Analysts expect increased competition for deposits among Malaysian banks in the fourth quarter of 2026, amid mixed signals in the sector and cautious sentiment over near-term growth prospects.
A report from Hong Leong Investment Bank (HLIB) Research highlighted that the banking sector’s current valuations largely reflect its underlying resilience, despite emerging challenges. These include pressures on non-interest income resulting from recent fluctuations in Malaysian Government Securities yields and potential temporary effects related to the expansion of the FTSE Bursa Malaysia KLCI (FBM KLCI). Consequently, HLIB Research advised caution heading into the final quarter of the year.
Public Bank Bhd was identified as a top pick, owing to its defensive qualities and relatively stable asset quality, which are expected to offer some protection if macroeconomic conditions worsen. The report showed that as of August 2026, system loan growth remained steady at 5.7% year-on-year, driven mainly by an 8% increase in business loans. The growth in corporate lending was supported by stronger demand from the services sector and escalating working capital requirements. Household loan growth held firm as well, increasing by 5% year-on-year.
Asset quality remained broadly stable, though HLIB noted a slight rise in the gross impaired loan ratio by one basis point to 1.44% in August, signaling the need for continued monitoring in the coming months. The research firm projected an average inflation rate of 2% for the full year, up from 1.8% in the first eight months of 2026. It cautioned that heightened inflation could pressure debt-servicing capabilities, particularly for more vulnerable small and medium enterprises.
On the funding side, the system lending spread narrowed slightly to 2.35%, influenced by a faster decline in average lending rates to 4.5% compared to fixed deposit rates, which eased to 2.16%. HLIB Research anticipated that deposit competition would intensify beginning in November as banks adjust their balance sheets to meet year-end objectives. As a result, significant net interest margin (NIM) improvements are unlikely in 4Q26, with recovery expected potentially delayed until the first quarter of 2027. Total deposit growth also moderated to 5.2% year-on-year, partly due to a sharp slowdown in foreign savings growth, which declined to 6.7%.
Separately, RHB Research maintained a neutral outlook on the banking sector, citing pressures on NIM from rising funding costs as loan growth outpaces deposit growth and loan-to-deposit ratios remain high. It flagged concerns that higher capital market rates could increase wholesale deposit costs, gradually driving up retail funding expenses. Rising bond yields were also noted as a challenge, potentially reducing trading income and affecting mark-to-market valuations. Additional risks identified include an increasing gross impaired loan ratio and thinning provision buffers, compounded by a lack of strong catalysts in the near term.
On loan demand, RHB Research reported a 13.8% year-on-year increase in system loan applications in August, with non-household borrowing outpacing household lending, while monthly growth remained flat. The combination of these factors suggests a cautious operating environment for Malaysian banks as they navigate the closing months of 2026.