US Tariffs Could Hit Malaysian Banks with Rising Bad Loans
Malaysian banks are facing a potential increase in gross impaired loans (GIL), or bad loans, over the next two fiscal years, primarily due to higher tariffs imposed by the US on Malaysian exports. According to a July 2025 report by CGS International, these tariffs could lead to a 5.6% rise in GILs in FY2025 and a 7% rise in FY2026.
The investment firm explains that Malaysian companies heavily reliant on the US market may see reduced business volumes and revenue because of these tariffs. This, in turn, could weaken their ability to repay debts, raising credit risk concerns for Malaysian banks.
Potential Impact on Bank Profits
CGS International also explored more severe scenarios for GIL increases:
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10% GIL Increase: If GILs rise by 10%, Malaysian banks’ FY2026 net profits could drop by an additional 3.2%. In this scenario, Hong Leong Bank and Public Bank would be the least affected, with their net profits falling by only 1% and 1.3%, respectively. Conversely, Affin Bank is projected to be the most impacted, with a potential 10.9% decline in net profits.
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30% GIL Increase: In a more extreme case where the banking sector’s GILs jump by 30% above current forecasts, the overall negative impact on banks’ total FY2026 net profits could reach 9.6%.
“Defensive Picks” Amidst Rising Risks
Despite the potential challenges, CGS International identifies Hong Leong Bank and Public Bank as “defensive picks” for investors concerned about increased credit risks from US tariffs. The report notes that even if their GILs were to surge by an unlikely 30%, their net profits would only be reduced by 3-4%, significantly less than the 6-7% GIL increases forecasted for FY2025-2026.
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