Malaysia banks signal caution despite resilient Q1 results

[KUALA LUMPUR] Malaysia’s banking sector delivered another quarter of resilient earnings and improving loan growth, but lenders and analysts sounded a cautious tone.

They suggested that the industry’s biggest challenge lies in sustaining credit demand amid a murky global outlook.

The sector entered 2026 facing a barrage of external risks, from shifting US tariff policies and escalating geopolitical tensions to rising energy prices stemming from the Middle East conflict.

Despite these headwinds, most banks reported solid first-quarter results, supported by steady lending growth, stable asset quality and resilient consumer demand.

Six of the 10 Bursa Malaysia-listed banks recorded growth in revenue and profit in the first quarter.

However, Maybank, Islamic bank MBSB, RHB Bank and CIMB reported lower revenue than in the year before. Maybank posted the steepest decline in revenue, booking a nearly 11.6 per cent year-on-year fall to RM14.9 billion (S$4.8 billion).

On the profitability front, MBSB, Maybank, Bank Islam and CIMB reported lower earnings, with MBSB’s net profit plunging 64.4 per cent to RM30.1 million. RHB was among the notable exceptions, posting a 14.2 per cent growth in net profit to RM856.8 million on the back of a 2.7 per cent decline in revenue to RM4.3 billion.

Growing sense of caution

While earnings were mixed, analysts described the results as having met expectations, but noted a growing sense of caution reflected in bank management commentary.

Loan growth in the industry accelerated to 5.6 per cent in April from 5.4 per cent in March, supported by both business and household lending.

Business loan growth rose to 6.3 per cent from 5.8 per cent, while household loan growth remained stable at 5.5 per cent.

Asset quality also remained healthy. The industry’s gross impaired loan (GIL) ratio held steady at 1.4 per cent, while the net impaired loan ratio improved to 0.9 per cent from 1 per cent previously, going by data from the central bank.

These figures suggest that Malaysian households and businesses have managed rising costs and external uncertainties better than many had expected.

CGS International analyst Wilson Ng said the banking sector’s asset quality remained resilient despite concerns that higher oil prices could eventually weigh on borrowers.

“In view of the elevated oil price, we do not totally discount the possibility of a deterioration in banks’ asset quality in 2026. Hence, we project a slightly higher GIL ratio of between 1.4 per cent and 1.5 per cent by end-2026,” he said.

He noted that several banks have offered repayment assistance programmes to borrowers affected by rising costs, but acceptance rates are staying below 10 per cent.

“On a positive note, the acceptance rate for these is still low, according to the banks, reflecting most businesses’ still-healthy financial positions that should enable them to weather the elevated oil prices,” he said.

The introduction of Bank Negara Malaysia’s RM5 billion SME Stabilisation Relief Facility in April is expected to provide an additional buffer for small and medium-sized enterprises (SMEs), cushioning them against a significant deterioration in credit quality.

Early signs

Despite the reassuring asset-quality indicators, analysts are becoming increasingly focused on the outlook for lending activity.

Several research firms noted signs that businesses are becoming more cautious, particularly in relation to expansion and capital expenditure plans.

Hong Leong Investment Bank Research observed that the corporate segment had begun to show signs of moderation, with application growth flattening and approval growth slowing significantly.

“The drop in the aggregate approval rate flags a potential credit tightening on the horizon,” said Hong Leong in a recent report.

MBSB Research analyst Samuel Woo also highlighted a slowdown in SME lending momentum, noting that loan growth among smaller businesses had eased sharply in April.

He noted that the rising cost pressures and tighter underwriting standards have resulted in several banks having guided for weaker loan growth this year.

“Banking statistics suggest lending activity has staged a strong recovery in recent months. The key question is whether that momentum can be sustained,” he added.

Although overall loan approvals rose 14.6 per cent year on year in April, approvals for working capital financing fell 2.2 per cent from the year before, reversing the sharp increase recorded in March.

