Kuala lumpur: Malaysian banks experienced a slight easing in profitability during the first quarter of 2026, influenced by higher provisions despite an increase in loan growth, as reported by RAM Rating Services Bhd.
According to BERNAMA News Agency, the rating agency revealed that eight selected local banks saw their average pre-tax return on assets and return on equity moderate to an annualised 1.33 percent and 13.5 percent, respectively, compared to 1.38 percent and 14.1 percent in the first quarter of 2025. The report highlighted that banks' earnings growth might continue to face pressure in 2026 due to lingering geopolitical risks, even with positive developments in the West Asia military conflict.
As per RAM Ratings, the banking system's loan growth accelerated to 5.4 percent year-on-year by the end of March 2026, up from 4.8 percent in 2025. This growth was driven by stronger business financing demands, whereas household credit showed moderation. The agency projects overall loan growth to be between 4.0 percent and 5.0 percent for the full year 2026, contingent on the developments in West Asia and their impact on domestic macroeconomic conditions.
It was noted that net interest margins (NIMs) remained steady year-on-year in the first quarter of 2026, with the eight local banks recording an average NIM of 2.04 percent, identical to the first quarter of 2025. Despite margin compression following a 25-basis point overnight policy rate cut in July 2025, margins have slightly improved as most deposits have repriced lower. RAM expects the overnight policy rate to remain stable for the remainder of the year.
On the asset quality front, RAM Ratings indicated that the gross impaired loan ratio of the system remained low at 1.40 percent as of the end of March 2026, compared to 1.37 percent at the end of December 2025 and 1.44 percent at the end of December 2024. This was supported by banks' proactive credit management. The average credit cost ratio for the eight banks rose to 19 basis points, up from 9 basis points in the first quarter of 2025, primarily due to the absence of a sizeable overlay reversal by one bank seen in the previous corresponding period and additional overlays set aside by several banks during the quarter. For the full year 2026, credit costs are expected to increase year-on-year to around 15 basis points, compared to 11 basis points in 2025, but remain manageable.
RAM Ratings also highlighted that despite macroeconomic challenges, banks' balance sheets remain resilient. The system's capitalisation stayed robust with a common equity tier-1 capital ratio of 14.2 percent as of the end of March 2026, providing substantial loss absorption buffers. Additionally, deposit growth improved to 4.8 percent year-on-year, up from 4.5 percent in 2025, fueled by banks' continued focus on current and savings account balances to protect margins.