PETALING JAYA: An improved or worsening economic outlook remains the core determinant for the banking sector performance.
MBSB Research said, in a note to clients, that it would be keeping an eye on key economic data being released later this week.
An overly negative result increases the likelihood of further overnight policy rate cuts, which would be negative for banks’ earnings and valuations.
It said the usual themes persisted: headwinds such as net interest margin (NIM) compression, possible asset quality and provisioning issues, and weak economic growth prospects which would afflict the industry, while tailwinds would vary on a case-by case basis.
“Hence, we continue to advocate for our bottom-up approach to stocks with a preference for defensive names,” it said.
Ahead of the banks’ second-quarter results, it said most banks should see NIM compression coming from the recent overnight policy rate hike.
“We are not expecting anything overly dramatic – there is some offset coming from statutory reserve requirement or SRR relaxation while the liquidity situation is said to improve in the second half of 2025,” it noted.
The research house said a few banks believe that they are poised to outperform others on this front.
MBSB Research said it was expecting a strong non-interest income or NOII quarter, as positive bond yield movements and currency volatility bode well for the trading and foreign exchange income front.
While some banks are guiding for improving fee income momentum, poor market conditions this quarter could impact unit trust and private banking segments, it added.
In terms of asset quality and provisioning, as most banks are already well-buffered, expect only a few instances of large overlay allocations, the research house said, adding that asset quality should see some uptick in select segments.
Maintaining a “neutral” call on the sector, MBSB Research said the residential mortgages segment had been earmarked as a source of potential concern.
“Out of the banks under our coverage, RHB Bank
Bhd seems the most pessimistic, explicitly guiding for a gross impaired loan ratio worsening to accelerate in the second half of 2025,” it said.
