Banks look beyond 2Q26 for growth

PETALING JAYA: Malaysia’s banking sector is poised for further gains as investors look beyond potentially weak second- quarter (2Q26) results to stronger economic growth and further capital management initiatives in 2027, according to MBSB Research.

“We think the banking sector will continue to rally, with a robust economic outlook and further room for capital management activities as the main drivers,” the research house said.

It maintained a “positive” call on the sector, saying the market is looking ahead to better profitability and growth prospects in 2027.

However, the brokerage cautioned that weaker-than-expected earnings in 2Q26 could trigger another short-term sell-off, although such weakness should be temporary.

“However, we are wary that the 2Q26 results season may come in weak (and there is little room for positive dividend surprises), so there is a possibility of another knee-jerk sell-off post-results,” the research house said.

MBSB Research identified net interest margin compression as the biggest near-term earnings headwind, as banks face higher funding costs amid intensifying competition for deposits.

Higher provisioning, cost inflation and weaker non-fee non-interest income were identified as additional risks.

Bank Negara Malaysia’s banking statistics nevertheless pointed to continued underlying strength in credit demand.

Business loans maintained their momentum and retail lending remained stable, while bond issuance almost doubled during the quarter.

“The market remains hungry for liquidity – especially for repos,” MBSB Research said, noting that repo usage had “skyrocketed” as banks sought to shore up short-term liquidity.

Repos (short for repurchase agreements, a form of short-term borrowing in banking) involve one party selling securities such as government bonds to another for cash, with a fixed promise to buy them back shortly after at a slightly higher price.

The price difference represents the interest.

The research house said strong economic growth drove better-than-expected loan demand, particularly from businesses, prompting banks to compete more aggressively for deposits.

Current account savings account growth remained strong, while fixed deposits declined slightly.

Despite the near-term margin pressure, MBSB Research expects loan growth to remain robust as economic sentiment improves, while fee income from wealth management, bancassurance and debt capital markets continue to support banks’ topline.

However, non-fee income could normalise from the strong levels recorded in 2025.

Capital management remains a key support, as banks continue having opportunities to release excess capital through subsidiary divestments, changes in regulatory capital requirements and greater adoption of the internal ratings-based approach to credit risk.

“Capital management has been a hot topic in the last few quarters and is responsible for multiple share price rallies,” it said. “This is a trend that should persist.”

While dividend surprises may be limited in 2Q26, MBSB Research expects more action in the second half of the year as banks gain greater clarity over their ability to meet return-on-equity targets and determine how much capital can be distributed.