Banks set to navigate challenging climate
PETALING JAYA: Malaysia's banking sector is expected to navigate the challenging global trade climate with resilience, underpinned by strong buffers, prudent underwriting, and a stable domestic economic backdrop.
Loan growth is likely to continue at a steady pace, supported by household demand and strategic expansion into small and medium enterprise (SME) lending, even as geopolitical uncertainties weigh on sentiment.
In its recent report, Fitch Ratings said: 'Malaysia's banking sector will be able to weather the higher trade tariff environment relatively well, helped by banks' adequate loss buffers and underwriting standards.'
The credit rating agency's base case assumes no major escalation in tariff rates, though it cautioned that persistent uncertainty due to rapidly evolving trade policies is likely to dampen loan demand and put moderate pressure on asset quality.
The household sector – accounting for roughly 60% of banks' loan books – is projected to remain a key pillar of stability.
'We expect the household sector to stay resilient due to steady job conditions and debt servicing capacities despite its high, albeit stable, leverage,' Fitch noted.
Malaysia's household debt-to-GDP ratio stood at 84% at the end of 2024, unchanged from a year earlier, with a median debt service ratio of 34% and steady employment conditions helping to contain risks.
Many leading banks are targeting higher-yielding SME loans and overseas expansion to lift profitability.
While these areas carry higher credit risk, Fitch believes 'most banks will be able to manage the risks well, backed by their consistent credit standards.'
Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd are the most regionally diversified, with overseas loans making up 36% to 39% of their total lending.
After years of portfolio restructuring in markets such as Indonesia and Thailand, these international exposures have shifted from a drag to a source of improved asset quality and earnings.
The operating environment score for Malaysia's banking system remains at BB+, in line with the sovereign rating of BBB+/Stable, the highest in Asean after Singapore.
Fitch warned that a downgrade in the sovereign rating is likely to bring about a downgrade of banks' variable ratings and issuer default ratings, although the outlook for the sector's ratings is stable.
Market concentration remains high, with the six largest groups – Maybank, Public Bank Bhd (PBB), CIMB, RHB Bank Bhd, Hong Leong Bank Bhd (HLBB) and AMMB Holdings Bhd – controlling about 69% to 72% of loans and deposits as of March 2025.
PBB and HLBB have maintained the most conservative credit standards, with impaired-loan ratios consistently below the system average.
Loan growth is expected in the mid-single digits on a constant currency basis, led by households, SMEs, and corporates.
Fitch observed that 'the risk of loss is not significant, considering the stable employment conditions and steady housing price movements,' despite relatively high loan-to-value ratios on housing loans compared with some regional peers.
While asset quality is projected to remain broadly steady, Fitch expects credit impairments to rise moderately over the next 12 to 18 months as some banks rebuild their loan-loss buffers.
Net interest margin pressure could re-emerge following Bank Negara Malaysia's recent policy rate cut, but the impact on banks' profits is broadly manageable due to their active asset liability management.
A mid-May 2025 reduction in the reserve requirement ratio is set to ease funding pressures, with higher-yielding SME loans and market-related income providing further support to profitability.
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Banks set to navigate challenging climate
The household sector – accounting for roughly 60% of banks' loan books – is projected to remain a key pillar of stability. PETALING JAYA: Malaysia's banking sector is expected to navigate the challenging global trade climate with resilience, underpinned by strong buffers, prudent underwriting, and a stable domestic economic backdrop. Loan growth is likely to continue at a steady pace, supported by household demand and strategic expansion into small and medium enterprise (SME) lending, even as geopolitical uncertainties weigh on sentiment. In its recent report, Fitch Ratings said: 'Malaysia's banking sector will be able to weather the higher trade tariff environment relatively well, helped by banks' adequate loss buffers and underwriting standards.' The credit rating agency's base case assumes no major escalation in tariff rates, though it cautioned that persistent uncertainty due to rapidly evolving trade policies is likely to dampen loan demand and put moderate pressure on asset quality. The household sector – accounting for roughly 60% of banks' loan books – is projected to remain a key pillar of stability. 'We expect the household sector to stay resilient due to steady job conditions and debt servicing capacities despite its high, albeit stable, leverage,' Fitch noted. Malaysia's household debt-to-GDP ratio stood at 84% at the end of 2024, unchanged from a year earlier, with a median debt service ratio of 34% and steady employment conditions helping to contain risks. Many leading banks are targeting higher-yielding SME loans and overseas expansion to lift profitability. While these areas carry higher credit risk, Fitch believes 'most banks will be able to manage the risks well, backed by their consistent credit standards.' Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd are the most regionally diversified, with overseas loans making up 36% to 39% of their total lending. After years of portfolio restructuring in markets such as Indonesia and Thailand, these international exposures have shifted from a drag to a source of improved asset quality and earnings. The operating environment score for Malaysia's banking system remains at BB+, in line with the sovereign rating of BBB+/Stable, the highest in Asean after Singapore. Fitch warned that a downgrade in the sovereign rating is likely to bring about a downgrade of banks' variable ratings and issuer default ratings, although the outlook for the sector's ratings is stable. Market concentration remains high, with the six largest groups – Maybank, Public Bank Bhd (PBB), CIMB, RHB Bank Bhd, Hong Leong Bank Bhd (HLBB) and AMMB Holdings Bhd – controlling about 69% to 72% of loans and deposits as of March 2025. PBB and HLBB have maintained the most conservative credit standards, with impaired-loan ratios consistently below the system average. Loan growth is expected in the mid-single digits on a constant currency basis, led by households, SMEs, and corporates. Fitch observed that 'the risk of loss is not significant, considering the stable employment conditions and steady housing price movements,' despite relatively high loan-to-value ratios on housing loans compared with some regional peers. While asset quality is projected to remain broadly steady, Fitch expects credit impairments to rise moderately over the next 12 to 18 months as some banks rebuild their loan-loss buffers. Net interest margin pressure could re-emerge following Bank Negara Malaysia's recent policy rate cut, but the impact on banks' profits is broadly manageable due to their active asset liability management. A mid-May 2025 reduction in the reserve requirement ratio is set to ease funding pressures, with higher-yielding SME loans and market-related income providing further support to profitability.
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Fitch Sees Stable Outlook For Malaysia's Top Banks Despite External Risks
Fitch Ratings expects the credit profiles of Malaysia's six largest banks to remain steady over the next 12 months, even as global trade tensions pose growing external risks. The rating agency cited Malaysia's diversified economy, adequate loan-loss buffers, and consistent underwriting standards as key factors supporting the sector's resilience and keeping impairment risks manageable. Household loans, which account for nearly 60% of total system lending, are expected to stay resilient, supported by steady employment conditions and sustained debt-servicing capacity, despite high but stable leverage levels. Fitch noted that the small and medium-sized enterprise (SME) segment — a growth driver for many banks — may be more vulnerable to softer economic conditions in a higher trade tariff environment. However, it does not foresee a significant rise in impairment rates that would undermine overall bank performance. The agency also expects moderate pressure on asset yields following Bank Negara Malaysia's recent policy rate cut aimed at cushioning the economy from external headwinds. Credit costs could rise as banks rebuild loan-loss reserves, but these pressures should be offset by higher market-related income amid sustained financial market volatility, as well as the 100-basis-point cut in the statutory reserve requirement in May 2025. Additionally, the growing share of higher-yield SME loans should help support margins. 'We expect risk-adjusted returns for Malaysian banks to remain broadly steady over the next year,' Fitch said.
