Banks' RM4.36bil buffer to cushion US tariff impairment risks

New Straits Times

3 days ago

KUALA LUMPUR: Malaysian banks are expected to remain resilient even if credit risks rise due to new United States tariffs, thanks to a sizeable RM4.36 billion management overlay (MO) buffer that could cushion potential loan impairments, according to CGS International.
The firm estimated that if banks need to provide for 50 per cent of the new gross impaired loans (GIL), the management overlay will be able to cover up to 37.9 per cent of the increase in banks' total GIL in financial year 2026.
CGS said Public Bank holds the highest management overlay coverage at 91.8 per cent, while Bank Islam trails with only 10.6 per cent.
It added the higher tariffs imposed by the US on Malaysian exports could reduce the business volumes and revenue of Malaysian companies that are reliant on the US market.
This, in turn, may weaken their debt servicing capabilities, sparking concerns of increased credit risks for Malaysian banks.
"As a consequence, we project GIL of the banks under our coverage to rise by 5.6 per cent in FY25 and 7.0 per cent in FY26," it added.
Based on a stress test conducted to assess the impact of rising GIL on banks, CGS estimated that a 10 per cent increase in FY26 gross impaired loans would reduce the combined FY26 net profits of banks under its coverage by 3.2 per cent.
"In our test, the least impacted banks were Hong Leong Bank (-1.0 per cent) and Public Bank (-1.3 per cent) while the most impacted was Affin Bank (-10.9 per cent).
"If the sector's GIL rises 30 per cent, the negative impact on banks' total FY26 net profits is 9.6 per cent, ranging from 3-4 per cent for Public Bank and Hong Leong Bank to 32.8 per cent for Affin, based on our estimates," the firm added.
CGS maintained its "Overweight" stance on banks, premised on potential re-rating catalysts of ongoing write-backs in management overlay and expected increases in the dividend payout ratios for most banks.