Banking sector tailwinds forecast to fade past 2027

PETALING JAYA: Tailwinds persist within the banking sector but some will not last indefinitely, with the main threat to growth prospects being current levels of loan demand not sustaining past 2027, and wealth management still being in its “low-hanging fruit” phase.

MBSB Research in a report said the fear today is also higher bond yields and global rate hikes.

“But the market likely saw this coming for quite some time. The bigger threat is the Middle East conflict – the damage to local demand and debt serviceability is immense and will likely persist long after current growth drivers start to wane,” it said in a report to clients.

However, it has maintained a “positive” call on the sector as for now, tailwinds outweigh headwinds – but the balance shifts the longer the war holds out.

MBSB Research said banks served as a proxy for the economy, and gross domestic product is outperforming expectations.

Local banks are also more defensive than regional peers, driven by geopolitical stability, high dividend yields, and superior asset quality, it said.

The research house expects further capital release initiatives ahead, with several banks already announcing special dividends (or at least commitments to further increase payout) and prioritising subsidiary capital upshoring.

MBSB Research also pointed out that cost pressures were surprisingly being well-maintained. “Despite initial concerns about cost inflation and high tech spend, we have been seeing extremely low operating expenditure inflation across the board, and this is a sign that tech efficiencies are already bringing in savings.”

The research house noted that in terms of loan growth, business loans have been on a hot streak, buoyed by the construction cycle and data centre announcements, adding that the latest Bank Negara Malaysia banking statistics imply that this momentum should remain for now, despite drag from retail loan demand.

MBSB Research said a core driver is wealth management income, which saw a surge as wealth fees are diverted from the Middle East to the Asean region.

However, the non-fee, non-interest income outlook is bleak, especially with global bonds’ rising yields and an expected hike in interest rates, it warned.

In terms of liquidity, current account savings account growth remains strong, but MBSB Research said to expect a return to fixed deposits as rising bond yields make wholesale funding less viable – hence deposit competition will persist.

It said asset quality problems were confined to smaller banks.

“Stress comes primarily from the retail portfolio, in residential mortgages and unsecured loans.

“The second-half 2026 net credit costs should be lower, with several one-off overlays already made during this quarter, but if the Middle East conflict is prolonged past the first quarter of 2026, we could be in for a tougher time.”

Meanwhile, MBSB Research added that net interest margin weakness is expected to persist.

It said while further steep compression is unlikely, most banks do not expect much recovery in subsequent quarters.