Public Bank tops banking peers with 12.2pct ROE

KUALA LUMPUR: Public Bank Bhd delivered the strongest results among its peers in the second quarter (Q2) of 2026, as Malaysia's banking sector posted stronger earnings despite persistent pressure on net interest margins (NIMs).

CIMB Securities Sdn Bhd said Public Bank recorded the highest return on equity among its peers at 12.2 per cent, driven by solid underlying earnings and industry-leading operating metrics.

The country's third-largest bank by assets saw its core net profit rise 3.7 per cent year-on-year (YoY) in the quarter and two per cent in the first half of 2026, despite the absence of meaningful overlay write-backs.

Asset quality remained strong, with a gross impaired loan ratio of 0.54 per cent, while its cost-to-income ratio of 35.1 per cent was the lowest among its peers.

Hong Leong Bank Bhd followed closely, supported by strong underlying operating momentum.

Its pre-provision operating profit rose 13.6 per cent quarter-on-quarter (QoQ) and 8.6 per cent YoY in the fourth quarter of its 2026 financial year (FY26).

This was supported by robust loan growth of 7.7 per cent YoY and continued cost efficiency, with its cost-to-income ratio at 38.7 per cent.

Credit recoveries provided an additional boost, lifting Q4 core net profit by 20.7 per cent QoQ and 14.2 per cent YoY.

"During the Q2 2026 earnings season, Alliance Bank Malaysia Bhd, AMMB Holdings Bhd, RHB Bank Bhd, Hong Leong and Public Bank reported results in line with our expectations and broadly consistent with consensus estimates.

"Affin Bank Bhd was the only one that missed expectations, dragged down by a second consecutive quarter of elevated net credit cost at 38 basis points, exceeding the FY26 guidance of 13 basis points," CIMB Securities said.

Looking ahead, the firm expects Malaysia's banking sector to maintain positive fund-based income growth in Q3, supported by a healthy credit pipeline and domestic investment activity.

However, tighter funding conditions could make it harder for banks to sustain the recent pace of loan growth.

"As deposit growth increasingly lags credit demand, banks are likely to become more selective in balance sheet deployment.

"This will likely lead lenders to reprice lower-yielding assets and prioritise small and medium enterprise, commercial and secured lending, where returns offer better compensation for funding and credit risks," it said.

CIMB Securities said the trend could have mixed implications for NIMs.

Greater lending discipline and risk-based pricing could support margins, but tighter credit conditions could eventually weigh on loan growth and borrower demand.

As a result, fund-based income growth in the second half of 2026 is likely to depend less on balance sheet expansion and more on banks' funding strength, asset mix, pricing discipline and credit selection.

"We forecast steady NIM of two per cent in both 2026 and 2027, and 2.01 per cent in 2028 on the back of an improving funding mix through ecosystem current account savings account and deposit franchise enhancements.

"Loan growth is projected at 5.1 per cent for 2026 and 5.2 per cent for both 2027 and 2028, in the absence of prolonged energy price shocks and significant domestic liquidity constraints.

"Such constraints could raise overall funding costs even without a policy rate hike and undermine banks' ability to maintain lending activity," CIMB Securities said.