Banks' impaired loans seen rising in 2025 on US tariff risk

New Straits Times

2 days ago

KUALA LUMPUR: Local banks could see gross impaired loans (GIL) rise by 5.6 per cent by year-end and seven per cent in 2026, reversing an eight per cent decline in 2024, due to risks stemming from higher United States tariffs on Malaysian exports.
CGS said the tariff hikes may reduce business volumes and revenue for companies that rely heavily on the US market, ultimately weakening their debt-servicing ability and increasing credit risks for banks.
Despite this, the research house has maintained its "Overweight" stance on the banking sector, citing manageable credit risks and potential upsides from write-backs in management overlays.
"We believe the higher tariffs imposed by the US on Malaysian exports could reduce business volumes and revenue of local companies that are reliant on the US market" it said in a research note.
CGS said a stress test showed that a 10 per cent rise in GIL could reduce sector-wide net profits by 3.2 per cent in financial year 2026 (FY26).
Public Bank Bhd and Hong Leong Bank Bhd were found to be the least affected, with estimated earnings drops of only 1.3 per cent and one per cent respectively. Affin Bank Bhd, meanwhile, could see profits fall by as much as 10.9 per cent.
Even in a worst-case stress scenario, where GIL jumps 30 per cent in FY26, the sector's total net profit would likely decline by just 9.6 per cent, it said.
CGS said banks were well-positioned to absorb credit shocks, with RM4.36 billion in management overlays as at end-March 2025.
These overlays could cover up to 37.9 per cent of any new impaired loans, assuming a 50 per cent provisioning need. The highest coverage was at Public Bank at 91.8 per cent, while the lowest was at Bank Islam Malaysia Bhd at 10.6 per cent.
"We do not expect significant increases of more than 10 per cent annually in banks' GILs in FY25 to FY26 due to healthy financial ratios, tight regulatory oversight by Bank Negara Malaysia and proactive borrower assistance initiatives," the firm said.
CGS named Public Bank and Hong Leong as defensive picks in a high-risk environment. It also maintained "Add" ratings on CIMB Group Holdings Bhd, Hong Leong and Public Bank, with target prices of RM9.10, RM30.70 and RM5.77 respectively.
Potential downside risks include weaker-than-expected economic growth, persistent inflationary pressure and stiff deposit competition.