdings Bhd, CIMB Group Holdings Bhd, Hong Leong Bank Bhd, Malayan Banking Bhd, Public Bank Bhd and RHB Bank Bhd.
