KUALA LUMPUR (Sept 4): Malaysian banks may step up provisioning amid macroeconomic and geopolitical uncertainties, limiting earnings upside ahead, an analyst said.

While asset quality remains healthy for now, Hong Leong Investment Bank flagged potential deterioration ahead, with the recently-ended quarter already showing “pockets” of higher provisions. Any writebacks in overlays are also unlikely given the continued loan expansion, the house noted.

“As such, credit costs could remain somewhat elevated and lumpy” in the second half of 2026, posing a potential drag on earnings should asset quality soften further, Hong Leong Investment said.

Malaysian banks performed as expected in the April-June quarter, with sector earnings expanding 3.9% quarter-on-quarter and 2.9% year-on-year led by Alliance Bank Malaysia Bhd (KL:ABMB) while Affin Bank Bhd (KL:AFFIN) declined.

Net interest margin, a measure of a bank’s profitability by comparing income from loans with expenses on deposits, shrank two basis points quarter-on-quarter and three basis points on a year-on-year basis in the second quarter.

The operating backdrop remains challenging, with net interest margin likely to stay under pressure amid persistent deposit competition and elevated funding costs, Hong Leong Investment said.

Earnings upside is limited as banks continue to navigate margin compression and elevated operating costs even with stronger loan volumes and non-interest income providing some cushion, the research house noted.

Overall, “we expect earnings growth to remain modest, with greater differentiation across banks depending on funding strength, fee income generation and cost discipline”, Hong Leong Investment added.

For strategy, the house is ‘neutral’ on the sector with Alliance Bank as its top pick backed by resilient earnings outlook and potential inclusion in the expanded KLCI benchmark.