KUALA LUMPUR (May 15): Malaysian banks can absorb potential credit risks from US tariffs on borrowers, with a “hefty” RM4.86 billion management overlay — a key buffer used by banks to guard against future loan losses — serving as a shield, according to CGS International.

It said banks had a large RM4.86 billion management overlay at the end of December 2024. This amount — 23.4% of total bad loans — could help absorb a 46.8% rise in bad loans, pushing the impaired loan ratio from 1.11% to 1.63%, assuming banks cover half of the new bad loans with provisions.

“[The] management overlay can act as a buffer against any increase in credit costs arising from the negative impact of US tariffs on borrowers,” CGS International said in a research note on Thursday.

CGS International said this buffer helps banks absorb shocks without immediate impact on their profits or stability. If the expected losses don’t materialise, banks can even release part of the overlay back into earnings, boosting profits in the process.

Based on its simulation after excluding CIMB Group Holdings Bhd (KL:CIMB), CGS International estimates that every 10% write-back will increase FY2025 earnings by 1.2%.

This flexible approach allows banks to remain resilient, while also positioning themselves to take advantage of improving conditions.

CGS International maintains an “overweight” stance on banks, citing write-backs in management overlay, and an uptrend in dividend payout ratios across most banks. It sees the sector’s 5.7% dividend yield in 2025 as attractive.

CGS International’s top bank pick is Hong Leong Bank (KL:HLBANK), with a “buy” rating and a target price of RM31.40. The bank stands out for its low bad loan ratio, strong loan growth, and rising earnings from its stake in Bank of Chengdu.

“The downside risks to our call are material deterioration in loan growth and asset quality,” the house cautioned.