THE banking sector entered the second half of 2026 on a firmer footing, with business loan demand strengthening further in July despite softer household borrowing activity and some moderation in deposit growth.
The latest data point to resilient credit conditions, supported by robust business applications and approvals, while asset quality remained stable.
However, renewed funding cost pressures saw lending spreads narrow slightly, tempering the overall outlook for banks.
Loan pipeline strengthened further in Jul-26, underpinned by robust business demand.
Biz applications/approvals surged, with the approval rate remaining healthy at 65.2% (Jun-26: 60.8%), pointing to sustained strong business lending momentum into the second half of 2026 (2H26).
Household demand remained comparatively subdued, with applications up just 1.7% year-on-year (YoY) and approvals down 2.6% YoY.
Deposit growth moderated to +5.6% YoY in Jul-26 (Jun: +6.0%), alongside softer current account, savings account (CASA) growth of +7.1% YoY (Jun: +7.7%).
Nevertheless, CASA continued to outpace overall deposit growth while FD remained flattish, suggesting funding mix remains relatively favourable despite some moderation in CASA momentum.
Asset quality remained resilient, with system gross impaired loan (GIL) holding steady at 1.43% in Jul-26 for the third consecutive month.
Household GIL improved marginally to 1.10% (Jun-26: 1.11%), while business GIL was stable at 1.91%, suggesting no signs of emerging stress despite stronger business credit momentum.
Lending spread narrowed 3 basis points (bps) month-on-month (MoM) to 2.36% in Jul-26 (Jun: 2.39%), as the 3-month FD rate rose 3bps MoM to 2.18%, outpacing the 1bp MoM increase in average lending rate to 4.55%.
Nevertheless, spreads remained 4bps above May levels, suggesting margin conditions remain relatively stable despite some renewed funding cost pressure.
Hong Leong Investment Bank maintains Neutral on the Banking sector. Meanwhile, the recently announced KLCI expansion could create a transitory overhang, further limiting near-term re-rating catalysts.—Sept 2, 2026
Main image: au.prosple.com
