PETALING JAYA: Malaysia’s banking sector performance outlook for the second half of the year (2H25) remains good, with the topline impact from net interest margin (NIM) compression set to be offset by higher non-fee non interest income (NOII), while larger recoveries will keep net credit costs from missing targets.
MBSB Research said most local listed banks had minimal concerns on the issues of asset quality and earnings compression and the headwinds impacting the sectors are not as bad as thought.
The research house has upgraded the sector to “positive” and believes the higher than normal dividend yields the sector stocks offer will make them a prime beneficiary of any emerging market inflows.
“Banks have a tried-and-tested game plan entering into 2H25 – we think they can make it through with minimal earnings disappointments. This year’s higher-than-normal dividend yields act as a nice bonus,” MBSB Research stated in its latest banking sector report.
Malaysian banks remain laggards relative to regional peers in Singapore and Thailand in terms of total returns year-to-date, according to RHB Research.
As earnings growth for banks around the region is expected to be muted for 2025, dividend yields and capital returns have been the main drivers of investors’ interest.
“On this front, Malaysian banks lag their peers, with dividend yields that have not been as compelling versus the latter,” it stated.
While experiencing a slower quarter for loans, MBSB Research added the local banking sector’s 2Q25 performance was decent, despite some larger overlays and higher operational expenditure growth.
The sector posted a 2% year-on-year (y-o-y) and quarter-on-quarter net profit growth in 2Q25. Net profit for 1H25 was up 2% y-o-y.
Most banks however expect loan activity to pick up in 2H25 as the sector is flushed with liquidity.
MBSB Research however warned loan growth could disappoint as most banks are expecting mediocre to weak figures.
The primary market residential mortgages environment is more competitive while industry small and medium enterprises yields are narrowing, leading to problematic portfolios in several banks that may dissuade strong growth in this segment.
Hence, MBSB Research expects NOII to act as a core topline driver in 2025.
Wealth management, bancassurance and debt capital markets are common drivers of the fee side. Foreign exchange volatility and lowering bond yields bolster these returns.
“We opine 3Q25 will be the quarter to look out for, as we can observe the full extent of NIM compression impact and whether the NOII windfall will be able to provide sufficient offset,” it advised.
NIM may compress as a consequence of Bank Negara Malaysia’s cut in the overnight policy rate in July and MBSB Research is wary of the possibility of a further rate cut in 2H25.
It added that since most banks have already issued large overlays, any rise in provisioning will be contained and it is not anticipating further incidents of higher provisioning. Rather, multiple banks are gearing up for large-scale writebacks.
RHB Research noted that banks are still holding on to overlay reserves for buffers with Malayan Banking Bhd
(Maybank) and Public Bank Bhd’s overlays remaining in excess of RM2bil and RM1bil respectively despite the latter’s RM158mil write-back in 2Q25.
MBSB Research’s top sector picks with a “buy” recommendation are Hong Leong Bank Bhd (HLB) and RHB Bank Bhd with a target price (TP) of RM21.71 a share and RM7.21 a share respectively.
RHB Research top buys are HLB (TP: RM25.70), Maybank (TP: RM10.90) and CIMB Group Holdings Bhd (TP: RM8.40).
The research houses like HLB as its higher payout ratio is sustainable given potential capital uplift from internal optimisation and Basel III reforms.
It noted that while CIMB did not pay out a special dividend in 1H25, the bank has reiterated its commitment to return excess capital to shareholders.
