This article first appeared in The Edge Malaysia Weekly on April 6, 2026 - April 12, 2026

WITH the conflict in the Middle East now in its sixth week and markets and oil prices still volatile, there is growing scrutiny over whether banks will top up loan loss provisions as mounting cost pressures weigh on certain segments of borrowers, particularly small and medium enterprises (SMEs).

Banking analysts whom The Edge spoke to say it ultimately depends on how long the conflict drags on and where crude oil prices land.

“It’s hard to say just yet [whether banks will need a top-up]. If the conflict is prolonged, maybe two to three months or longer, and crude oil prices stay elevated and supply constraints in energy set in, then maybe that could prompt banks to make some management overlays, resulting in higher expected credit losses (ECL),” David Chong of RHB Research says.

Management overlays are additional loan loss provisions that banks set aside, beyond those derived from ECL models, to account for risks not fully captured by the models. Higher provisions will dampen earnings.

“Most banks have some cushion as they already have [some level of] management overlays in place which can be reallocated to cover any new asset quality issues. This would help mitigate the overall impact on ECL,” Chong points out. It is understood that some of the overlays were carried over from the Covid-19 pandemic period.

Chan Jit Hoong of AmBank Research says, “It remains to be seen whether provisions will go up but [the risks] are leaning towards the downside. If the war is prolonged, for prudence purposes, banks will likely prop up their pre-emptive provisions.”

One way of gauging whether banks have sufficient management overlay cushion is to look at their loan loss coverage (LLC) levels. “There are banks with a comfortable LLC excluding regulatory reserves of over 100% as at end-2025, including Malayan Banking Bhd (KL:MAYBANK), CIMB Group Holdings Bhd (KL:CIMB), Public Bank Bhd (KL:PBBANK) and even Alliance Bank Malaysia Bhd (KL:ABMB). And then, there are others with LLC at 70% to 80%, which just optically suggests that the need to top up overlays could be higher,” an analyst notes.

RHB Bank Bhd’s (KL:RHBBANK) LLC is 76.6% while those of AMMB Holdings Bhd (KL:AMBANK) and Affin Bank Bhd (KL:AFFIN) are at 75.2% and 75.7% respectively. (Including regulatory reserves, their LLC ratios are at 118.2%, 100.3% and 121.3%, respectively.)

CGS International Research notes that Malaysian banks are sitting on RM4.33 billion in management overlays as at the end of last year. (It excluded CIMB as it did not have information on its overlays). These could be “written back to offset additional provisions from any new impaired loans, in our view”, the research house says in a March 19 report.

Of the banks, Maybank had the highest management overlay at RM2.3 billion as at end-2025, followed by Public Bank (RM800 million). On the flip side, Affin Bank and Bank Islam had the lowest, at RM37 million and RM51 million respectively. RHB’s stood at about RM339 million. (See chart.)

“We estimate that every 10% increase in banks’ gross impaired loans (GIL) would trim the sector’s net profit by 3%, with impact ranging from between -1% and -1.2% for Public Bank and Hong Leong Bank Bhd (KL:HLBANK) to -9.9% for Affin Bank,” CGSI says. It adds, however, that the impact on the sector could be cushioned by the hefty RM4.33 billion management overlays as at end-December 2025, which it estimates would be adequate to cover up to a 37.8% increase in banks’ GIL.

At the time of writing last Friday, Brent crude was trading at above US$109 a barrel, up 51.4% from around US$72 before the war began on Feb 28. There is growing concern that higher oil prices would raise operating costs for certain companies, potentially hurting profits, cash flow and the capacity to service loans.

RHB Research’s Chong notes that if the war were to drag on longer and cost pressures keep mounting, the segment that is likely the most vulnerable is SMEs. This is due to lower pricing power, among others.

“Big corporates, on the other hand, post-Covid-19, have been holding up really well in terms of asset quality. As for households, they are [vulnerable] to price inflation but still are probably okay as long as the employment level remains healthy.

“So, it’s really a small cohort of SMEs that bear watching. But this is not something new, really. For a while now, banks have been paying a close watch on SMEs. And that’s why some banks have been keeping the management overlays in their books,” he notes.

The bank with the highest exposure to SMEs is Alliance Bank, with SME lending accounting for about 34% of its total loans versus the sector average of 17%, followed by AMMB’s 25.8%, analysts say.

