WHILE the banking sector may face several challenges that could weigh on earnings in 2026, the outlook appears more encouraging for 2027.
A resilient economy, the sector’s defensive qualities and further potential for capital management are expected to support stronger valuations going forward.
According to MBSB Research, a weak quarter two 2026 could lead to another knee-jerk sell-off post-results, like the last two quarters, but should recover immediately after.
“Our robust economic growth outlook, geopolitical stability, excellent dividend yields, and superior asset quality give our banks a more defensive nature, making them an attractive pick,” said MBSB.
There is room for further capital management initiatives ahead, and Basel transition is largely capital accretive.
While the coming quarter’s dividend outlook is mostly predictable, the second half of 2026 may host further surprises.
Note that wealth management, bancassurance, and debt capital markets are major drivers.
Forex volatility aside, the stabilisation of interest rates should result in some moderation in investment income from 2025’s strong result. A Fed rate hike could further adversely affect non-fee NOII.
So far, a robust economic performance is driving loan demand, particularly for business loans. The momentum should remain intact. However, banks with large international exposure may be impacted by currency fluctuations.
Current account savings account growth remains strong, and non-deposit funding is still in high demand.
“Despite this, we get a sense that banks were not expecting such strong loan demand, as a result, an ongoing scramble for deposits is elevating FD rates,” said MBSB.
Several banks see limited room for further optimisation, especially as deposit competition ramps up in response to better-than-expected loan demand.
On the asset side, expect more aggressive loan rebalancing, favouring higher-yielding business loans. Oil prices have improved from a couple of months back.
However, heightened cost pressures will take some time to abate as supply chains normalise.
So far only a few banks have sounded alarm bells for asset quality, so do not expect anything overly severe. However, since geopolitical volatility is here to stay, expect some large overlay allocations in subsequent quarters.—Aug 14, 2026
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