RHB Research has maintained its NEUTRAL stance on Malaysia’s banking sector, saying the risk-reward outlook has become more balanced despite a decent second-quarter earnings season.
The research house named AMMB Holdings Bhd, Malayan Banking Bhd (Maybank) and Hong Leong Bank Bhd (HLBK) as its top sector picks.
RHB said aggregate sector profit after tax and minority interests (PATMI) increased 6% quarter-on-quarter and 4% year-on-year in 2Q26, supported by stronger non-interest income and contained operating expenses.
However, it cautioned that funding pressures could persist into the second half of 2026 as higher wholesale deposit rates intensify competition for retail deposits, particularly against the backdrop of strong loan pipelines and elevated loan-to-deposit ratios.
Higher bond yields could also weigh on banks’ non-interest income while putting further upward pressure on wholesale funding costs.
Seven Of Nine Banks Meet Expectations
Seven of the nine banks under RHB’s coverage reported results that broadly met its and market expectations during the quarter.
Affin Bank Bhd and MBSB Bhd were the two exceptions, with both missing forecasts.
RHB said Affin’s weaker-than-expected performance reflected higher credit costs as retail asset quality deteriorated further, while MBSB continued to face net interest margin pressure stemming from elevated funding costs.
On dividends, HLBK’s final dividend of 80 sen per share was a positive surprise, translating into a payout ratio of 50.4% compared with RHB’s assumption of 46%.
Public Bank Bhd and CIMB Group Holdings Bhd, meanwhile, declared interim dividends below expectations, although RHB believes this was largely a matter of timing.
Non-Interest Income Recovers
Sector non-interest income rebounded from a softer first quarter, supported by broad-based improvements in fee income, trading and foreign exchange activities.
Net interest income was more subdued, however, as loan growth of about 5% to 6% year-on-year was offset by a low-single-digit contraction in sector net interest margins due to domestic deposit competition and some overseas pressure.
Operating expenses remained well controlled, helping keep the sector cost-to-income ratio stable to lower and supporting a quarter-on-quarter improvement in pre-provision operating profit.
Sector credit costs remained stable at around 19 basis points, unchanged from 1Q26, although RHB noted differences across individual banks.
Large recoveries and write-backs at Alliance Bank Malaysia Bhd and HLBK helped offset higher credit costs at Affin, Public Bank and CIMB. Maybank also added another RM200 million in management overlays during the period.
Impaired Loans Edge Higher
RHB said sector gross impaired loans increased by about 2% quarter-on-quarter, with the majority of banks recording higher retail impaired loans.
Sector loan loss coverage eased to 93.8%, while RHB noted that overall loan loss coverage has fallen by about 16 percentage points since end-2024.
The research house said banks can no longer depend as heavily on benign credit costs as a driver of earnings growth.
Most banks nevertheless retained their 2026 return-on-equity guidance, although Bank Islam Malaysia Bhd lowered its ROE target.
Several banks also adjusted assumptions for margins and credit costs.
CIMB and Alliance Bank cut their net interest margin guidance, reflecting tighter liquidity conditions in Indonesia in CIMB’s case and Alliance Bank’s focus on maintaining asset quality.
Banks generally acknowledged the increase in retail impaired loans but did not view the deterioration as systemic.
Affin and Bank Islam, however, raised their credit cost guidance amid cost-of-living pressures and past-due loan issues.
Basel III Provides Capital Upside
RHB said banks also provided updated guidance on the capital impact of Basel III reforms, with most pointing to a larger-than-previously-expected uplift.
Alliance Bank delivered the biggest surprise, raising its expected capital benefit to 60-70 basis points from 30-40 basis points, potentially giving it room to lift its sustainable dividend payout ratio.
RHB made only marginal changes to its sector earnings forecasts, trimming FY26-FY28 sector PATMI by less than 1% per annum.
It cut Affin’s FY26 forecast by 7% due to higher credit costs and reduced CIMB’s forecasts by about 2% per annum due to a wider NIM squeeze. These were partly offset by earnings upgrades for HLBK.
Dividend forecasts were raised for Alliance Bank and HLBK following updates on the expected capital benefits from Basel III reforms.
The sole rating change during the quarter was Public Bank, which was downgraded to NEUTRAL from BUY on valuation grounds.
RHB said the combination of tighter funding conditions, higher bond yields, rising impaired loans and diminishing loan-loss buffers means the banking sector’s earnings outlook remains sound but offers less compelling upside than before.
