HLBANK: Malaysian Banking Sector Poised for Robust Growth on NIM Expansion and Capital Returns

The Malaysian banking sector is set to enter 2026 on a fundamentally strong footing, with analysts maintaining an “Overweight” recommendation on the industry. The optimistic outlook is primarily driven by expectations of net interest margin (NIM) expansion and strategic capital management initiatives, which are anticipated to lead to a significant rebound in profitability.

Performance Review and Key Drivers

Analysts anticipate brighter Net Interest Income (NII) prospects for the sector this year. This is supported by a healthy non-household loan pipeline and the continued repricing of deposits, a positive effect filtering through from last year’s Overnight Policy Rate (OPR) cut. Despite potential further easing in regional benchmark rates, the impact is not expected to be as severe as in 2025, with much of the asset yield impact already absorbed. Interestingly, a muted rise in the 3-month KLIBOR in 4Q25 suggests less intense seasonal deposit competition, which is further contributing positively to NIM. Overall, an improvement in 1H26 NIM compared to 2H25 is projected, with momentum potentially continuing into the second half of 2026 if banks maintain disciplined funding strategies.

Another key theme for the sector is enhanced dividend yields and capital management. The upcoming adoption of Bank Negara Malaysia’s new capital framework for credit risk, effective mid-2026, is expected to unlock excess capital for several banks, allowing for increased shareholder returns. Public Bank and Hong Leong Bank are identified as potential beneficiaries. Furthermore, CIMB has already announced a MYR2bn capital return plan for 2025-2027, which is estimated to significantly boost its FY26F-27F Return on Equity (ROE) by 16-24 basis points.

Asset Quality and Future Outlook

Asset quality is expected to remain stable, with analysts expressing no major concerns. While certain portfolios like mortgages, auto loans, and SMEs will be closely monitored, overall credit costs are anticipated to stabilize at 20 basis points, reflecting controlled asset quality and the retention of decent provision and overlay reserves.

However, a potential moderating factor is the growth in non-interest income (non-II), particularly from investment gains, which analysts forecast could be softer in the coming year. This moderation is specifically due to the in-house forecast for the 10-year government bond yield.

Despite this, the sector is projected to see its profit after tax and minority interests (PATMI) growth rebound significantly to +5% year-on-year in 2026, a marked increase from the estimated +2% in 2025. This strong rebound will be underpinned by sustained loan growth, coupled with easing NIM pressure leading to stronger NII growth, and stabilized credit costs.