RAM Ratings: Banks’ profitability eased in 1Q 2026 amid higher provisions; credit fundamentals remain sound

Published on 15 Jun 2026.

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Malaysian banks’ 1Q 2026 financial performance softened slightly, weighed down by higher provisions even as loan growth gathered pace. The average pre-tax return on assets and return on equity of eight selected local banks moderated to an annualised 1.33% and 13.5%, respectively (1Q 2025: 1.38% and 14.1%). Banks’ earnings growth could still face some pressure in 2026, as geopolitical risks may linger despite recent positive developments in the Middle East military conflict.

The banking system’s loan growth picked up to 5.4% y-o-y as at end-March 2026 (2025: 4.8%), underpinned by stronger business financing demand while household credit moderated. RAM projects overall loan growth to come in at between 4% and 5% for full-year 2026, depending on developments in the Middle East and their second order effects on domestic macroeconomic conditions.

Net interest margins (NIMs) remained stable y-o-y in 1Q 2026, with eight selected local banks recording an average NIM of 2.04% (1Q 2025: 2.04%). “Margins had compressed in the second half of 2025 following a 25-bp overnight policy rate (OPR) cut in July but have since ticked up as most deposits have repriced lower. At this juncture, RAM expects the OPR to remain stable for the rest of the year,” said Wong Yin Ching, RAM’s Senior Vice President of Financial Institution Ratings.

On the asset quality front, the system’s gross impaired loan (GIL) ratio remained low at 1.40% as at end-March 2026 (end-December 2025: 1.37%; end-December 2024: 1.44%), supported by banks’ proactive credit management. The eight banks’ average credit cost ratio rose to 19 bps (1Q 2025: 9 bps), largely reflecting the absence of a sizeable overlay reversal by one bank seen in the previous corresponding period and additional overlays set aside by several banks during the quarter. For full year 2026, credit costs are anticipated to come in higher y-o-y at around 15 bps (2025: 11 bps) but remain manageable.

Despite macroeconomic headwinds, banks’ balance sheets remain resilient. The system’s capitalisation stayed robust, with a common equity tier-1 capital ratio of 14.2% as at end-March 2026, providing ample loss absorption buffers. Deposit growth improved to 4.8% y-o-y (2025: 4.5%), driven by banks’ continued focus on current and savings account balances to safeguard margins.

RAM’s Banking Quarterly Roundup 1Q 2026 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

 

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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