Credit costs may stay elevated, limiting profit growth through the second half
KUCHING: Malaysian banks could face higher credit costs in the second half of 2026, potentially limiting earnings growth despite healthy asset quality.
Hong Leong Investment Bank (HLIB) said the recently ended quarter had already shown “pockets” of higher provisions, while there was limited scope for banks to write back existing overlays as loan growth continued.
“As such, credit costs could remain somewhat elevated and lumpy” in the second half of 2026, HLIB said.
It added that earnings could come under further pressure if asset quality deteriorated.
The cautious outlook follows a broadly in-line performance by Malaysian banks in the April-June quarter.
Sector earnings rose 3.9 per cent quarter-on-quarter and 2.9 per cent year-on-year, led by Alliance Bank Malaysia Bhd, while Affin Bank Bhd recorded a decline.
However, net interest margins remained under pressure as competition for deposits and elevated funding costs persisted.
Net interest margin narrowed by two basis points quarter-on-quarter and three basis points year-on-year in the second quarter.
HLIB said stronger loan volumes and non-interest income were providing some cushion, but margin compression and elevated operating costs continued to limit earnings upside.
“Overall, we expect earnings growth to remain modest, with greater differentiation across banks depending on funding strength, fee income generation and cost discipline,” it said.
HLIB maintained its “neutral” stance on the banking sector, with Alliance Bank as its top pick due to its resilient earnings outlook and potential inclusion in the expanded KLCI benchmark.
