Malaysia’s banking sector delivered a mixed set of results in the first half of 2026, with earnings growth remaining modest as resilient loan demand was offset by margin compression and higher provisions at selected banks, according to Hong Leong Investment Bank (HLIB) Research.
HLIB maintained its NEUTRAL stance on the sector, saying current valuations already largely reflect optimism over capital management, while few immediate catalysts are visible for a further sector re-rating.
Overall sector earnings increased 2.9% year-on-year and 3.9% quarter-on-quarter in 2Q26.
Alliance Bank Malaysia Bhd (ABMB) was the standout performer, with its 1QFY27 earnings reaching 28.8% of HLIB’s full-year forecast and beating expectations, helped by lower-than-expected provisions following sizeable write-backs.
Alliance Bank’s earnings climbed 25.0% year-on-year and 20.5% quarter-on-quarter, supported by stronger non-interest income (NOII) and lower provisions.
In contrast, AFFIN Bank Bhd and Public Bank Bhd missed HLIB’s expectations.
AFFIN’s 1H26 earnings represented 45.6% of the research house’s full-year projection, while Public Bank achieved 47.4%. Both were affected by higher provisions amid continued net interest margin (NIM) compression.
AFFIN’s quarterly performance was particularly weak, with earnings declining 11.1% year-on-year and 5.9% quarter-on-quarter, reflecting softer non-interest income due to lower fee income, alongside higher provisions and tax expenses.
Despite the mixed earnings performance, underlying loan and deposit growth remained resilient.
Sector loan growth accelerated to 4.6% year-on-year, compared with 3.4% in 1Q26, while deposits expanded 2.8%, improving from 1.9% in the preceding quarter.
However, competition for deposits and elevated funding costs continued to weigh on profitability.
Sector NIM narrowed by two basis points quarter-on-quarter and three basis points year-on-year.
HLIB expects margin pressure to persist into the second half of 2026 as banks continue competing for deposits.
While stronger lending volumes and non-interest income could cushion some of the impact, the research house sees limited upside to earnings as banks contend with margin compression and elevated operating costs.
As a result, HLIB expects sector earnings growth to remain modest, with performance increasingly differentiated by each bank’s funding strength, ability to generate fee income and cost discipline.
Asset quality remained broadly healthy during the period, with the sector’s gross impaired loan (GIL) ratio at 1.41%, up two basis points quarter-on-quarter but 10 basis points lower year-on-year.
Nevertheless, HLIB cautioned that recent results showed pockets of higher provisions and net credit costs (NCC), with sector NCC rising by a modest 3.8 basis points quarter-on-quarter.
Macroeconomic and geopolitical uncertainties could also prompt banks to maintain precautionary provisions.
Banks under HLIB’s coverage collectively hold about RM5.4 billion of management overlays, equivalent to approximately 1.7 times their total provisions in 2025, alongside healthy capital buffers.
HLIB believes sizeable provision write-backs could be premature, particularly while loan books continue expanding.
Consequently, credit costs could remain elevated and uneven during 2H26, potentially weighing on earnings should asset quality deteriorate.
Against this backdrop, HLIB lowered its target price for AFFIN Bank to RM2.00 from RM2.30, while maintaining its HOLD recommendation.
The revised valuation is based on an implied 0.4 times calendar-year 2027 price-to-book ratio, incorporating a 5.8% return on equity, 9.9% cost of equity and 3.0% long-term growth assumption.
Although AFFIN recorded the strongest loan growth among the banks under HLIB’s coverage at 13.6% year-on-year as at June 2026, the research house highlighted its comparatively weaker earnings quality and balance-sheet fundamentals.
AFFIN generated the lowest return on equity among peers at 4.3%, alongside a sector-low NIM of 1.52% and an elevated cost-to-income ratio of 63%.
Its GIL ratio stood at 1.82%, while loan-loss coverage excluding regulatory reserves was 71% and NCC was 35 basis points.
HLIB also highlighted AFFIN’s relatively small management overlay of about RM30 million, loan-to-deposit ratio of 104% and low current account savings account (CASA) mix of 27%, arguing that these metrics warrant a wider valuation discount relative to peers.
For the broader sector, HLIB said valuations have become less compelling following recent gains.
At 1.16 times forward price-to-book, the banking sector is trading around one standard deviation above its five-year average.
Near-term capital-management prospects are also largely concentrated in CIMB Group Holdings Bhd and Public Bank, according to HLIB.
The research house is awaiting further clarity on RHB Bank Bhd’s new capital-management plan, expected to be disclosed by 1Q27, while AMMB Holdings Bhd’s approximately RM2 billion shareholder-return plan is unlikely to materialise until 1Q28 following the implementation of Basel III reforms.
HLIB also expects the confirmed expansion of the benchmark FBM KLCI to potentially create a temporary overhang during 2H26.
Against this backdrop, Alliance Bank remains HLIB’s top banking pick for the second half of 2026, supported by its resilient earnings outlook and potential inclusion in the expanded FBM KLCI.
Overall, HLIB expects Malaysian banks to remain resilient through the rest of 2026, but said earnings growth is likely to be modest as stronger loan demand and healthy capital positions are counterbalanced by funding-cost pressures, compressed margins and the possibility of higher credit costs.
