Healthy loan growth likely for banks in 2026

PETALING JAYA: Malaysia’s banking sector is expected to sustain healthy loan growth as resilient domestic demand and stronger regional lending momentum support credit expansion through 2026.

However, continued net interest margin (NIM) compression is likely to keep a lid on earnings growth despite attractive valuations and robust asset quality.

BIMB Research maintained a “positive” stance on the sector, with Malaysia Building Society Bhd (MBSB) as its preferred “buy” call with a fair value of 65 sen.

“Most banks delivered first-half 2026 earnings in line with expectations, except for MBSB, whose results were weighed down by margin compression arising from the transition away from Rule 78 financing recognition,” it said.

The research house said sector valuations “remain appealing”, trading at approximately one times 2027 price-to-book value (P/BV), while offering attractive dividend yields of 6.1%, which should continue to provide support for banking sector share prices.

It also expects asset quality to remain resilient, saying “the banking system’s gross impaired loan ratio to remain broadly stable, with only a marginal increase at most”.

“Banks also continue to retain the precautionary provisions established in 2025 to cushion against potential risks stemming from US tariff measures,” BIMB Research said.

“These buffers provide additional flexibility and could be redeployed, if necessary, to absorb any credit deterioration arising from geopolitical uncertainties, including the United States-Iran conflict,” it added.

Together with ongoing loan recovery efforts, banks may also have room to further enhance their management overlays in response to prolonged tensions in the Middle East.

“Consequently, we expect sector-wide provisioning requirements to remain manageable, reducing the likelihood of any material or unexpected spike in credit costs,” the research house said.

The lending outlook is supported by stronger economic prospects, with Malaysia recording gross domestic product (GDP) growth of 5.7% in 1H26, exceeding expectations.

BIMB Research said this had prompted its economist to raise the 2026 GDP growth forecast to 5.5% from 4.9%.

“Growth is expected to be underpinned by the ongoing artificial intelligence-driven technology upcycle, which continues to support electrical and electronics manufacturing and exports, while favourable energy market dynamics provide tailwinds for petroleum and other energy-related exports,” it said.

Loan growth accelerated to 6.3% year-on-year (y-o-y) in the second quarter of financial year 2026, driven by stronger domestic and regional lending momentum, particularly in Indonesia and Singapore.

Still, BIMB Research lowered its 2026 banking earnings growth forecast to 3% from 4.5% previously, reflecting a steeper projected net interest margin compression of seven basis points from 2025, compared with its earlier assumption of a one-basis poin decline.

The change lowered its forecast for net interest income growth to 1.8% y-o-y from 3.2% previously, while 2026 non-interest income (NOII) growth expectations were also reduced amid “persistent headwinds in treasury and markets-related income”.

Sector core earnings, however, rose 6.0% quarter-on-quarter in 2Q26, supported by higher NOII, lower loan-loss provisions and disciplined cost management.

Despite the near-term earnings moderation, BIMB Research marginally raised its 2027 earnings growth projection to 7.3% y-o-y from 7% previously.

One analyst told StarBiz the banking sector would be on a relatively firm footing in the second half, supported by healthy loan demand and a resilient domestic economy.

“While margin compression remains a near-term challenge, we expect banks to manage the pressure through stronger fee income, cost discipline and prudent credit management,” he said.

“Improving economic activity should continue to translate into loan growth, but the key focus will be on how quickly funding costs normalise and whether banks can sustain asset quality,” he added.