Malaysia's Banking Sector Surpasses Pre-Pandemic Strength in 2026

KUALA LUMPUR (Jan 20): Malaysia’s banking sector is in a stronger position in 2026 than it was before the pandemic, and is poised for further gains even with the recent rise in share prices, says MBSB Research. In a research note on Tuesday, MBSB Research said banks still have room for further gains and are likely to attract continued foreign investor interest, supported by Malaysia’s improving economic outlook and relative stability compared with neighbouring countries. “Bolstered by multiple tailwinds, the banking industry is in a good place. With geopolitical certainty, dividend yields and asset quality showing unprecedented levels of improvement, foreign inflows should continue driving banking valuations — even after the recent rally,” said the research house. Banks are now better managed, according to analysts, and have healthier balance sheets, stronger loan quality, and more cost control despite valuations being increased. One of the major factors to support the banking sector is dividends. MBSB Research noted that banks have had more excess capital in the past, partially due to clearer regulatory rules. It added that some banks have already paid special dividends or signalled higher dividend payouts, which could continue to support investor returns. On earnings drivers, MBSB Research expects fee income to play a larger role in supporting topline growth in the near term. Wealth management, bancassurance and capital market services are expected to contribute more, while investment income is expected to moderate as interest rates stabilise. Loan growth is expected to remain driven by business lending, as higher-yielding corporate and commercial loans continue to offset softer retail demand. MBSB Research said the construction sector is likely to be the main catalyst in 2026, supported by large infrastructure projects and stronger private sector activity, particularly in Johor. The research house also expects a gradual recovery in working capital loans, which have been weak in recent years due to global uncertainty and softer manufacturing activity. MBSB Research believes improved domestic economic conditions and a stronger business outlook could encourage companies to start spending and restocking again. However, on liquidity, MBSB Research cautioned that it could tighten over time, noting that the system loan-to-deposit ratio is already at a record high, although it noted that banks are increasingly using alternative funding sources, which could help ease some of the pressure. MBSB Research maintained its positive call on the banking sector, citing stronger fundamentals and stable growth prospects. It also sees more multinational companies (MNCs) choosing Malaysia as a hub for production and sourcing activities. “The banking sector continues to be bolstered by tailwinds. We expect a multitude of catalysts to drive foreign inflows,” said the research house.