Here’s how Basel 4 may impact Malaysian banks

The Basel 4 credit risk framework implementation could have greater impact.

Malaysian banks are expected to remain cautious in regard to their approach to capital management as they brace for possible impacts of the Basel 4 implementation on their capital ratios.

Malaysian banks have begun adopting Basel 4 operation risk frameworks in January 2025. Since operational risk accounts for only 8% of banks' total risk-weighted assets (RWA), the negative impact on their CET1 ratio is expected to be limited, said UOB Kay Hian analyst Keith Wee Teck Keong in a sector report published on 13 January.

The implementation of the Basel 4 credit risk framework in mid-2026 could have a greater impact, he warned. Credit risk represents 88% of banks’ RWA.

Wee and UOB Kay Hian assume that when Basel 4 is fully adopted, RHB, AmBank, Bank Islam, CIMB, Public Bank, and Maybank have the highest potential capital management capacity as a percentage of market capitalisation.

Meanwhile, Alliance Bank, Hong Leong Bank, and Affin Bank have the least, with CET1 ratios below 13.5%.

However, the actual capital management capacity of banks under Basel 4 remains uncertain as of press time, Wee said, as full implementation is still sometime in the future.

“Given the above, we recommend focusing on sector laggards for a better risk-reward balance,” Wee said, naming  Public Bank, RHB Bank and Hong Leong Bank as their favored banks to invest in.

“Public Bank and Hong Leong Bank could benefit from potential credit cost tailwinds,” Wee said.

Meanwhile, RHB Bank is reportedly poised to outperform the sector in the first six months of 2025, on the back of its now stabilised asset quality metrics, further reinforced by its high beta.