UOBKH Research said that foreign shareholding in the banking sector remains high at 24.2%.
PETALING JAYA: Foreign shareholding in listed Malaysian banks is nearly at a five-year peak, even as foreign funds remain as net sellers of local equities for 21 straight weeks.
However, the elevated foreign ownership may be a near-term downside risk, amid uncertainties surrounding a potential global slowdown due to US president Donald Trump’s trade policies.
In a note, UOB Kay Hian (UOBKH) Research said that foreign shareholding in the banking sector remains high at 24.2%, near its five-year peak of 25.9%.
“While earnings resilience and attractive dividends support the investment case, valuations at plus 0.5 standard deviation above mean and foreign shareholding that is near a five-year high may limit upside.”
While the sector is well-positioned to withstand a potential economic slowdown, supported by stronger provision buffers, UOBKH Research recommended investors to focus on relatively more defensive banking stocks.
“Amid heightened risk aversion, we have screened banks based on key defensive traits, including low foreign shareholding, below-mean price-to-book value ratio, above-peer average CET1 ratios, high dividend yields, and solid loan-loss coverage.
“Public Bank Bhd
, Malayan Banking Bhd (Maybank), Hong Leong Bank Bhd, and RHB Bank Bhd met most criteria (five out of eight criteria),” stated UOBKH Research.
It has “buy” calls on Public Bank, Hong Leong Bank and RHB. However, Maybank remains a “hold” on valuation grounds.
“Amid external uncertainties, we favour banks with attractive valuations, high provision buffers and capital management potential for added defensiveness.”
Overall, UOBKH Research has maintained its “market weight” stance on the banking sector as risks and fundamentals are balanced. On the banks’ results for the fourth quarter of financial year 2024 (4Q24), UOBKH Research said the earnings were broadly in line with expectations, with eight of the nine banks meeting forecasts.
Affin Bank Bhd was the only exception, reporting earnings above expectations due to a one-off provision writeback.
However, its pre-provision operating profit fell short due to a spike in operating expenses.
The sector’s 4Q24 earnings rose 9.5% year-on-year (y-o-y), driven by a two-percentage point positive operating JAWS and a 45% y-o-y drop in provisions, in the absence of lumpy management overlays from AMMB Holdings Bhd while banks like Public Bank and Affin Bank saw writebacks.
In finance, the JAWS ratio refers to a metric that measures the difference between the growth rate of a financial institution’s income and its operating expenses, indicating the extent to which income growth exceeds expense growth.
In 4Q24, top performers were Affin Bank, RHB Bank and Public Bank.
Public Bank and RHB Bank benefitted from net interest margin (NIM) expansion, lower provisions, and strong non-interest income, while Affin Bank saw a boost from a significant provision write-back.
Looking ahead into 2025, UOBKH Research is expecting a slight moderation in sector earnings growth.
“We expect sector earnings growth to ease slightly to 7% in 2025 from 9% in 2024, driven by slower non-interest income growth from a high base.
“However, stable NIM and a rebound in loan growth should help offset some of the impact.
“Upside risks include more aggressive writebacks of excess pre-emptive provisions, while downside risks stem from weaker-than-expected NIM,” according to the research house.
