Malaysia banks ride investment-led growth, but deposit war threatens margins

KUALA LUMPUR: Malaysia's banking sector is expected to remain supported by resilient credit demand and an investment-led economic upcycle, although intensifying deposit competition could continue to weigh on banks' net interest margins (NIM).

PublicInvest Research and CIMB Securities maintained "Overweight" calls on the sector, citing healthy loan growth and resilient fundamentals, while Hong Leong Investment Bank (HLIB) Research retained its "Neutral" stance, citing limited upside from current valuations.

According to PublicInvest, system-wide loans grew 6.1 per cent year-on-year (YoY) in September 2026, driven by a 7.7 per cent expansion in business loans.

CIMB Securities said the investment upcycle was supporting stronger corporate financing demand, particularly across construction, manufacturing and working capital activities. It expects this momentum to sustain credit growth through 2027.

However, the research firm cautioned that deposit growth continued to lag lending expansion, potentially intensifying competition among banks for funding.

PublicInvest Research and CIMB Securities reported system deposit growth of 3.7 per cent YoY in September, compared with 4.2 per cent in August.

HLIB Research similarly said that stronger loan demand could push banks to offer more competitive deposit rates to maintain liquidity, delaying a meaningful recovery in NIM.

PublicInvest noted that the banking system's lending spread improved slightly to 2.35 per cent in September, following a higher average lending rate of 4.54 per cent and a marginal decline in the 12-month fixed deposit rate to 2.19 per cent.

"However, margin headwinds persist, with potential yearend deposit competition likely to exert further pressure on funding costs, limiting the scope for a meaningful NIM recovery in the financial year 2026," the research firm added.

On asset quality, all three research firms remained broadly positive, with the system gross impaired loan ratio improving to 1.42 per cent in September from 1.44 per cent in August.

Nevertheless, PublicInvest cautioned that rising household impaired loans pointed to emerging repayment pressures, particularly amid elevated living costs.

HLIB Research expects near-term asset quality risks to remain manageable through end-2026, although the outlook warrants monitoring heading into 2027.

On stock picks, PublicInvest reiterated its Outperform ratings on Maybank, CIMB Group and AMMB Holdings, while CIMB Securities favoured Public Bank, RHB Bank and Hong Leong Bank.

HLIB Research, meanwhile, favoured Public Bank for its defensive profile and resilient asset quality, maintaining its Neutral recommendation on the banking sector.