RAM Ratings: Banks’ profitability edged up nominally in 1Q 2025 but credit headwinds expected

Published on 06 Jun 2025.

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Malaysian banks’ financial results saw a marginal improvement in 1Q 2025, supported by lighter provisions and stable margins, even as loan growth moderated. The average pre-tax return on assets and return on equity of eight selected local banks clocked in at an annualised 1.38% and 14.1%, respectively (1Q 2024: 1.37% and 13.8%). Amid global tariff uncertainties, banks’ profits are anticipated to come under some pressure in 2025 with potentially slower loan growth and increased provisions. 

The banking system’s loans grew 5.2% y-o-y as at end-March 2025 (2024: 5.5%). Business loan expansion eased while household credit demand largely held up. “We project overall loan growth to slow to 4.0%-4.5% for full-year 2025, tampered by still-evolving trade negotiations and uncertainties that began in April 2025. The recent reduction in the Statutory Reserve Requirement (SRR) to 1% from 2%, is also not envisaged to materially boost loan growth, although it buoyed liquidity,” said Wong Yin Ching, RAM’s Senior Vice President of Financial Institution Ratings. 

Net interest margins (NIMs) were mostly stable in 1Q 2025 compared to the previous corresponding quarter, with the eight banks reporting an average NIM of 2.04%. The lower SRR will have a mild positive impact but overall margins are expected to stay largely unchanged in 2025. Banks’ NIMs will be predominantly influenced by the direction of the overnight policy rate (OPR). At this juncture, RAM expects the OPR to remain stable for the rest of the year unless economic growth slows significantly, which is not our current base case.

On the asset quality front, the system’s gross impaired loan (GIL) ratio stood at a historical low of 1.42% as at end-March 2025 (end-December 2024: 1.44%; end-December 2023: 1.65%). In addition, the eight banks’ average credit cost ratio was a subdued 9 bps (1Q 2024: 22 bps; 2024: 18 bps), primarily due to a sizeable management overlay reversal at a local bank. While domestic banking groups have indicated that their direct loan exposures to US tariffs are limited, the secondary impact of global trade disruptions on the economy remains uncertain. Overall, RAM projects the system’s GIL and credit cost ratios to trend higher to 1.5% and 25 bps, respectively, for 2025. However, these are considered manageable levels. Banks’ loan loss coverage and capital ratios also remain robust, providing an ample loss absorption buffer.

RAM’s Banking Quarterly Roundup 1Q 2025 can be downloaded at www.ram.com.my.

 

Analytical contact
Wong Yin Ching, CFA
(603) 2708 8280
yinching@ram.com.my

Media contact
Sakinah Ariffin
(603) 2708 8212
sakinah@ram.com.my

 

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