KUALA LUMPUR, Feb 9 — The outlook for Malaysia’s banking system, rated A3 stable, remains stable, underpinned by steady economic growth and sound bank fundamentals, said Moody’s Ratings.
In a statement today, the rating agency said supportive factors include household spending driven by a strong labour market, steady private and public investment, lower interest rates, a healthy tourism sector, and electronics exports.
It said banks’ credit costs will rise only modestly after substantial improvements over the last four years, as retail and corporate balance sheets remain sound, with some stress in small and medium-sized enterprises (SMEs) due to cost pressures, pre-existing weaknesses in some sectors, and slower global trade.
Moody’s said banks’ asset risk will be broadly stable with a modest increase in credit cost and expects that the nonperforming loan (NPL) ratio will be around 1.4 per cent-1.6 per cent in 2026, in line with the long-term average and compared with 1.4 per cent at the end of June 2025.
“Overall business loan credit quality in Malaysia has improved over the years, with an NPL ratio of 2.2 per cent at the end of June 2025 compared to 2.8 per cent at the end of June 2023,” it added.
Moody’s said Malaysia’s banks would also remain well-capitalised, as systemwide assets are expected to grow moderately and the banking sector to generate a 10 per cent-11 per cent return on equity, thereby generating internal capital that will be much higher than the asset growth.
At the end of June 2025, the systemwide Common Equity Tier 1 (CET1) capital ratio was broadly steady at 14.7 per cent from 14.9 per cent a year earlier, while dividend payout ratios have increased in the last two years at some banks.
Moody’s said the profitability of banks will remain adequate as net interest margins (NIMs) should bottom out, supported by strong non-interest income from wealth management, insurance, capital markets, and fee income.
It said that NIMs narrowed for Malaysian banks in 2025 due to policy rate cuts; nevertheless, deposit repricing, which typically lags rate cuts, should help stabilise NIMs in 2026.
“Malaysia’s 25 basis points policy rate cut last year was moderate compared to peers in Southeast Asia, and we expect only a moderate increase in credit costs.
“Meanwhile, funding and liquidity will be stable, and we expect loans to grow broadly in tandem with deposits and, hence, the aggregate loan-to-deposit ratio of the rated banks to remain around 91 per cent, while system loans and deposits have increased by five per cent on average in the last five years,” it added.
Moody’s said banks’ liquidity will remain sufficient due to their holdings of government securities.
“The aggregate liquidity coverage ratio and net stable funding ratio remained healthy and above the regulatory minima, at 160.5 per cent and 115.7 per cent, respectively, at the end of June 2025.
“The Malaysian government’s willingness and capacity to support banks when needed will remain strong,” it said. — Bernama
