PETALING JAYA: Malaysian banking stocks could be looking at more modest returns this year, after a strong performance in 2024.
Regardless, RHB Research thinks that local banks should continue to offer investors a good defensive option to tide through the external volatility.
The sector is supported by stable domestic macroeconomic conditions coupled with ample stock provision buffers available to be reversed and support earnings growth, if need be.
“As with our regional strategy, we advocate taking a tactical approach towards Malaysian banks.
“We expect a decent performance in the first quarter from the banks, thanks to dividend declaration, while the unveiling of the next mid-term plans by some banks could be received positively, for example a higher return on equity (ROE) target and better clarity on capital management plans.”
The research house’s top picks are AMMB Holdings Bhd
and Alliance Bank Malaysia Bhd due to valuations.
Meanwhile, CIMB Group Holdings Bhd is its preferred pick among the large banks for relatively stronger earnings growth and cheaper valuations.
It also likes Hong Leong Bank Bhd for its defensiveness.
RHB Research pointed out that the banking sector offers dividend yield of over 5% in the financial year of 2025 (FY25).
“We think this is attractive and there could be room for yield to compress further – positive for share prices.”
Furthermore, there could be upside potential to dividend projections for banks as, with a stable outlook and better visibility on the impact from Basel III reforms, these could be positive for dividend payout and capital management initiatives. Basel III reforms will be implemented in stages in Malaysia with operational risk set to go live in 2025.
In addition, the banking sector also offers investors leverage to foreign institutional investor inflows given Malaysia banks, as liquid, large cap stocks, will likely be beneficiaries.
“Apart from that, some banking groups are set to unveil their next mid-term strategic plans this year.
“We think investors will be watching out for the new ROE targets with credible ones aiding in valuation re-rating,” it said.
On earnings, RHB Research estimates the sector to see a net profit growth of 7% in FY24, before stabilising at 5% to 6% in FY25 to FY26.
Its FY25 to FY26 bottomline growth is underpinned by the assumptions of stable loan growth while non-interest income growth moderates to about 6% per annum, from the double-digit growth seen in 2023 and (estimated for) 2024.
“Our projections also take into account a marginal one to two basis point (bps) per annum net interest margin squeeze and stable credit cost of 20-bps per annum,” it added.
