KUALA LUMPUR (July 6): Strong capital buffers could offset any pressure on Malaysian banks’ margins despite external uncertainties amid a low interest rate environment, according to Fitch Ratings.
The rating agency said that although any hike in interest rates and unexpected economic developments could stress borrowers on making repayment of loans, the impact is expected to be mild on Malaysian banks due to their strong asset quality.
“External uncertainties and potential increases in borrowing costs could place modest pressure on debt-servicing capacity,” Fitch said.
“Nevertheless, we expect any normalisation in credit costs from current low levels to be gradual and unlikely to result in a material deterioration in asset quality,” it added.
The agency said Malaysian banks' capitalisation remains steady, with the sector's common equity tier-1 (CET1) ratio at 14.0% in May 2026, comfortably above regulatory minimums.
It noted that AMMB Holdings Bhd's (KL:AMBANK) capital position improved following the adoption of internal ratings-based models, which reduced risk-weighted assets.
Meanwhile, Public Bank Bhd (KL:PBBANK) and Hong Leong Bank Bhd (KL:HLBANK) continue to operate under the standardised approach, resulting in higher risk-weight density than peers.
"In 1Q2026, risk-weighted assets represented 65% of total assets at Public Bank and 61% at Hong Leong Bank, compared with around 50% for most other major banks. While this reduces reported capital efficiency, it should position both banks favourably ahead of the final Basel III reforms," it said.
The banking sector’s loan book health is supported by improving loan growth, low non-performing loan (NPL) ratios, improving Stage 2 loan metrics, and credit costs that remain below historical averages.
During the first quarter of 2026, the agency noted that the six largest Malaysian banking groups accounted for around 70% of system loans.
The sector’s asset quality remained stable, with the NPL ratio holding at 1.4% and the Stage 2 loan metrics ratio declining to 6.1% from 6.6% a year earlier.
This is further supported with loan growth which has improved by 5.4% year-on-year, while credit costs stayed below historical averages, supported by favourable credit conditions and healthy borrower performance.
“Profitability continues to be supported by diversified revenue streams, disciplined cost management and low credit costs,” it said.