PETALING JAYA: The defensiveness of the banking sector will likely return to the spotlight amid macroeconomic concerns weighing down on other sectors.
Kenanga Research said although still early days, system loan growth is expected to be intact at around 6%, with banks’ guidance sharing similar confidence.
That said, it noted that there could be more concerns weighing on the overall small medium enterprise (SME) segment.
“Participating in this space would require stronger emphasis on quality over quantity which we are already seeing across the sector. We also maintain our view for a steady overnight policy rate (OPR) at 3%,” the research house added.
It noted that household loans will remain the stronger pillar for overall systems growth, where it notes a rising shift towards mid-to-upper priced mortgages (RM500,000 to RM1mil).
Business loans may struggle, particularly with the wholesale and retail trade SMEs which are likely to be the most sensitive against unfavourable economic headwinds, it said.
“However, we find comfort in the overall system’s tightening gross impaired loan readings of 1.44% in December 2024 (all-time low to date) as well as most banks’ similar moderation reflecting higher overall quality in the financial system.” Kenanga Research said.
It added that based on fourth quarter 2024 results, most banks have been able to stabilise their net interest margins (NIM) from waning seasonal competition and post-heavy deposit competition seen throughout 2024. This is expected to carry on into this year with most banks aiming to keep margins stable, albeit with pressures now coming from asset yields to garner larger loan shares, it said.
“Common targets include SMEs for better margins and higher-value mortgages for safety and access to a more affluent clientele,” the research house said.
Kenanga Research said taking cues from a recent engagement with Bank Negara, it believed that the resiliency and defensiveness of the economy still holds potential for growth expansion, with inflation being well contained.
“Though we anticipate a stable OPR, we also opine that a 25-basis point cut may not be overly undermining to the overall profitability of the banks, given efforts to bolster fee-based income to defend against volatility in the investment market.
“In our sensitivity analysis, every annualised cut in the OPR would translate to a 2%-4% reduction in earnings,” it added.
The research house said against looming uncertainties, its sector picks offer a mix of defensible growth prospects, such as AmBank which comes on the back of a more solid return on equity even as the group focuses on stronger earnings drivers as opposed to gaining market share in less profitable segments.
Following its recent transition into Foundation Internal Ratings-Based, the group’s newly acquired Common Equity Tier 1 or CET1 levels of about 15% could lead to more generous dividend pay-outs and make AmBank one of the leaders in yield prospects, it said.
This is premised on our anticipated dividend payout of 50% against the group’s more gradual step-up of 45% (from 40%), Kenanga Research added.
It also said among the large-cap banks, it likes Malayan Banking Bhd
(Maybank) as despite its leading market share, it still holds better-than-industry asset quality (December 2024: 1.23% vs industry’s 1.44%) with earnings growth expected to outpace its counterparts.
“We take a longer-term view on Maybank. In the event industry headwinds shift to tailwinds, its scale could allow it to benefit the most in terms of loans book acquisitions and NIM expansion.” Kenanga Research has maintained its “overweight” call on the banking sector.
