Malaysian banking outlook stable; increased external volatility but credit fundamentals resilient

Published on 25 Mar 2026.

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RAM Ratings has maintained its stable outlook for the Malaysian banking sector for 2026. In its latest commentary, Banking Insight 2026 – Steady Against the Tide, the agency noted the sector’s strong capital buffers, generally stable funding and liquidity positions, and still benign asset quality indicators, even as external volatility and intensifying competition could test operating conditions.

“While heightened military tensions in the Middle East, global trade disruptions and US trade protectionist measures could elevate market volatility and pose downside risks to growth, we expect banks’ credit profiles to remain resilient, underpinned by strong fundamentals and prudent risk management,” said Wong Yin Ching, Senior Vice President, Financial Institution Ratings at RAM.

Key expectations:

• Loan growth projected at 4%-5% in 2026 (2025: 4.8%). Islamic financing continues to remain a structural driver of credit growth, having contributed an average of 69% of system loan growth over the past five years.
   
• Capital buffers to remain strong despite higher dividend payouts, which lowered common equity tier-1 capital ratio to 14.2% as at end-December 2025 (end-December 2024: 15.1%).
   
• Gross impaired loan (GIL) ratio to hold steady at 1.4% this year, with net credit costs expected to increase modestly to around 20 bps in 2026.
   
• Funding and liquidity profiles remain sound, supported by sustained deposit growth momentum and continued capital market access, providing sufficient buffer to mitigate against any potential funding stress.
   
• Earnings improvement expected to moderate in 2026, with a mild expansion in net interest margin as deposits fully reprice down following the 25 bp overnight policy rate cut in July last year.

Resilient domestic demand, a healthy labour market and accommodative interest rates underpin RAM’s GDP growth expectation of 4.0%-5.0% for 2026 (2025: 5.2%). This baseline should continue to support credit demand and borrowers’ debt-servicing capacity, although the balance of risks remains tilted to the downside given external-trade uncertainty and episodic market volatility. Household lending – which accounts for 60% of system loans – should remain the primary loan growth driver, supported by ongoing residential mortgage demand, although auto financing growth is likely to slow in line with RAM’s expectations of slower new vehicle sales this year. “Business financing demand could be more volatile, given sensitivity to external trade conditions and supply-chain disruptions but should benefit from the execution of approved investments and continued policy-led initiatives under national master plans,” Wong adds.

Banks have gradually increased dividend payouts as they return excess capital accumulated during the pandemic to shareholders. “We expect banks to continue prioritising capital efficiency to support shareholder returns while maintaining adequate buffers against downside risks,” said Sophia Lee, Senior Vice President, Financial Institution Ratings at RAM. In our view, the sector’s capital position remains a key rating strength, although buffers are thinner following higher distributions. Most banks consider their capital positions to be sufficiently strong to meet near-term Basel III reform requirements, with some anticipating capital ratios to improve post-implementation.

System asset quality remained robust in 2025, with GIL ratio receding to a multi-year low of 1.37% as at year-end. “We expect credit pressures to remain manageable although uncertainties could increase borrower stress in certain portfolios and push net credit costs up if the external challenges persist,” said Lee. Small and medium enterprises, restructured exposures and unsecured retail portfolios would be key areas to watch out for.

Digital banks - a niche subsegment within the broader banking system - are now fully operational, although product breadth is still fairly limited. “Recent leadership changes at several digital banks may indicate strategic recalibration as operations transition beyond the start-up phase, although we do not expect digital banks to pose a material near-term competitive threat to incumbents given the RM3 bil cap imposed by Bank Negara Malaysia during the first three to five years of operations,” said Wong. Over the medium term, competitive impact will depend on the pace of customer acquisition, product offerings, the eventual trajectory of funding costs and the incumbents’ own digitalisation adoption.

In Islamic finance, the Capital Market Masterplan 2026-2030 - anchored by Maqasid al-Shariah as a differentiator - could usher in a new growth phase, with execution hinging on sustainable and transition finance depth, scalable Shariah-compliant structures, and stronger cross-border participation.

RAM’s Banking Insight is available for download at www.ram.com.my.

 

Analytical contacts
Loh Kit Yoong
(603) 2708 8285
kityoong@ram.com.my

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

Sophia Lee
(603) 2708 8211
sophia@ram.com.my

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

 

About RAM Rating Services Berhad (RAM Ratings)

Established in 1990, RAM Ratings is a leading credit rating agency registered under the Securities Commission’s Guidelines on Credit Rating Agencies. In addition to the provision of credit ratings for corporate bonds and sukuk and their issuers, RAM Ratings also provides research and publications on Islamic finance, fixed income and macro-economic and industry analysis as well as data analytics relating to credit risk, counterparty assessments and other related domains. 

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