PETALING JAYA: The local banking sector is expected to remain resilient in the second half of financial year 2026 (2H26) despite a more challenging operating environment, with higher-for-longer global interest rates, market volatility and tighter domestic funding conditions likely to keep pressure on margins, says CIMB Research.
The research house said banks entered 2H26 from a position of strength, with defensive earnings, resilient asset quality and strong capital, liquidity and loan-loss buffers supporting the sector.
In the second quarter of financial year 2026 (2Q26), the sector’s core net profit rose 4.1% year-on-year (y-o-y) and 5.6% quarter-on-quarter (q-o-q) to RM9.4bil, bringing 1H26 core net profit to RM18.3bil, up 1.6% y-o-y.
It noted that the recovery was broad-based, with most banks recording positive y-o-y earnings growth.
This came following a recovery in non-interest income, sustained loan growth and continued cost discipline, which more than offset ongoing pressure on net interest margins (NIMs).
In addition, CIMB Research said non-interest income recovered strongly in the quarter, rising 13.7% q-o-q, supported by recurring fee income from wealth management, bancassurance and client-related activities.
Fund-based income remained relatively stable, growing 1.2% y-o-y and 0.4% q-o-q, despite a further 4.5-basis-point q-o-q decline in sector NIMs.
However, the research house expects margin pressure to persist into 2H26, amid elevated funding costs and deposit competition, while market volatility could also weigh on treasury and trading income.
Despite these headwinds, it expects asset quality to remain largely intact.
CIMB Research said the key test for 2H26 would be whether banks can translate healthy balance-sheet growth into stronger returns without compromising funding discipline or asset quality.
The recovery in return on equity is anticipated to be gradual, while capital optimisation could provide an additional boost to shareholder returns, with strong capital buffers and the implementation of Basel 3.1 creating scope for higher payout ratios and special dividends at some banks.
It said Public Bank Bhd
, Hong Leong Bank Bhd and Alliance Bank Malaysia Bhd stand out with greater headroom to raise payouts or declare special dividends under the revised capital adequacy framework.
Furthermore, an analyst with another bank-backed brokerage also noted that the sector delivered a decent 2Q performance.
However, with the risk-reward outlook now more balanced, he kept his “neutral” call on the sector.
The analyst said funding pressures could persist in the 2H26 as higher wholesale deposit rates fuel competition for retail deposits, while strong loan pipelines and elevated loan-to-deposit ratios add to the pressure.
The analyst also cautioned that rising bond yields could weigh on non-interest income, while a gradual increase in gross impaired loans and lower…
Read More: Banks expected to remain resilient amid mounting 2H pressures
