TA Research said its loan growth forecast of 6.2% for 2025 could soften to between 5.5% and 5.8% on the back of weaker demand.
PETALING JAYA: Being proxy to the overall economy, banking stocks have come under pressure amid heightened market volatility due to escalating global trade tensions.
While Malaysian banks are predominantly domestically focused and thus insulated from direct fallout from the US-China trade war, TA Research expects several indirect headwinds to emerge.
Chief among them is the potential softening of loan and fee-based income growth as business sentiment weakens and visibility diminishes, which in turn may lead to delays in capital investments, expansion plans, and mergers and acquisitions activities.
The research house said its loan growth forecast of 6.2% for 2025 could soften to between 5.5% and 5.8% on the back of weaker demand.
“Furthermore, a broader regional slowdown could elevate asset quality risks, particularly for banks with clients operating in export-reliant sectors such as electrical and electronics, palm oil, machinery and equipment, rubber, furniture and plastics.
“These industries collectively account for over 40% of Malaysia’s exports and are vulnerable to softer external demand and margin compression from rising input costs, which could erode profitability and strain borrower cash flows,” it said in a report yesterday.
The research house said it has conservatively raised its credit charge forecast for the sector to 30.6 basis points (bps) in 2025 (up from 29.4 bps in 2024) and there is potential for further increases.
“We note that any uptick may be contained, given the substantial overlay buffers accumulated by the banks over the years.”
According to the research house, banks with the highest domestic and retail exposure, as well as the strongest asset quality, particularly those with ample loan loss coverage, are best positioned to weather current uncertainties.
“We believe that in the event of a potential economic slowdown, business loans are likely to be affected first. Retail loans should remain steady as this segment of loans is diversified across individual borrowers and is often tied to essential needs like a mortgage or hire purchase.
“Moreover, business loans tend to be more susceptible to defaults in a volatile market environment, prompting banks to adopt a more cautious approach towards this segment,” the research house added.
TA Research said Public Bank Bhd
stood out in this regard. With a predominantly local loan book with a substantial retail exposure and having one of the sector’s highest loan loss coverage ratios, the research house expects the bank to be least affected by trade-related risks.
Hong Leong Bank Bhd (HLB) also scores well but TA Research said it remained slightly cautious due to HLB’s earnings exposure to Bank of Chengdu in China, which contributes around 28% of the former’s profit before tax.
Slower economic growth in China could pose a downside risk to this contribution, said the research house.
“Nevertheless, we are keeping our earnings forecasts unchanged for now, as we believe the 90-day pause and temporary exemptions on selected export items could soften the overall impact of tariffs on 2025 performance.
“In the short term, we also expect a pick-up in front-loading activities during this window, which could lift second-quarter gross domestic product numbers and partially offset potential weakness in the second half.”
Malaysia is also likely to attract more trade orders and foreign investment thanks to its relatively lower tariff profile compared with several regional peers.
TA Research recently revised its FBM KLCI target downward to 1,660 points, from 1,785, based on a 2026 price-to-earnings multiple of 14.1 times.
In tandem, it is also adjusting the valuation assumption for the banking sector by raising the market risk premium from 5.5% to 6% to reflect the increased earnings risk, softer investor sentiment and a more volatile macro backdrop.
“We maintain our ‘overweight’ stance on the banking sector. The recent correction has brought valuations to more compelling levels, with most banks now trading near their 10-year mean or -1 standard deviation on a price-to-book basis, offering attractive entry points for many banking stocks,” TA Research pointed out.
Its sector picks are Public Bank and CIMB Group Holdings Bhd. It also upgraded AMMB Holdings Bhd to “buy” from “hold” as the bank’s risk-reward profile improved significantly,
It said downside risks to sector earnings and share price performance include continued foreign fund outflows, compressed net interest margins and should Bank Negara cut the overnight policy rate to support growth.
Higher than-expected credit costs in a weakening economic environment could also weigh banks’ earnings, said the research house.
