Banks' Asset Quality Resilient On Healthy Buffers, Proactive Risk Management - RAM

KUALA LUMPUR, Sept 4 (Bernama) -- Malaysian banks’ asset quality remains resilient, supported by healthy loss-absorption buffers and proactive credit risk management, RAM Ratings said.

In its Banking Quarterly Update for the second quarter (2Q) of 2026, the credit rating agency said this was despite heightened uncertainties stemming from the West Asia conflict and ongoing United States (US) trade tensions.

The banking system’s gross impaired loan (GIL) ratio edged up to 1.43 per cent at end-June 2026, from 1.37 per cent at end-December 2025.

“Nevertheless, overall credit fundamentals remain sound, supported by healthy loss-absorption buffers and banks’ proactive credit risk management,” it said in a statement today.

RAM expects the GIL ratio to remain broadly stable at around 1.4 per cent by end-2026, although it anticipates higher delinquencies in certain loan segments.

“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 three per cent, will help mitigate further deterioration in asset quality,” said RAM Financial Institution Ratings senior vice-president Wong Yin Ching.

The agency said the annualised average credit cost ratio of eight selected local banks remained largely stable at 18 basis points (bps) in 2Q 2026, compared with 19 bps in 1Q 2026.

Most banks continued to maintain management overlays, with several increasing provisions during the quarter amid macroeconomic uncertainties.

Meanwhile, the average GIL coverage ratio, including regulatory reserves, remained healthy at 139 per cent, well above the pre-pandemic level of 107 per cent at end-2019.

Banking sector loan growth strengthened to 5.5 per cent year-on-year (y-o-y) in the first half (1H) of 2026, from 4.8 per cent in 2025, driven primarily by business loans, which grew 6.1 per cent, while household lending growth moderated to 5.0 per cent.

Growth in business financing was largely attributable to corporate borrowers rather than small and medium enterprises (SMEs).

Meanwhile, growth in residential mortgages, the largest subsegment of household loans, continued to decelerate over the past two to three years, easing to 5.4 per cent in 1H 2026 from 5.9 per cent in 2025 and 6.9 per cent in 2024.

“Net interest margins contracted by three bps quarter-on-quarter (q-o-q) to 2.01 per cent, reflecting intense competition for deposits and loans, and are expected to remain under pressure for the rest of the year.

“Nevertheless, stronger non-interest income and improved cost efficiency more than offset margin compression, lifting the average pre-tax return on assets of eight selected local banks to 1.39 per cent in 2Q 2026, from 1.33 per cent in 1Q 2026,” it said.

The banking system’s common equity tier-1 ratio declined to 13.9 per cent at end-June 2026, from 14.7 per cent a year earlier, primarily due to stronger loan growth, lower securities valuations and higher dividend distributions.

The eight selected banks 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.

-- BERNAMA