Overall banking loan approvals surged 14.6 per cent year on year in April, climbing from the 12.7 per cent growth in March, Hong Leong Investment Bank noted.

This momentum was anchored by an acceleration in business loans, which expanded by 6.3 per cent, an increase from 5.7 per cent the previous month. The growth was driven largely by robust drawdowns for working capital financing.

The decline in working capital approvals may indicate growing caution among businesses, which typically rely on such financing to fund inventories, payroll and expansion activities.

Cautious mood

Analysts said the divergence between healthy outstanding loan growth and softer forward-looking indicators suggests that many businesses remain hesitant about committing to new investments.

Socio-Economic Research Centre executive director Lee Heng Guie earlier said the full effects of global trade tensions and policy uncertainty on investment activity have yet to be fully reflected in economic data.

Speaking at the centre’s first-quarter economic tracker briefing in March, he warned that geopolitical conflicts, tariff shifts and fiscal imbalances continue to weaken the global backdrop.

“Faced with soaring oil prices, volatile energy costs and the ongoing threat of external tariffs, businesses are operating under heightened demand uncertainty, subsequently squeezing corporate profits and forcing many to delay key investment and capital expenditure decisions until the macro picture stabilises,” he said.

The cautious mood is increasingly reflected in banks’ own outlooks.

Maybank management said it is reassessing several key financial targets for 2026, including its return-on-equity target of above 11.8 per cent, and its loan growth target of between 4 and 5 per cent on a constant-currency basis.

The bank said inflationary pressures on its regional markets could affect borrowing demand and economic growth, and that its lending strategy may increasingly focus on selected segments such as hire-purchase financing and mid-market customers.

Updated guidance is expected to be provided when the group reports its second-quarter results.

Kenanga Investment Bank senior equity analyst Clement Chua noted that most banks struck a cautious tone, citing difficulties in fully assessing how geopolitical tensions and elevated fuel prices might impact borrower health. Any meaningful signs of repayment stress are expected to surface only in the second quarter or later.

The research firm said Maybank could be among the lenders that revise their targets later this year, along with Hong Leong Bank, which may fall slightly short of its return-on-equity target.

Affin Bank may also revisit its guidance on investment income and credit costs, while MBSB has yet to reassess its profitability targets, despite already having raised its credit cost assumptions.

At the same time, banks are becoming more selective in how they deploy capital.

Public Bank, which is sticking to its 2026 loan-growth target of between 4 and 5 per cent, is expected to focus on higher-income and higher-value customer segments that are less vulnerable to inflationary pressures.

It is also expected to take a more cautious approach towards SME lending, and to place greater emphasis on forward-looking credit assessments and cash flow strength.

CIMB Group CEO Novan Amirudin earlier said the bank remains cautiously optimistic despite the uncertain external environment.

“While our direct exposure to West Asia remains limited, we continue to assess potential second-order impacts on the broader macroeconomic and operating environment,” he said in the company’s Q1 financial results statement.

Despite growing concerns over the lending outlook, major banking stocks have largely held up this year, supported by resilient earnings, attractive dividend yields and stable asset quality.

At the close of trading on Friday (Jun 5), Maybank had risen 3.4 per cent in the year to date to RM10.80; Public Bank had gained 8.5 per cent to RM4.87, and RHB Bank, by 9.4 per cent to RM8.48. CIMB slipped 8.8 per cent to RM7.39, and Hong Leong Bank fell 4.3 per cent to RM21.32.

Other risks

Analysts also warned that profitability could face pressure from factors beyond credit quality.

Competition for deposits remains intense, while a stronger ringgit could dampen treasury and foreign exchange-related income.

Although net interest margins have shown signs of stabilisation, any renewed competition for funding or lending market share could weigh on earnings.

CGS International said the downside risks to the sector include weaker-than-expected economic growth and higher inflation, which could result in softer loan demand, slower fee income growth and higher loan loss provisions.