Malaysian banks’ asset quality remains resilient despite a slight deterioration amid heightened uncertainties arising from the Middle East conflict and ongoing US trade tensions. The banking system’s gross impaired loan (GIL) ratio edged up to 1.43% as at end-June 2026 (end-December 2025: 1.37%). Nevertheless, overall credit fundamentals remain sound, supported by healthy loss-absorption buffers and banks’ proactive credit risk management. RAM expects the 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. 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,” said Wong Yin Ching, RAM Ratings’ Senior Vice President of Financial Institution Ratings. RAM remains watchful of SMEs and lower-income borrowers, given their greater vulnerability to an economic downturn.
The annualised average credit cost ratio of eight selected local banks stayed largely stable at 18 bps in 2Q 2026 (1Q 2026: 19 bps). Most banks continue to maintain management overlays, with several institutions increasing provisions during the quarter in view of macroeconomic uncertainties. Meanwhile, the average GIL coverage ratio (including regulatory reserves) remained healthy at 139%, well above the pre-pandemic level of 107% as at end-2019.
Banking sector loan growth strengthened to 5.5% y-o-y in 1H 2026 (2025: 4.8%), driven primarily by business loans (6.1%), while household lending moderated to 5.0%. Growth in business financing was largely attributable to corporate borrowers rather than 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% in 1H 2026 (2025: 5.9%; 2024: 6.9%).
Net interest margins contracted by 3 bps q-o-q to 2.01%, 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% in 2Q 2026 (1Q 2026: 1.33%).
The banking system’s common equity tier-1 ratio declined to 13.9% as at end-June 2026 (end-June 2025: 14.7%), primarily due to stronger loan growth, lower securities valuations and higher dividend distributions. Capitalisation, however, remains healthy and provides ample loss-absorption capacity. In addition, banks adopting the Standardised Approach for credit risk are anticipated to benefit from capital savings following the implementation of the Basel reforms on 1 July 2026.
The eight selected banks in RAM’s roundup are AFFIN Bank Berhad, Alliance Bank Malaysia Berhad, AMMB Holdings Berhad, CIMB Group Holdings Berhad, Hong Leong Bank Berhad, Malayan Banking Berhad, Public Bank Berhad and RHB Bank Berhad.
Leave a Reply