20-07-2025
Banks on strong footing
PETALING JAYA: The Malaysian banking sector, a bellwether of the economy, faces indirect pressures from mounting global uncertainties induced by the harsh US tariff policies and rising geopolitical tensions.
These headwinds could impact supply chains and lower demand for some industries, potentially resulting in elevated credit risks for banks.
Despite these challenges, the sector, according to banking experts, is still on a strong footing, thanks to its strong capital position, stringent risk governance and the country's proactive move of forming trade partnerships and broadening its export markets.
All these bodes well for the banking sector going forward.
OCBC Bank (M) Bhd chief risk officer Priya Ranjan Sharma told StarBiz the banking sector continues to face headwinds this year, driven by persistent geopolitical tensions and the possibility of 25% reciprocal tariffs imposed by the United States. The tariffs would take effect on Aug 1.
'These developments, particularly the strained trade relations between China, the United States, and its regional partners, pose risks to supply chain stability and investor sentiment.
Given the importance of United States as a trading partner to Malaysia, the tariffs may impact export volumes and revenues, placing pressure on the broader economy.
'Malaysia's strategic role in the China+1 supply chain diversification offers some resilience.
'The government is actively working to diversify export markets and stimulate domestic investment and consumption to cushion the impact.
'Structural reforms and increased public infrastructure spending are expected to support growth, though at a more moderate pace, with gross domestic product projections revised downwards,' he said.
Despite these challenges, Ranjan Sharma said Malaysia's banking sector remains fundamentally sound.
Banks are well-capitalised and maintain diversified portfolios which helps limit systemic risk and ensures continued financial stability in the face of external pressures, he noted.
UCSI University Malaysia associate professor of finance and Centre for Market Education research fellow Liew Chee Yoong
UCSI University Malaysia associate professor of finance and Centre for Market Education research fellow Liew Chee Yoong said the local banking sector is expected to face moderate indirect pressures this year from elevated US tariffs and geopolitical tensions, though systemic resilience should prevent severe disruption.
He said while recent US reciprocal tariffs (targeting solar cells and semiconductors) have limited direct impact on core banking activities, secondary effects could materialise through supply chain friction and reduced business confidence.
Liew said export-oriented industries, particularly electronics and commodities may experience weakened demand, potentially elevating credit risks for banks' corporate portfolios.
'Concurrently, escalating South China Sea tensions and US-China tech decoupling could disrupt regional trade flows and investment.
'Nevertheless, the banking sector's robust capital adequacy level with common equity tier-1 capital ratios of about 15%, stringent risk governance, and Malaysia's diversified trade partnerships should mitigate material deterioration.
'Banks remain well-positioned to absorb shocks, though vigilance toward trade finance non-performing loans and working capital stress in vulnerable sectors is warranted,' he said.
In terms of loan growth for this year, Ranjan Sharma expects loan growth to remain resilient.
Growth drivers such as ongoing infrastructure developments and strategic investment initiatives like the Johor-Singapore Special Economic Zone could help support demand, he said.
On the consumer side, he said loan growth is projected to stay steady, underpinned by stable employment conditions and consistent income levels.
Liew said loan growth is projected to moderate to between 4% and 5% this year, down from 5.5% last year, with business loans emerging as the primary engine of growth.
He said net interest margins (NIMs) are anticipated to stabilise or edge marginally higher by 0.5 basis points (bps) this year after compression last year, contingent on deposit competition easing and monetary policy adjustments.
'However, a potential 25bps overnight policy rate (OPR) cut in the later part of the year could reintroduce NIM volatility, initially compressing yields on variable-rate loans before lower funding costs provide offsetting relief.
'Strategic repricing of loans and proactive liquidity management will be critical for banks to defend margins.
'Overall, NIM trends will remain range-bound, lacking significant upward momentum but avoiding steep deterioration,' Liew noted.
A bank's NIM is a key profitability indicator that reflects the difference between the interest income a bank earns from loans and the interest it pays on deposits.
A wider NIM indicates higher earnings for banks.
Ranjan Sharma said NIM across the banking sector is expected to experience some compression following the recent cut in the OPR.
He said additional pressure may arise from heightened competition for deposits as institutions seek to maintain funding stability.
Furthermore, slower global trade, driven by escalating tariffs and geopolitical tensions, could weigh on sector performance, he noted. In particular, he said higher US reciprocal tariffs may dampen loan growth in export-oriented industries, adding to the cautious outlook.
Bank Negara lowered the OPR by 25bps to 2.75% on July 9, describing the decision as a pre-emptive move to secure economic growth.
On profitability, Liew said: 'The Malaysian banking sector's profitability in 2025 is projected to remain resilient, with return on equity stabilising at 10% to 11%, marginally below 2024 levels but reflective of disciplined adaptation to external headwinds.
'This stability will be anchored by three synergistic pillars: diversified revenue streams, operational efficiency, and prudent risk management.
'Non-interest income particularly from wealth management (amplified by the EPF Account 3 rollout), digital transaction fees, and capital market activities will counterbalance potential NIM compression.'
RAM Rating Services Bhd senior vice-president of financial institution ratings Wong Yin Ching
RAM Rating Services Bhd senior vice-president of financial institution ratings Wong Yin Ching said the OPR rate cut will transmit fairly quickly into the real economy, easing household and business finance expenditures. This may limit the rise of impaired loans within marginal segments in the near term, she said.
'That said, asset quality remains sound and is not a major concern, with the banking system's gross impaired loan ratio expected to come in at 1.50% as of the end of this year (end-May: 1.45%).
'Considering uncertainties on the horizon, the banking system will likely experience moderating loan growth this year relative to last year. The five months annualised loan growth for this year stood at 3.5%, compared with 5.5% last year.
'Banks are likely to see only a mild impact on their NIM from the OPR cut. The average NIM of eight selected local banks clocked in at 2.06% and 2.04% in last year and 1Q25, respectively,' Wong said.
Based on RAM's past discussions with banks, she said most indicated that a 25bps cut typically results in a full-year NIM contraction of about 2bps to 3bps.
Wong said the earlier reduction in the Statutory Reserve Requirement from 2% to 1% in May is expected to offer a slight cushion to margins by releasing some funds for redeployment into higher-yielding assets.
