Banking sector asset quality intact buffered by overlay balances

PETALING JAYA: While leading indicators for the banking sector remained strong based on November 2025 statistics, concerns persist over tightening liquidity and its potential impact on funding costs in the coming quarters, particularly amid expectations of stronger loan growth in 2026.

MBSB Research said tighter liquidity remains the sector’s main headwind, even as supportive tailwinds continue to underpin growth. Several banks have reported weaker liquidity indicators in November 2025, raising concerns that stronger loan growth next year could accelerate liquidity tightening and reignite intense deposit competition.

Despite this, banking sector share prices have trended higher over the past month, supported by elevated dividend yields, improving loan growth prospects, ongoing gross impaired loan recoveries, stable net interest margins (NIMs), and stronger fee income.

Sector loan growth expanded 5.2% year-on-year in November 2025, slightly lower than October’s 5.4% growth. However, lending momentum remained resilient, backed by a surge in loan applications and rising approval rates.

Deposit growth moderated to 2.7% year-on-year, weighed down by softer current account savings accounts and foreign currency inflows. Meanwhile, interest spread edged up by one basis point to 2.39%.

Hong Leong Investment Bank (HLIB) Research expects NIM pressures to have persisted through the fourth quarter of financial year 2025, with gradual easing anticipated as deposit costs normalise. It sees system loan growth remaining comfortably within its 2025 forecast range of 5% to 5.5%.

Asset quality risks remain limited, with banks well-buffered by overlay balances and significant impaired loan provisions built up over the past five years. However, margin pressures are expected to persist in the near term due to intensified fixed deposit competition and slower repricing of funding costs.

Looking ahead, Kenanga Research forecasts more moderate system loan growth of around 5% in 2026, aligned with a softer GDP growth outlook of 4.2%. It noted upside risks if manufacturing activity remains resilient amid sustained investment inflows.

Among banking stocks, Kenanga Research favours Malayan Banking Bhd (Maybank) for its dominant domestic market share, while HLIB Research has moved several stocks — including Alliance Bank Malaysia Bhd, AMMB Holdings Bhd, CIMB Group Holdings Bhd, Maybank and RHB Bank Bhd — from “buy” to “under review” due to limited upside.