There are also some concerns among analysts about banks with exposure to Indonesia and Singapore — such as CIMB and Maybank — as they are among the region’s most vulnerable to rising oil prices.

Nevertheless, banks are understood to be monitoring borrowers closely, preferring to proactively engage early on with those in trouble than risk having to impair loans later. As it stands, banks in Malaysia already offer support through loan restructuring and rescheduling (R&R) to viable borrowers.

The Association of Banks in Malaysia, in a press statement on April 1, urged individuals and businesses experiencing financial constraints to reach out early to their respective banks to seek support and appropriate assistance.

Be that as it may, there are growing calls from certain industry and political groups — including the SME Association of Malaysia and Selangor MCA — for banks to introduce a six-month loan moratorium for affected SMEs and micro SMEs.

Maybank Investment Bank Research notes that, in the current environment of high oil prices, sectors that could be negatively affected include airlines (as a result of route disruptions and higher jet fuel costs), shipping (from rising insurance costs) and those that are trade sensitive, such as the export-oriented electronics sector. The B40 (bottom 40%) and M40 (middle 40%) consumer groups too would be affected but this is buffered to some extent by government subsidies and price controls on essential items.

But there are also potential beneficiaries, the research house notes. These include the oil and gas sector (with upstream and service players likely to see improved earnings prospects and capital expenditure cycles if oil prices remain elevated), as well as the petrochemicals sector and port operators (should disruptions to Middle East shipping routes divert transshipment flows to Southeast Asian hubs). Plantation companies too may benefit from higher crude palm oil prices, it adds.

Despite lingering uncertainties, most research houses, including RHB Research, AmBank Research and Maybank IB Research, continue to have a positive investment stance on the banking sector.

“While ongoing geopolitical tensions may introduce volatility to the outlook, for now, the sector offers investors attractive dividend yields that could be further enhanced by capital optimisation initiatives. We favour the larger banks with attractive dividend yields, sound asset quality and/or decent loan provision buffers that can help shield earnings from any potential asset quality issues,” says RHB Research whose top picks are Public Bank, CIMB and Maybank.

AmBank Research highlights that Malaysian banks are well-positioned to navigate macro uncertainty, thanks to strong capital, liquidity and provision buffers. Bank Negara Malaysia’s stress test outcomes — as detailed in its Financial Stability Review 2H2025 publication released last week — provide a measure of reassurance as well.

“In our opinion, Malaysian banks can absorb macro shocks, as reinforced by Bank Negara’s conservative stress tests: even under a severe scenario where the GIL ratio spikes to 8.7% (from 1.4% in 2025), the Common Equity Tier 1 ratio would decrease to just 12%, still well above the 4.5% regulatory floor and internal comfort levels. More importantly, such deterioration is unlikely given available mitigation levers (such as R&R and special funds) and as evidenced during Covid-19, when [the GIL ratio] peaked at only 1.9% in a crippled economy.

“Besides, system LLC including regulatory reserves remains elevated at 127% (versus the 2015 to 2019 average of 114%), underscoring the sector’s ability to weather rainy days,” it says in an April 1 report. The industry’s GIL ratio has deteriorated slightly to 1.42% as at end-February compared with 1.37% as at end-December 2025.

The research house notes that the household sector is more insulated, backed by ongoing policy measures, with banks that have a higher exposure to residential mortgages — such as Hong Leong Financial Group Bhd (KL:HLFG), Hong Leong Bank and Public Bank, with exposure at 42% to 48% compared with the sector’s 37% — offering a layer of defence. This is underpinned by borrowers prioritising monthly repayments to safeguard their homes, alongside strong collateral backing.

“That said, pockets of weakness could emerge in the business segment from rising operating expenditure. We expect big corporates to be relatively more resilient than SMEs. RHB Bank, Maybank and CIMB have stronger franchises in the former (31% to 34% versus the sector’s 26%) while Alliance Bank is more exposed to the latter (34% versus the sector’s 17%),” AmBank Research says. Its top banking pick is HLFG.

Maybank IB Research’s top picks are RHB Bank, AMMB and Public Bank while CGSI Research’s are Maybank, RHB Bank and AMMB.

As at last Friday, the Bursa Malaysia Financial Services Index had risen 0.74% year to date compared with the FBM KLCI’s 0.92% gain.

Read also “Malaysian banks resilient against a scenario worse than 2008 crisis, stress test shows” on Pg 57

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